With rising scale of business and decreasing in-person meetings and delegation of job responsibilities, there are increasing challenges for organizations in ensuring control over the abuse of authority and committing Frauds through Collusion.

As we are aware that in MNC’s and big size Organizations, the job profiles are defined and Employee collusion often results in Frauds. In this write-up I have tried to put in my sincere efforts in sharing a recently exposed fraud as an Internal Auditor and some of the Controls that every big Organization must ensure in its ERP.

The facts of the Fraud are as per below-

1. The department in need of services will create an indent

2. The Purchase department personnel will float a tender as per the requirements

3. The Colluded-Employees will then make a last and lowest bid(since they are having the internal Information) through their Unregistered Partnership firm

4. The bid will get accepted and they will get the salary as well as business Income.

Key Catches here-

1. The bids are generally last bids.

2. These Firms are generally not GST registered.

3. No proper physical office they posses.

4. They make bids to small works.

5. These are mostly Unregistered Partnership firms.

6. They rarely do file their Income tax returns.

Having discussed the case, I personally feel that the Internal Auditors in today’s evolving and technology driven environment must not limit them to Accounts Audit and tax compliance rather there is a greater need of Analyzing Commercial transactions from the fraud perspective.

Key Internal Controls that must be immediately implemented to plug the above Fraud Risk-

1. Applying limit on amount of supply from the Vendors who are not GST registered. Both Count and Sum Limit must be applied so that number of transactions and high value transaction both get reported.

2. Ensuring of KYC of all Partners while opening a Vendor account of a Partnership Firm. Preferring on boarding of registered Partnership Firms registered with registrar of Firms & Societies.

3. Ensuring KYC of all Vendors once every Year.

4. Ensuring personal visit to new vendor Office space/Factory from an independent agency similar to Employee background verification thing.

5. Alike Job Rotation, Employee dealing with Vendor must be rotated or task based rotation must be there. Like in Purchase department switching job responsibilities of Employees like Engineering Purchase department with Equipment Purchase department or similar rotation.

6. Analyzing the transactions where Vendors have been recently changed and observing the onward trend and volume with new vendor.

7. Checking reasons for switching where a permanent change in vendor for a particualr supply/service is evident from the transactions.

8. Implementation of a system where even the purchase personnel don’t have access to the quoted amount till the last minute of closing of tender.

9. Vendor level scrutiny is a must, ensuring scrutiny of unorganised sector specifically Unregistered Partnership firms unregistered proprietorship firms.

10. Making mandatory Copy of Partnership deed and latest Income tax return copies at time of opening of Vendor account of a Unregistered Partnership firm and similar documents from other unorganized sector.

Unregistered Partnership firms being incorporated by Employees and then entering as a vendor in the same organization committing abuse of authority is the latest and trending fraud. The Employee of Purchase and Indenting department through collusion enter into a partnership. As the Purchase department is aware of the lowest bid all the times, they themselves will quote through their own unregistered partnership firm. On the basis of lowest quotation their quote is accepted and they get the business.

*****

Author is a practicing chartered accountant based out of Amritsar and practices Income tax, Company Law, GST and Internal/Statutory Audit. Please like this page so that i feel motivated and post more helpful posts like this.

Author Bio

Qualification: CA in Practice
Company: singh singh & co
Location: Amritsar, Punjab, IN
Member Since: 07 Mar 2019 | Total Posts: 2

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