Auditing Fraud - A SAI India Experience

By P.K. Mukhopadhyay

In recent times the Comptroller and Auditor General of India audited a series of fraudulent drawls of public funds in a provincial government .These drawls amounting to Rs. 6500 million occurred during 1990-96 and related to the Animal Husbandry department of that government.

Audit investigations were prompted by the following:

Annual financial statements and appropriation accounts of several years showed that the Animal Husbandry department had made large scale excess drawls over and above their authorised budgets.
Unexplained and unjustified increase in purchases of cattle feed ,fodder ,medicines and veterinary equipment were noticed.
Preliminary examination of records provided evidence of subversion of internal control mechanisms.
Media reports.
Public interest litigations had been filed before the High Court of the province.
Police action had been initiated in some cases in early 1996.
The provincial government had shown vulnerability to fraud as it had been reluctant to ensure timely submission of initial accounts and had been lukewarm in its response to earlier reports of the CAG of India.

Though the fraud essentially involved drawl of money against bills based on fake invoices by officials of the Animal Husbandry Department connivance of officials of the Treasury and Finance departments were probable.
Audit Strategy.

In view of the strong evidence of extensive subversion of internal controls and established procedures, reliance was placed on direct substantive testing. Nearly 9000 vouchers and 0.35 million sub-vouchers were compiled into a database. It was also decided to extensively document and report on the breakdown of internal controls and subversion of procedures relating to purchases , budgetary and expenditure control, and the drawl and disbursement of funds. The role of officials in departments, such as Finance, District Administration, Treasury, Vigilance and Sales Tax, who could have connived in the systematic fraudulent drawl of funds was also to be examined.

Constraints.

Large non- computerised volumes of data were to be audited.
Audit staff had limited previous experience of investigating fraudulent transactions.
Auditee offices were dispersed and located at considerable distances away from the audit office .
Since the fraud was also being investigated by a Federal Investigating agency key officials were not easily available for discussion as many were in custody. Further, a number of vital records had also been seized by the investigating agency and were therefore not easily available for audit examination.
A large number of audit teams were deployed and this raised coordination issues.
The possible connivance of the top political leadership in the fraud led to reluctance on the part of key officials in coming forward with information.
Threats existed to the personal safety of audit officials.
The ongoing criminal investigations placed a heavy demand on senior audit officials for information thereby affecting the pace of audit work.
There was pressure from the media to provide information on audit findings.

Audit Approach.

In view of the constraints detailed above, several innovations had to be built into the audit approach. The more significant of these are:

A database was created of purchase and payroll vouchers and sub-vouchers. This facilitated analysis and review of the fraudulent payments and provided insights into new aspects of the fraud.
The skills of the auditors were supplemented through close supervision and monitoring to cover the lack of adequate guidelines for auditing fraud.
To keep audit findings confidential the standard practice of issuing preliminary observations was dispensed with. The findings were ultimately issued to the highest ranking civil servants of the provincial government.
Audit teams were given limited assignments and their findings were collated by senior officers so as to maintain confidentiality of final audit conclusions.
Records were largely examined at the audit offices and the offices of the investigating agencies.

Audit Findings

Rupees 6,500 million were drawn over budget authorisation in 6 years by the Animal Husbandry Department.
During 1993-96, Rupees 4,730 million was drawn by Animal Husbandry Department towards purchase of feed and fodder while approximately only Rupees 100 million was required as per approved scale.
Just 7 Drawing officers of this department, drew approximately Rupees 4,350 million in 3 years even though the total budget provision for the entire department was approximately Rupees 2,300 million .The bulk of the fraudulent payments , amounting to Rupees 4,010 million were made to only 36 suppliers in 6 districts.
System of centralised selection of vendors for purchase of feed and fodder, was made non-functional. This facilitated issue of purchase orders on little known farms for supply of enormous amounts of feed/fodder, medicines etc.
Reputed manufacturers and suppliers of medicines were bypassed and established procedures for vendor selection were ignored . Hence medicines were ordered on little known local dealers.
While Rupees 1,510 million was paid for supply of medicines, hospitals and dispensaries reported receipt of negligible quantities of medicines. They also confirmed that no indents for medicines had been placed by them. The purchases were therefore fictitious. Numerous discrepancies were noticed in the suppliers invoices and they appeared to be fake.
Payment authorisation process by the departmental officers and the treasuries violated all prescribed checks and controls. Funds allotment figures, quoted in the bills, were unrealistically high. The treasury officers overlooked this and did not check whether allotments shown actually existed before admitting claims for payments. Several other violations in procedures pointed to the direct complicity of treasury officers in this fraud.
Finance Department failed to investigate continued excess of expenditures over budget allotments thereby eroding completely the expenditure control mechanisms. This significantly contributed to the unfettered drawl of funds by the Animal Husbandry Department .
Finance Department overlooked exchequer problems caused due to heavy drawl of funds from the some of the treasuries. They did not question or investigate the reasonableness of such cash outgo, even though the Reserve Bank of India periodically kept the department posted regarding cash disbursement from treasuries.
The Budget Controlling Officer (Director) of the concerned department subverted crucial budgetary and expenditure controls. Instead he provided misleading budgetary forecasts. These were not critically examined in the Finance Department while framing budget estimates of the government.
Internal check over payments were completely subverted within the Animal Husbandry Department . The bill drawing officers , entrusted with the task of exercising checks , were directly involved in presenting false claims on the basis of fake documents.
Several officials subsequently found to be involved in the fraud were continued in the same positions in violation of laid down policy regarding transfer of officials. Some of these officers were also retained in service beyond their dates of superannuation without following laid down procedures for vigilance clearance etc. and in one case despite court orders to the contrary.
The complicity of top political executives in blocking detailed investigation into the fraudulent drawls and in providing patronage to tainted officials was pointed out in audit and documented.
Cases of irregular and unauthorised appointment of large number of junior officials were also detected in course of audit examinations.
An examination of sales tax cases and income tax cases relating to the suppliers who had received fraudulent payments showed that action taken on these by the concerned departments were inadequate and had allowed suppression of taxable sales turnover as wellas taxable incomes.

Impact of the Audit.

SAI demonstrated its capability to investigate and report on cases of corruption and fraud even if these involved high level political functionaries.
Speedy finalisation of audit facilitated the ongoing investigation by the Investigating agencies and commencement of prosecutions against the key officials who were mentioned in the audit report.
Media coverage of the audit findings created public awareness about the need of improved accountability through the CAG's audit.
In the light of the audit findings the concerned department and the government could take corrective action for improving financial control .
Fraud awareness and methodology of audit of fraud related matters in the SAI was developed. This helped in audit of several other cases of fraud in other provincial governments.
Timely completion of this audit highlighted the importance and usefulness of application of information technology in investigative audit. In the countries where auditee records are not computerised, application of sophisticated analytical tools could be possible by creating computerised databases in the audit office, as was demonstrated in this case.