fraud reporting final

8/9/2019 Fraud Reporting Final

1/23

Fraud ReportingFraud ReportingFraud ReportingFraud Reporting

CA Mahesh Krishnan

SIRC - ICAI

4th July 2014


2/23

Sec 143 (12) Notwithstanding anything contained in this section, if an

auditor of a company, in the course of the performance of his

duties as auditor, has reason to believe that an offence

involving fraud is being or has been committed against the

com an b officers or em lo ees of the com an , he shall

immediately report the matter to the Central Governmentwithin such time and in such manner as may be prescribed.

143 (13) states: No duty to which an auditor of a company

may be subject to shall be regarded as having beencontravened by reason of his reporting the matter referred to

in sub-section (12) if it is done in good faith

2 Insight Series: SIRC, ICAI :July 4th


3/23

Non-Compliance 143 (15) : Fine not less than Rs. One lakh but may extend

to Rs. 25 lakhs

147 (2) : Fine provisions overridden by 143 (15) but

imprisonment if done knowingly

3

but cannot confirm hence does not report with genuine

intentions but later found to be fraud.....

Insight Series: SIRC, ICAI :July 4th


4/23

Reason to believe that ..... what constitutes reasonable grounds to suspect that a

contravention has taken place.

To have reasonable grounds to suspect, the auditor must have

both a suspicion and ajust cause for that suspicion, i.e. the

sus icion must be based on some facts sufficient to induce

Insight Series: SIRC, ICAI :July 4th4

that state of mind in a reasonable person (George v Rockett(1990) 170 CLR 104). A reasonable suspicion (triggering the

requirement to report) can exist without the auditor having

conducted exhaustive and conclusive investigations into thematter.

[Regulatory Guidance : Australia]


5/23

Definition of Fraud (Sec 447) fraud in relation to affairs of a company or any body

corporate, includes any act, omission, concealment of any

fact or abuse of position committed by any person or anyother person with the connivance in any manner, with intentto deceive, to gain undue advantage from, or to injure the

,or any other person, whether or not there is any wrongfulgain or wrongful loss

wrongful gain means the gain by unlawful means of property to which

the person gaining is not legally entitled wrongful loss means the loss by unlawful means of property to which

the person losing is legally entitled



6/23

Person guilty of FraudSec 447 deals with this....

Imprisonment : 6 months to TEN years Fine : amount of Fraud (minimum) ~ Three times the

amount of Fraud (maximum)



7/23

Grounds

for

reporting

If an auditor has sufficient reason to believe that an offence involving fraud has

been or is being committed against the Company or by officers or employees of

the company,

Report to

whomHe shall report the matter to the Central Government. The report shall be sent to theSecretary, Ministry of Corporate Affairs in a sealed cover by Registered Post with

Acknowledgement Due or by Speed post followed by an e-mail in confirmation of the same.

To reportby when

immediately but not later than sixty days of his knowledge

Steps Auditor shall forward his report to the Board or the Audit Committee, as the case may be,

immediatel after he comes to knowled e of the fraud seekin their re l or observations


within forty-five days;Receive reply from BoD or Audit Committee

in case the auditor fails to get any reply or observations from the Board or the Audit

Committee within the stipulated period of forty-five days, he shall forward his report to the

Central Government

Format The report shall be on the letter-head of the auditor containing postal address, e-mail addressand contact number and be signed by the auditor with his seal and shall indicate his

Membership Number. The report shall be in the form of a statement as specified in Form

ADT-4

The provision of this rule shall also apply, mutatis mutandis, to a branch auditor, cost auditor

and a secretarial auditor during the performance of his duties under section 148 and section204 respectively


8/23

Contents of the Report Report (letter head full contact details membership

number etc.) should have:

Full details of the suspected offence involving fraud (attach

documents in support)

Particulars of the officers or em lo ees who are sus ected to be

involved in the commission of the offence Basis on which fraud is suspected

Period during which the suspected fraud has occurred

Estimated amount involved in the suspected fraud



9/23

Other Countries...... Australia Corporations Act 2001: places an obligation on the

auditor to notify ASIC within 28 days if he/she becomes aware of

circumstances that......... France Code de Commerce : The auditors draw the attention of

the next general meeting to any irregularities or inaccuracies they


any criminal acts which they become aware of to the PublicProsecutor and incur no liability in connection with suchdisclosures

Singapore Companies Act Auditors get special privileges;

immunity; defamation protection

Money Laundering / US - FCPA


10/23

Is this not a Paradigm shift in Audit

expectation?

Yes,

The Kingston Cotton Mills judgement is perhapsnot the end of the road any more

OBJECTIVE of a Statutory or Internal Audit or certification


NOT to find frauds

Other allies (not present in all companies, however) Vigil

Mechanism; Audit Committee; Independent Directors;

Internal Audit.


11/23

Shifting sands.......

"It is the duty of an auditor to bring to bear on the work he has toperform that skill, care and caution which a reasonably careful,

cautious auditor would use. What is reasonable skill, care and cautionmust depend on the particular circumstances of each case. An auditoris not bound to be a detective, or, as was said to approach his workwith suspicion, or with a forgone conclusion that there is something


wrong. e s a wa c og, no a oo oun . e s us e nbelieving tried servants of the company in whom confidence is placedby the company. He is entitled to assume that they are honest andrely upon their representations, provided he takes reasonable care."

Ironically, since that definitive statement, there has been a gradualmetamorphosis in an auditor's duty of care. It is no longer sufficientfor an auditor to rest upon the honesty and accuracy of others. Hemust go further and satisfy himself ............


12/23

Is Fraud Reporting for All Companies?

Yes no company is exempted.

In fact, for same company cost auditor; company secretary,branch / main auditor will monitor!

Auditor is expected to report fraud even if there is no

KMP

KMP CFO is not a CA

NoVigil mechanism

No Internal Audit

No Independent directors



13/23


14/23

Clients use of bank funds. Not

possible for daily monitoring by auditor

Inherent detection risk faced by auditor

How auditor can downsize this risk? Review bank statements

Advances / loans given to whom?

Top transactions

Analysis of payments

CFO Representation

Audit is not a fault-finding exercise to .....audit is not a

fraud-finding exercise.



15/23

Can auditor request to compulsorily attend BoD

meeting to understand what's happening?

Will attending BoD give auditor full comfort.

Can auditor then be affixed with fraud reporting incompleteness as he has been give the right so duty follows?

If a fraud is happening, can we expect it to come out by

Or is attending BoD just an opportunity for auditor to

enhance his understanding of business / way decisions are

made. Is there alternate way to do this apart form attending

BoD meeting?

Fraud risk oversight at BoD level



16/23

Fraud discovered now. Happened

March 2012. To report?

Yes, definitely.

We have 60 days from the time we have reason to believe May trigger rectification of accounts; accounting of error etc.



17/23

Should the Auditor report even if the

Audit Committee disagrees ?

If an auditor has sufficient reason to believe that there has

been fraud and the audit committee rejects that, it still has to

be reported to the central government. If, in such an

instance, the stock price witnesses a crash because of the

initial sus icions, would the auditor be held at fault?



18/23

QUESTIONS ??

Ack: AICFE Website /Report to Nations


19/23

Auditor to get into these aspects.... Fraud risk ownership identifying a senior member to

identify / manage fraud risks

Fraud risk assessment how often done

Pro-active fraud detection process -To what extent has the

,

resolve potentially significant fraud fraud risk assessment;

flag suspicious transactions; computerised email

monitoring.....

Fraud risk tolerance and Risk Management Policy; how muchrisks are transferred to others by insurance / contract etc.



20/23

Auditor to get into these aspects.... Process level anti-fraud controls e.g. Centralising collections;

outsourcing cash movements

Process level controls - designed to prevent, deter and detect each of thesignificant fraud risks identified in its risk assessment. For example, therisk of sales representatives falsifying sales to earn sales commissions canbe reduced through effective monitoring by their sales manager, withapprova require or sa es a ove a certain t res o

Environment level anti-fraud controls : Major frauds usually involvesenior members of management who are able to override process- levelcontrols through their high level of authority. Preventing major fraudstherefore requires a strong emphasis on creating a workplace

environment that promotes ethical behaviour, deters wrongdoing andencourages all employees to communicate any known or suspectedwrongdoing to the appropriate person.



21/23

Auditor to get into these aspects.... Ethical behaviour; code of conduct

Training upon hiring; encouraging seeking advice /communicating wrong-doing

Communication systems prior to decisions (difficult) due to

concerns

Prompt reaction / investigation (IA?)

Monitoring compliance with code of conduct



22/23

FRAUD !!FRAUD !!FRAUD !!FRAUD !!

Catastrophic risk Becoming common only scale, not occurrence, is remarkable



23/23

Fraud Findings Typically 5% revenue lost due to fraud

Median amount f fraud $145,000. 22% atleast $1Milliom

Median duration : 18 months Occupational frauds : Three main categories asset

misappropriations (85%); corruption; financial statement fraud9%

Mainly detected by tips mainly by employees... (hotlines help!) Banking / financial; government; manufacturing more prone

Higher the perpetrators level of authority, the greater fraud lossestend to be.

Collusion helps employees evade independent checks and otheranti-fraud controls, enabling them to steal larger amounts

It takes time and effort to recover...and recover the money!!


fraud reporting final

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