Introduction
In recent times, India has seen an exponential increase in the number of fraudulent activities reported. According to the National Crime Records Bureau, India’s total reported fraud cases rose from 352 in 2015 to 2103 in 2019, which is a 496% jump in a span of five years.
This unprecedented increase has prompted organisations in the country to take proactive steps to prevent, detect and address fraud. Auditors, in particular, have an important role to play in keeping a check on fraudulent activities in businesses. This article dives deep into the role of auditors in the identification, prevention, and mitigation of fraud in the books of accounts in India.
The Indian Audit System
The Indian audit system is based on the principles of modified auditor general model. Under this system, the government of India, along with the two African countries, India and Kenya, has implemented a separate body to perform the function of auditing the organisations and implementing laws and regulations for compliance purpose.
The Auditor General of India (AGI) is an independent constitutional body responsible for the auditing of the accounts and financial statements of the government of India and its subsidiaries. The AGI is assisted by an organisation of the Controller and Auditor Generals (CAGs), who are appointed by the President of India and rendered accountable to the Parliament.
The CAGs are further assisted by various groups of auditors like the Chartered Accountants, the Cost and Management Accountants, and various other specialist resource persons in conducting audits. They are further aided by an Information Technology Support Team in the Information Technology Division, who are well-trained to protect the systems and electronic information from any malicious attack or data corruption.
Types of Fraudulent Activities in India
Fraud can be broadly categorised into two subcategories: financial fraud and non-financial fraud. Almost all fraudulent activities conducted in India can be classified under either of these two heads.
Financial Fraud
Financial fraud involves fraudulent activities that involve money, such as skimming, embezzlement, money laundering, and accounting fraud. These activities mainly involve money either being stolen or hidden from the company or organisation.
Non-Financial Fraud
Non-financial fraud involves frauds related to physical assets, goods, or services, such as bribery, corruption, and misappropriation of resources. These activities involve stealing or using physical assets, goods, or services for personal gain.
Role of Auditor in Detecting & Preventing Fraud
When it comes to detecting and preventing frauds in books of accounts, the auditor is required to undertake an exhaustive audit of the books and records of accounts. The auditor must be able to assess the internal control systems of the company and identify the areas of potential frauds. The auditor must conduct tests to determine whether the transactions have been accurately recorded in the company’s ledgers and have been properly authorized by the management. In order to accurately identify the frauds, the auditor must use analytical tests and sampling techniques.
The auditor needs to identify any potential conflicts of interests or other irregularities in transactions. He needs to assess the adequacy and effectiveness of internal control systems of the company and recommend necessary changes to enhance the same. A key way of detecting and preventing frauds is by the auditor performing a fraud-risk assessment. This involves the auditor assessing the potential areas of frauds and putting in place controls to limit the opportunities of frauds.
The auditor should also undertake an exhaustive review of the company’s accounts in order to identify any suspicious or unusual transactions. He must take necessary steps to confirm the details of such transactions and follow up on them to ensure that their accuracy is not compromised.
The auditor should too investigate any sudden changes in the financial health of the firm and seek clarification from the management about it. Additionally, the auditor must conduct reviews of management letters, reports and other sources of information which might contain indications of fraud and must report any such indications to the appropriate authority.
Role of Auditors in Fraud in the Books of Accounts in India
Auditors play a critical role in the identification, prevention, and mitigation of fraud in the books of accounts in India. Their role normally includes a combination of regulatory compliance, forensic analysis, and an internal audit of the financial records.
Regulatory Compliance
Auditors are expected to comply with certain regulations like Companies Acts, 2013 as well as the Institute of Chartered Accountants of India (ICAI) stringent accountability guidelines, while conducting an audit of the company’s books of accounts. These regulations help the auditors detect any inconsistencies or fraudulent activities in the company’s records.
Forensic Analysis
While performing an audit, the auditors review the company’s books of accounts, including the balance sheet, general ledger, and the financial statements of the organisation. They analyse the historical data, identify any suspicious patterns, and look for anomalies in the financial accounting records.
Internal Audit
The auditors also conduct an internal audit of the financial records of the organisation to detect any fraud. This process involves evaluating and verifying the accuracy of the financial accounts by going through the company’s books of account, checking the balance sheets, and ensuring that all the necessary accounting standards are followed.
Reporting
After conducting the audit and detecting the fraud, the auditors have to report their findings to management and stakeholders. The reports usually include the exact nature of the fraud, the amount of money involved, the source of the fraud, and suggestions or recommendations on how to remediate the damages caused by the fraud.
Case of Fraud Detected in Books of Accounts in India
There have been numerous cases in India of frauds discovered in books of accounts. In recent years, some of the high profile frauds that have been detected by either the CAG or auditors, include the following cases-
Jet Airways: Jet Airways filed for bankruptcy due to the irregularities and fraudulent activities detected in their books of accounts. The major reason behind the downfall of Jet Airways was attributed to the irregularities that the auditors failed to detect or address. The misreported financial data and lack of appropriate internal control systems enabled the management to get away with many fraudulent activities. Post the bankruptcy, the role of auditors and the internal control systems adopted by the company were heavily criticized.
NSEL Fraud: NSEL, a part of Jignesh Shah-led Financial Technologies, was accused of carrying out fraudulent transactions in their books of accounts to the tune of Rs. 5,500 crore. A detailed investigation uncovered the scope of the fraud along with the respective people involved in it. It was alleged that the fraud was aided by the poor audit practices of the company and the absence of effective risk management strategies.
Vijay Mallya Case: This case is widely regarded as one of the biggest fraud and money-laundering scams in India. The case involves prominent businessmen and auditors who were allegedly involved in defrauding several financial institutions. The auditors are accused of filing false audit reports which enabled the company and its promoters to misuse the funds borrowed by them.
Conclusion
In conclusion, the role of auditors in the identification, prevention, and mitigation of fraud in the books of accounts in India is critical. It is important for organisations to ensure that their financial activities are audited regularly and any deviations in the books of accounts are reported in order to keep a check on fraudulent activities in the organisation.
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(Author can be reached at email address casharma.sharad2000@gmail.com or on Mobile No. 9990365673)
Disclaimer: “Neither this article nor the information contained herein shall in any way be construed as forming a contract or shall constitute professional advice required before acting upon any matter. CA Sharad Kumar Sharma has taken all due care in the preparation of this article for accuracy in its contents at the time of publication. However, no liability shall be accepted by him in the event of any direct, indirect or consequential damages arising out of or in any way connected with the use of this article or its contents. “
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