Welcome Welcome to the presentationto the presentation

on the subject:on the subject:

Audit to Detect Fraud and Corruption:Audit to Detect Fraud and Corruption:Evaluation of Fight against Corruption and Money Laundering.Evaluation of Fight against Corruption and Money Laundering.

Presented by: Zubair Ahmed Khan, FA&CAO Presented by: Zubair Ahmed Khan, FA&CAO

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Md.Nazrul Islam, Addl. FA&CAOMd.Nazrul Islam, Addl. FA&CAOBangladesh RailwayBangladesh Railway

Members of SAI, Bangladesh.Members of SAI, Bangladesh.

Contents of the presentationContents of the presentation A) Audit to Detect Fraud and CorruptionA) Audit to Detect Fraud and Corruption

1.1. IntroductionIntroduction2.2. Definition of fraud.Definition of fraud.3.3. The circumstances in which fraud happens.The circumstances in which fraud happens.4.4. Fraud risk.Fraud risk.

B) Evaluation of Fight against Corruption and Money Laundering.B) Evaluation of Fight against Corruption and Money Laundering.1.1. Auditing fraud risk managementAuditing fraud risk management2.2. Auditing the fraud risk assessmentAuditing the fraud risk assessment3.3. Auditing the response to the risk of fraudAuditing the response to the risk of fraud ResponsibilitiesResponsibilities Fraud Response Plan Fraud Response Plan

C) Fraud Investigation.C) Fraud Investigation.1.1. Background of investigationBackground of investigation2.2. Receiving and evaluating information that may lead to an investigation.Receiving and evaluating information that may lead to an investigation.3.3. Planning and Management.Planning and Management.4.4. Field work : fact finding and evidence gathering.Field work : fact finding and evidence gathering.5.5. Reporting.Reporting.6.6. Referral.Referral.7. Audit done by OCAG8. Scope of Investigation9. Risk areas were found during investigation :10. Way/Technique of corruption11. Limitation of Audit

D) ConclusionD) Conclusion

A) Audit to Detect Fraud and CorruptionA) Audit to Detect Fraud and Corruption 1. Introduction1. Introduction

Bangladesh is a big muslim country of 16 core population. People are very Bangladesh is a big muslim country of 16 core population. People are very much islam practicing. Our per capita income is $800. We are fighting much islam practicing. Our per capita income is $800. We are fighting

against corruption since independence.against corruption since independence.

SAI, Bangladesh is a constitutional body to prevent and detect SAI, Bangladesh is a constitutional body to prevent and detect such kind of fraudulent activities. SAI audit govt. sectors and corporate such kind of fraudulent activities. SAI audit govt. sectors and corporate bodies in a regular intervals within the frame of Govt. rules and bodies in a regular intervals within the frame of Govt. rules and procedures.procedures. For ensuring accountability, Govt. is trying to minimize the For ensuring accountability, Govt. is trying to minimize the fraudulent activities. For strengthening SAI, Bangladesh and to fraudulent activities. For strengthening SAI, Bangladesh and to provide provide guidance for a detailed and expert, or forensic, examination of the audited guidance for a detailed and expert, or forensic, examination of the audited body’s protection against fraud irregularities, a guide line/Audit manual body’s protection against fraud irregularities, a guide line/Audit manual has already been prepared by the SPEM project. has already been prepared by the SPEM project.

It is in line with paragraph 27of the Audit Code which requires It is in line with paragraph 27of the Audit Code which requires that: ‘Auditors should establish whether audited bodies have taken that: ‘Auditors should establish whether audited bodies have taken reasonable steps in relation to the limitation of the possibility of fraud’. reasonable steps in relation to the limitation of the possibility of fraud’. The procedures in this manual are compliant with ISSAI 4100 Compliance The procedures in this manual are compliant with ISSAI 4100 Compliance Audit Guidelines for audits performed separately from the audit of Audit Guidelines for audits performed separately from the audit of financial statements. financial statements.

2. Definition of fraud.2. Definition of fraud.

Legal definition of fraud may differ from time Legal definition of fraud may differ from time to time. It also differ between the countries.to time. It also differ between the countries.

For the purposes of Audit team SAI, For the purposes of Audit team SAI, Bangladesh has definedBangladesh has defined some sort of frauds, some sort of frauds, These may be considered as:These may be considered as:

TheftTheft False accountingFalse accounting Bribery and corruptionBribery and corruption DeceptionDeception CollusionCollusion

3. The circumstances in which fraud 3. The circumstances in which fraud happens.happens.

Four basic elements are necessary for a fraud to Four basic elements are necessary for a fraud to occur:occur:

People to carry out the fraud. They may be People to carry out the fraud. They may be individuals or a group of people inside or outside the individuals or a group of people inside or outside the organisation,organisation,

Assets to acquire fraudulently,Assets to acquire fraudulently, Intent to commit the fraud,Intent to commit the fraud, Opportunity.Opportunity. The purpose of the audit is to establish that such a The purpose of the audit is to establish that such a

sound system has been adequately designed and sound system has been adequately designed and implemented by management.implemented by management.

4. Fraud risk.4. Fraud risk.

Fraud is just one of many risks an organisation faces.Fraud is just one of many risks an organisation faces. The deliberate nature of fraud can make it difficult to The deliberate nature of fraud can make it difficult to

detect and deter. Risk, in the context of managing detect and deter. Risk, in the context of managing fraud risk, is the vulnerability or exposure an fraud risk, is the vulnerability or exposure an organisation has towards fraud and irregularity. organisation has towards fraud and irregularity.

It combines the probability of fraud occurring and the It combines the probability of fraud occurring and the corresponding impact measured in monetary terms.corresponding impact measured in monetary terms.

Preventive controls and the creation of the right type Preventive controls and the creation of the right type of corporate culture will tend to reduce the likelihood of corporate culture will tend to reduce the likelihood of fraud occurring while detective controls and of fraud occurring while detective controls and effective contingency planning can reduce the size of effective contingency planning can reduce the size of any losses.any losses.

B) Evaluation of Fight against Corruption and Money B) Evaluation of Fight against Corruption and Money Laundering.Laundering.

1.1. Auditing fraud risk managementAuditing fraud risk management

Everybody in an organisation contributes to the management of fraud risk. This Everybody in an organisation contributes to the management of fraud risk. This starts at the top where senior management set the tone of the organisation and starts at the top where senior management set the tone of the organisation and promote an anti-fraud culture throughout the organisation. promote an anti-fraud culture throughout the organisation.

Operational staff design and implement and operate the control actions required to Operational staff design and implement and operate the control actions required to minimise risk. minimise risk.

The personnel function ensures that the right staff members are recruited. The personnel function ensures that the right staff members are recruited. Accommodation services ensure physical security and IT services promote Accommodation services ensure physical security and IT services promote computer and data security. computer and data security.

The role of internal audit is to deliver an opinion to the Accounting Officer on the The role of internal audit is to deliver an opinion to the Accounting Officer on the whole of an organisation’s risk management, control and governance. whole of an organisation’s risk management, control and governance.

Examination of the adequacy of arrangements for managing the risk of fraud and Examination of the adequacy of arrangements for managing the risk of fraud and ensuring that the organisation actively promotes an anti-fraud culture. ensuring that the organisation actively promotes an anti-fraud culture.

The Accounting Officer is responsible for maintaining a sound system of internal The Accounting Officer is responsible for maintaining a sound system of internal control that supports the achievement of departmental policies, aims and objectives, control that supports the achievement of departmental policies, aims and objectives, fort safeguarding public funds and departmental assets. fort safeguarding public funds and departmental assets.

The responsibility for the overall management of anti-fraud activities should be The responsibility for the overall management of anti-fraud activities should be allocated to an appropriate senior officer e.g. the Principal Finance Officer.allocated to an appropriate senior officer e.g. the Principal Finance Officer.

see next slide....see next slide....

B) Evaluation of Fight against Corruption and Money B) Evaluation of Fight against Corruption and Money Laundering.Laundering.

1.1. Auditing fraud risk managementAuditing fraud risk managementcontd.....contd.....

Internal Audit have a key role to play in the examination of the adequacy Internal Audit have a key role to play in the examination of the adequacy of arrangements for managing the risk of fraud and ensuring that the of arrangements for managing the risk of fraud and ensuring that the organisation promotes an anti-fraud culture.organisation promotes an anti-fraud culture.

A clear statement of commitment to ethical behaviour throughout the A clear statement of commitment to ethical behaviour throughout the organisation should help to ensure that staff know that they are expected to organisation should help to ensure that staff know that they are expected to follow the rules without circumventing controls and that they should avoid follow the rules without circumventing controls and that they should avoid or declare any conflicts of interest. or declare any conflicts of interest.

Senior Management should try to create the conditions in which members Senior Management should try to create the conditions in which members of staff do not possess the motivation or the opportunity to commit fraud. of staff do not possess the motivation or the opportunity to commit fraud. The maintenance of good staff morale may help to minimise the likelihood The maintenance of good staff morale may help to minimise the likelihood of an employee causing harm to the organisation through fraud.of an employee causing harm to the organisation through fraud.

Under the right conditions staff members themselves are an excellent Under the right conditions staff members themselves are an excellent deterrent against fraud. There should be avenues for reporting suspicions deterrent against fraud. There should be avenues for reporting suspicions of fraud. Staff should be encouraged to report suspicions of fraud either to of fraud. Staff should be encouraged to report suspicions of fraud either to their line managers, to internal audit or to a hotline set up for this purpose. their line managers, to internal audit or to a hotline set up for this purpose.

2.2. Auditing the fraud risk assessmentAuditing the fraud risk assessment

The key components of fraud risk assessment:The key components of fraud risk assessment: Managing the risk of fraud should be embedded in the entirety Managing the risk of fraud should be embedded in the entirety

of an organisation’s risk, control and governance procedures. of an organisation’s risk, control and governance procedures. A risk-based approach enables organisations to target their A risk-based approach enables organisations to target their resources, both for improving controls and for pro-active resources, both for improving controls and for pro-active detection, at problem areas. The key components of fraud risk detection, at problem areas. The key components of fraud risk assessment comprise:assessment comprise:

• • Assessing the organisation’s overall vulnerability to fraud Assessing the organisation’s overall vulnerability to fraud • • Identifying the areas most vulnerable to the risk of fraud Identifying the areas most vulnerable to the risk of fraud • • Evaluating the scale of fraud risk Evaluating the scale of fraud risk

3.3. Auditing the response to the risk of Auditing the response to the risk of fraudfraud

The key components of the response to the fraud risk assessment:-The key components of the response to the fraud risk assessment:- Once the risks have been evaluated and prioritised consideration can be Once the risks have been evaluated and prioritised consideration can be

given to identifying appropriate responses. Responding to the risk of fraud given to identifying appropriate responses. Responding to the risk of fraud involves compiling anti-fraud control policies and fraud response plans. involves compiling anti-fraud control policies and fraud response plans. Responses to fraud risk include:Responses to fraud risk include:

Developing and promoting an anti-fraud culture.Developing and promoting an anti-fraud culture. Allocating responsibilities for the overall management of fraud risk and for Allocating responsibilities for the overall management of fraud risk and for

the management of specific fraud risks.the management of specific fraud risks. Establishing cost effective internal controls to detect and deter fraud that Establishing cost effective internal controls to detect and deter fraud that

are commensurate with the identified risk.are commensurate with the identified risk. Developing the right skills and expertise required to manage the risk of Developing the right skills and expertise required to manage the risk of

fraud effectively and to respond effectively to fraud when it occurs.fraud effectively and to respond effectively to fraud when it occurs. Responding effectively to fraud when it occurs.Responding effectively to fraud when it occurs. Establishing appropriate avenues for reporting fraud. Establishing appropriate avenues for reporting fraud. Continuously monitoring the risk environment and systems of internal Continuously monitoring the risk environment and systems of internal

control. control. Reporting fraud centrally. Reporting fraud centrally.

ResponsibilitiesResponsibilities

ResponsibilitiesResponsibilitiesResponsibilities in relation to fraud are set out below:Responsibilities in relation to fraud are set out below:• • The Accounting Officer is responsible for establishing and maintaining a The Accounting Officer is responsible for establishing and maintaining a

sound system of internal control that supports the achievement of sound system of internal control that supports the achievement of departmental policies, aims and objectives. departmental policies, aims and objectives.

• • Overall responsibility for managing the risk of fraud has been delegated Overall responsibility for managing the risk of fraud has been delegated to….. [e.g. the Principal Finance Officer (PFO)]. Their responsibilities to….. [e.g. the Principal Finance Officer (PFO)]. Their responsibilities include:include:

1) Liaising with the Risk Management Committee and/or Audit 1) Liaising with the Risk Management Committee and/or Audit CommitteeCommittee..

2) Operational managers are responsible.2) Operational managers are responsible.3) Internal audit is responsible .3) Internal audit is responsible .4) Every member of staff is responsible.4) Every member of staff is responsible.

Fraud Response PlanFraud Response Plan

The department has a Fraud Response Plan The department has a Fraud Response Plan that sets out how to report suspicions, how that sets out how to report suspicions, how investigations will be conducted and investigations will be conducted and concluded. This plan forms part of the concluded. This plan forms part of the department’s anti-fraud policy.department’s anti-fraud policy.

C) Fraud Investigation C) Fraud Investigation I.I. Background of investigation Background of investigation Definition of investigation:Definition of investigation:

Investigation function is a tool for collecting facts. An investigation including Investigation function is a tool for collecting facts. An investigation including all types of related inquiries may be defined as :A legally based and analytical all types of related inquiries may be defined as :A legally based and analytical process designed to gather information in order to determine whether process designed to gather information in order to determine whether wrongdoing occurred and, if so, the persons or entities responsible.wrongdoing occurred and, if so, the persons or entities responsible.

Definition of wrongdoing and fraudDefinition of wrongdoing and fraudInvestigating wrongdoing includes investigating:Investigating wrongdoing includes investigating:i.i. Malfeasance - criminal activity;Malfeasance - criminal activity;ii.ii. Misfeasance - activity which is not necessarily criminal but by any measure Misfeasance - activity which is not necessarily criminal but by any measure

should not be occurring. should not be occurring. iii.iii. A fraudulent practice is any act or omissionA fraudulent practice is any act or omission iv.iv. Theft of assetsTheft of assets Legal powers and obligationsLegal powers and obligations Investigation resourcesInvestigation resources ReferralsReferrals

Without appropriate powers and resources it advisable to hand over the Without appropriate powers and resources it advisable to hand over the investigation to those who are in possession of such powers and resources.investigation to those who are in possession of such powers and resources.

II.II. Receiving and evaluating information Receiving and evaluating information

that may lead to an investigationthat may lead to an investigation..

Receipt and handling of source informationReceipt and handling of source information PredicationPredication RegistrationRegistration EvaluationEvaluation NotificationNotification

III.III. Planning and Management.Planning and Management.

The planning and subsequent management of any The planning and subsequent management of any investigation is critical to a fair and effective investigation is critical to a fair and effective outcome. Any investigations work plan must be outcome. Any investigations work plan must be flexible and investigations require particular attention flexible and investigations require particular attention to evolving and sometimes unanticipated demands. to evolving and sometimes unanticipated demands.

IV.IV. Field work : Fact finding and Field work : Fact finding and evidence gatheringevidence gathering

Types of evidenceTypes of evidence Relevance of evidenceRelevance of evidence Testimonial evidenceTestimonial evidence Witness testimonyWitness testimony General witnessGeneral witness Specialist witnessSpecialist witness Subject interviewSubject interview FairnessFairness Specific and Sweep interviewsSpecific and Sweep interviews

V.V. REPORTINGREPORTING Reports generally outline the facts established through Reports generally outline the facts established through

investigations, formulate findings and conclusions, and, where investigations, formulate findings and conclusions, and, where necessary, make appropriate recommendations.necessary, make appropriate recommendations.

1.Report Structure, Format and Style1.Report Structure, Format and Style :- :- Reports must be designed to ensure stylistic and editorial Reports must be designed to ensure stylistic and editorial

consistency and must be-consistency and must be- • • factually correctfactually correct • • impartial and objectiveimpartial and objective • • concise, clear and completeconcise, clear and complete • • logically organized.logically organized. 2.Fairness during the report writing stage:-2.Fairness during the report writing stage:- 3.Confidentiality of reports3.Confidentiality of reports

VI.VI. ReferralsReferrals

ReferralsReferralsWithout appropriate powers and resources it Without appropriate powers and resources it advisable to hand over the investigation to advisable to hand over the investigation to those who are in possession of such powers those who are in possession of such powers and resources.and resources.

VII.VII. Measures against fraud and Measures against fraud and corruptioncorruption

Bangladesh is a country where governance are administered Bangladesh is a country where governance are administered through democracy. All legal and law enforcing agency are also through democracy. All legal and law enforcing agency are also active. Within the constitutional frame Govt. established some active. Within the constitutional frame Govt. established some institutions/commissions to resist and condemn the fraudulent institutions/commissions to resist and condemn the fraudulent activities as possible to a minimum level. The following are :-activities as possible to a minimum level. The following are :-

parliamentary committees for Ministries and Finance.parliamentary committees for Ministries and Finance. Anti- corruption commission.Anti- corruption commission. Human rights commission.Human rights commission. Information right commission.Information right commission.

In addition there some non-government organization of In addition there some non-government organization of international character like Transparency International, international character like Transparency International, Bangladesh (TIB) are also active on socio-Economic activities Bangladesh (TIB) are also active on socio-Economic activities of Govt. and Non- Govt. organizations of Bangladesh.of Govt. and Non- Govt. organizations of Bangladesh.

VIII.VIII.AUDIT DONE BY OCAGAUDIT DONE BY OCAG

SAI Bangladesh i.e. office of CAG we’ll call SAI Bangladesh i.e. office of CAG we’ll call letter OCAG completed audit on fraud and letter OCAG completed audit on fraud and corruption through a project. The Central corruption through a project. The Central Medical Supplies Depot (CMSD) was selected Medical Supplies Depot (CMSD) was selected to carry out a fraud prevention and forensic to carry out a fraud prevention and forensic investigation pilot audit on purchasing & investigation pilot audit on purchasing & storekeeping.storekeeping.

IX.IX. Scope of Investigation: Scope of Investigation:

The Investigation covered the examination of The Investigation covered the examination of tenders, contracts, orders delivery notes tenders, contracts, orders delivery notes invoice, storekeeping records and other invoice, storekeeping records and other documents as record in our evidence logs or documents as record in our evidence logs or records of documentary evidence examined. records of documentary evidence examined. The staff of CMSD were interviewed.The staff of CMSD were interviewed.

X.X. Risk areas were found during Risk areas were found during investigation :investigation :

i.i. Deference between contract prices and market prices.Deference between contract prices and market prices.

ii.ii. Procurement in collusion with contractors.Procurement in collusion with contractors.

iii.iii. Procurement without having any demand from user end/unnecessary Procurement without having any demand from user end/unnecessary procurement/push delivery.procurement/push delivery.

iv.iv. Bid rigging.Bid rigging.

v.v. Manipulation in specification.Manipulation in specification.

I.I. Irregular payment not complying rules/regulation.Irregular payment not complying rules/regulation.

II.II. Faulty specification.Faulty specification.

III.III. GOVT. revenue loss.GOVT. revenue loss.

IV.IV. Procurement without specific plan.Procurement without specific plan.

V.V. Payment made/expenditure show by Payment made/expenditure show by

VI.VI. djusting documents without work done.djusting documents without work done.

VII.VII. Equipments/goods delivered not conforming speciation Stock /Inventory.Equipments/goods delivered not conforming speciation Stock /Inventory.

XI.XI. Way/Technique of corruptionWay/Technique of corruption1.1. In collusion with local agent.In collusion with local agent.

2.2. In excess of estimated cost and market price.In excess of estimated cost and market price.

3.3. Parches made from other than lower bidder.Parches made from other than lower bidder.

4.4. Procurement of same article at different rates.Procurement of same article at different rates.

5.5. Purchase made from Non-manufacturing agent.Purchase made from Non-manufacturing agent.

6.6. Carriage & insurance paid by procuring entity instead of supplier.Carriage & insurance paid by procuring entity instead of supplier.

7.7. Procurement of unusable, non- essential, unnecessary items.Procurement of unusable, non- essential, unnecessary items.

8.8. Procurement made without user demand.Procurement made without user demand.

9.9. Purchase of defective pallets.Purchase of defective pallets.

10.10. Payment of survey cost by procuring entity instead of supplier .Payment of survey cost by procuring entity instead of supplier .

11.11. see next slide....see next slide....

XI.XI. Way/Technique of corruption Way/Technique of corruption contd.....contd.....

12. Earning not deposited to Government treasury revenue from tender schedule etc. sale records.

13. False statement of repairs of medical equipment’s.14. False equipment purchases.15. Procurement in excess of procurement plan.16. Low graded equipment purchased.17. Purchase from non-responsive bidder.18. Procurement was made by altering technical specification.19. Payment made without work done (training, maintenance, service charge)20. Non recovery of VAT at source.21. Payment made before supplying goods.

XII.XII. Limitation of AuditLimitation of Audit

1.1. We don’t have mandate.We don’t have mandate.

2.2. There is a another government organization There is a another government organization called (ACC) Anti-Corruption Commission to called (ACC) Anti-Corruption Commission to prevent corruption.prevent corruption.

3.3. People are not willing to give evidence.People are not willing to give evidence.

4.4. People are not willing signature in evidence.People are not willing signature in evidence.

5.5. SAI has got no power interrogate concerned SAI has got no power interrogate concerned people.people.

6.6. Presently law does not supportPresently law does not support

D) D) Conclusions Conclusions

In the situation stated above our SAI is trying In the situation stated above our SAI is trying to open new avenues to make audit to prevent to open new avenues to make audit to prevent fraud and corruption. We conduct a pilot audit fraud and corruption. We conduct a pilot audit on corruption revealing many techniques how on corruption revealing many techniques how Corruption occur.Corruption occur.

Thanks to all participantsThanks to all participants..