Bank Audits - Case Studies
March 26, 2015
♣
CA Parveen Kumar II Partner II
ASA & Associates LLP www.asa.in
Agenda
• Case Studies
• Bank Audit Assignments – Run-through
• Challenges
2
8 Global Case Studies
Bank of Credit and Commerce International (BCCI) was
founded in Karachi, in 1972 and registered in Luxembourg,
London. It was a major international bank with 30,000
employees and had operations in 78 countries. It was the
seventh largest private bank up to 1991 until it was closed
Allegations:
• One of the largest scandals with $ 20-billion-plus-heist.
• More than $13 billion funds were unaccounted.
• Other allegations include bribery, support of terrorism,
money
laundering, smuggling, sale of nuclear
technologies etc.
Enron Corporation was founded in Houston, Texas in 1985.
Was one of the world’s leading electricity, natural gas, pulp,
paper
and
communications
company
(22,000
employees). This most Innovative Company lost its fame in
2001
with
its
accounting
fraud.
ALLEGATIONS:
The debts of the company were hidden and profits were
inflated by more than $1 billion. It offered bribes to foreign
governments to win contracts abroad.
WorldCom was the United States’ second largest long
distance phone company that was founded in the year 1983.
After 19 years of establishments i.e. in 2002 the company’s
accounting scandal came into exposure.
ALLEGATIONS:
Underreporting interconnection expenses by capitalizing on
the balance sheet and $3.8 billion is overstated as capital
expenses
rather
than
operating
expenses.
Tyco international was a global manufacturing company
founded in 1960. Its operational headquarters is in New
Jersey. With 118,000 employees it is composed of security
services, safety products, fire protection services, flow
control, electrical and metal products.
Allegations:
CEO Dennis Kozlowski and former CFO Mark H. Swartz were
accused of the theft of $600 million from the company in
2002.
Kanebo Limited was a textiles and cosmetics group giant in
Japan. It was originally established in 1887. It has 13,580
employees. In 2003 a major accounting fraud was revealed
which was considered as one of the largest frauds in Japan.
Allegations:
Inflated profits by $2 billion over a five-year period.
Parmalat was founded in 1961 in Italy. A multinational Italian
dairy and food corporation with more than 15,000 employees.
This company collapsed in 2003 with an accounting scandal of
$ 20 billion which is considered as one of the biggestbankruptcy
Allegations:
Company’s total debt was more than double on the balance sheet.
Forgery and bankruptcy are some other allegations
AIG was founded in 1919 in Shanghai, China by Cornelius
Vander Starr, it went to public in 1969. It is a major American
Insurance Corporation based in New York City with 116,000
employees.
Allegations:
The company maintained lucrative payoff agreements,
soliciting rigged bids for insurance contracts and inflated
financial position by $2.7 billion in 2005.
Satyam Computer was founded in 1987 in Hyderabad, India to
offer information technology services. The company has a
network in 67 countries with 53,000 employees. Recently i.e.
on 7th January, 2009 the accounting scandal came into
exposure.
Allegations:
Inflated cash and bank balances of more than $1.5 billion,
overstated debtors’ position of $100 million and understated
liability.
9 Indian Case Studies
What if departure from standard is allowed by
the regulator
AS – 15
• Feb 9, 2011 - RBI issued circular (DBOD.BP.BC.80/21.04.018/2010-11) on
reopening of Pension Option to employees of Public Sector
Banks and Enhancements in Gratuity limits.
• In terms of this circular the bank may amortize this expense
over a period of 5 years
This is departure from requirements of AS 15
AS – 15
• ICAI Announcement
– Since the accounting treatment for such expenditure is prescribed
under prudential regulatory framework of the Regulator, the
auditors need not qualify their audit report on this account
– As per Standard of Audit (SA) 706 – the matter should be brought
out by way of “Emphasis of Matter Paragraph” in the audit report
“Without qualifying our opinion….
Public Sector
Bank - 1
• Window Dressing
(Provisional Balance Sheet)
Public Sector
Bank - 2
• Cash Count
Public Sector
Bank - 3
• Fund Utilization
Public Sector
Bank - 4
• Demand Loans
(Securities check)
Public Sector
Bank - 5
• Drawing Power
(Stock – Job work)
Public Sector
Bank - 6
• Surprise Inspection
ATM
• Connectivity
Software
• Interest Calculation
Bank Audit Assignments
Run-through
Appointment
Acceptance
Planning
Execution
Report
Document
Appointment
Caution
Change in
constitution
Indebted
Securities
Intimate and Confirm
Acceptance
Scope
Team
Fee
Confidentiality
Limitation
Responsibility
Limitations
Liability to be limited
Mail Communication
Jurisdiction
Indemnify loss
Limitations
•
•
•
•
•
•
•
Investigation ?
Update and advice ?
Guarantee for future ?
Copyright ?
Test check ?
Loss to third party ?
Your Responsibilities ?
Responsibilities
•
•
•
•
Maintaining Books
Decision Making
Preparation of Financials
Policies
Planning
Study
Audit
Master
Circular
Master
file
Guidance
Note
Audit file
– B1
Bank’s
Instructions
Audit file
– B2
Audit Team
Appointment Letter
Authority letter, Checklists
Study notes, files
Planning
Memo
Compliance Test
Substantive check
Ask For
• RBI Audit Report
• PY Balance sheet, Audit
File
• Inspection Reports
• Guidelines
Execution
Documentation
Working Papers
Ratio Analysis
Management Representation
Careful
•
•
•
•
•
Assets Classification
Provisioning
Frauds
Suspense & sundry accounts
Inter branch accounts
REPORT
Manager
• Sign
• Stamp
Yourself
• Sign
• Stamp
Document all Discussions
Standards on Auditing
• Auditing, Review and Other Standards (‘Standards on
Auditing’) are pronouncement issued by the competent
authority to provide guidance on audit, review, other
assurance and related services engagements.
• Standards on Auditing are issued with a view to securing
compliance by auditor on various matters for the proper
discharge of their functions. These Standards are
mandatory for auditor to be followed.
Institute of Chartered Accountants of India
(Auditing and Assurance Standard Board)
46
SA 230 – Audit Documentation
Summary
• Audit Documentation deals with the auditor’s responsibility to prepare
audit documentation for an audit of financial statements.
• Audit documentation means – The record of audit procedures
performed, relevant audit evidence obtained, and conclusion the
auditor reached. (terms such as ‘working papers’ or ‘work papers’ are
also sometimes used)
Collecting Evidence ……
47
Collecting Evidence …… Audit was
File
Recording
significant
items for future
Law
As per
regulatory
requirements
According to
Standards
Basis for
conclusion
Assisting engagement team
Planned
48
CHALLENGES
Professional
Regulator
Management
• Time management
• Technical update
• Role and Responsibilities
• Expectations
• Business Environment
• Training
• Checklist Approach?
• Tone at the TOP
• Priorities / Pressures
• Resources…
Thank You
parveen.kumar@asa.in
# 9810101790