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Forensic Auditing in Government

Written By Admin on Monday, 2 September 2013 | Monday, September 02, 2013

Forensic Auditing in Government: An Absolute Necessity
-Nalin Kumar Srivastava

With the phenomenal increase in Governments expenditure and revenue budget, the operations of Government have become much more complicated and cumbersome. There has been a paradigm shift in the States focus so far as governance and administration issues are concerned. The priority of government is to uplift the overall socio economic conditions of the citizens of the country. Though, this has been the priority since independence, but this has become more significant in the recent times as the Governments exchequer has sufficient resources to support these developmental initiatives. In this scenario it has become an absolute necessity for the Government to ensure thathe actual benefireaches to the intended  beneficiaries anthere are no leakages and malpractices in the channel. This is particularly significant in the light of the phenomenal  tax  growth  witnessed  by  the  countrrecently  but  this  phase  may  not continue indefinitely and so there is an urgent need to utilize these resources properly and to ensure that the benefits reaches to the poor and needy citizens of the country. In this context, the role of auditing in general and forensic auditing in particular assumes significance.

For  anGovernment,  the  biggest  challenge  is  to  prevent  leakages  and  fraudulent activities present in the system. Many of the Schemes in the Social sector have not been able to deliver the intended results as they were not having proper implementation strategies. Placing the internal controls in placehaving proper internal and forensic auditing strategies should form a significant part of the Scheme Implementation Guidelines. There is a need for an expert group who would carefully plan these strategies, right at the Scheme design level and put them in place in operational manual as well so that they become integrated in the Scheme itself.

The objective of forensic audit is to find whether or not a fraud has taken place. Forensic auditor shall have to examine voluminous records and witnesses, if permitted by law. Proper documentation is vital in substantiating the findings. The auditors need to have a fair knowledge of entitys business and legal environment. They should also have awareness of computer assisted audit procedure for carrying out proper forensic audit. The forensic audit also requires an innovative approach from the auditors so that they are able to outsmart the fraudster.

Integration of Forensic and Internal Auditing
Internal  Control  Framework  and  internal  audit  is  carried  out  and  reported  within  framework which assumes that the top executives of the Ministry are responsive to the need for good governance and accountability and would therefore act upon the audit findings.  But,  at  some  places  there  is  even  a  clear  wilat  the  top  to  misuse  the Government resources and give mala fide orders and directions to the subordinates.

In India, there are agencies which are responsible for investigating fraud and corruption. To make their effectiveness better, there is a need to integrate forensic auditing with the role of these investigating agencies. The forensic auditing can provide preliminary data

upowhich  these  investigating  agenciecan  bastheir  investigationsThe  formal weddinbetween forensic auditing aninvestigating agencies can go a long way in preventing frauds and ensuring that the Governments resources are utilized properly.

Data Mining and Data Analysis: A Key to Forensic Auditing

One of the best ways of addressing the challenge of fraud, waste and abuse is through computer matching. Regarded as effective management tools, matching techniques can be used to examine extremely large amounts of computerized data quickly and cheaply. The ability to match computer data or in modern terms data mine has come a long way as evidenced by burgeoning forensic auditing field. Data analysis is, in fact, one of the most important techniques for any auditing leave alone the forensic auditing and it can help in giving our audit a meaningful direction. This is particularly significant in the light of recencomputerization of financial and accounting operations of the Governmenof India. Presently, the entire payment and accounting of the Central Government is through Expenditure Accountinsoftware called  COMPACT whichas  led to  a creation of database for all the payments made out of Government exchequer. Now, this database can be used for generating meaningful information which can provide useful feed for auditors going to audit on the ground.

The COMPACT database generated by various field units can be operated upon by some data mining software such as ACL (Audit Command Language) which will throw all the exceptions such as payment made to one agency repetitively in a financial year or number of payments made in a range just below the sanctioning limit prescribed for one level of authority. Similarly, we can generate various types of exceptions both on the revenue and expenditurside.  Thaudit  team caplan  its  fielvisitaccordinglbaseothe seriousness of these exceptions and also can have a focused and planned approach in conducting the actual examination at the ground level.

The analysis of data can give useful trends which can be used for analyzing control weaknesses and also for putting a proper control system in place. Thus, the Government Auditors would need to develop an affinity towards data mining and data analysis techniques and should actually develop a habit for playing with data so that their interpretation of any data set becomes logical and are able to draw conclusions from the available data.

Critical Point Auditing:
Forensic auditing should focus on significant transactions. Critical point auditing technique aims at filtering out symptoms of fraud from regular and normal transactions in whicthey  are  mixeor  concealedFor  this purposefinanciastatements,  books, records,  etc  are  analyzed  mainly  to  detect  significant deviations.  This  technique emphasizes on trend analysis by tabulating significant financial transactions, detecting unusual  debit  and  credit  entries  in  the  account  leading  to  unusual  debit  and credibalances.    The    technique    also    focuses    on    weaknesses/inadequacies    in    internal control/check  system  likdelayed  or  non  reconciliatioofigures  reportethrough accounts  or  that reported  to  RBI.  The  analysis  of  these  can  help  in  bringing  out

significant deviations. Besides, the technique also emphasizes on finding out false debit or credit entries to detect frauds related with omission or commission.

Propriety Audit
Propriety audit is conducted to report that whether all the expenditure sanctioned and incurred are need based and all the revenues due to Government have been realized in
time and credited to the government account. In conducting the propriety audit, Value foMoney audit technique aims at  lending assurance thaeconomy, efficiency and
efficacy have been achieved in the transactions for which expenditure has been incurred or revenue collected is usually applied. The same analogy, with modifications to the
principles of propriety of public finance, applies to forensic audit to establish fraudulent intentions if any, on the part of management. Financial frauds are results of wasteful,
unwarranted and unfruitful expenditure or diversion of funds by the investigated entity to another entity.

In carrying out fraud investigations auditors need to proceed scientifically and develop a profile of the entity under investigation, its personnel and beneficiaries, using available information. This should be followed by identifying questionable accounts, account balances and  relationshipbetween accounts,  for  finding out  variances  from current expectations and  past  relationships.  Finally,  the  auditors  shoulgather anpreserve evidence corroborating asset losses, fraudulent transactions and financial misstatements.

Eight Steps to Forensic Auditing Applied to NREGA
These nine steps would be able to establish a viable forensic auditing on an ongoing
proactive basis in a cost effective manner. These eight steps have been illustratively applied on NREGA Scheme; however the application is not exhaustive.

1.   Take Stock of the Risks: In this step the risk matrix of the Scheme needs to be established and major risks should be identified. Few risks of the Scheme can be listed as:
a Presence  of a  very  large  distribution  chain  may  hamper  the  program objectives.
b Illiteracy level high in the villages may hamper the program execution as few people may take their advantage.
c Absence  of  a  proper  grievance  mechanism  in  the  Scheme  is  also  a significant risk which may hamper program objective.
d.   Lack of proper mechanism in issuing job cards which may lead to issue of duplicate cards.
e Non integration of census and job card data.
f.    Actual  entitlements  and  provisions  of  the  Scheme  not  known  to  thbeneficiaries.
g.   Mass scale publicity of the Scheme not being done in the Scheme.
h Difference  ithe  local conditions  macreate  problemas  Scheme  is uniformly designed for the country.
i.    Not monitoring the asset created in the Scheme.
j.    Lack of appropriate documentation at the field level.

2.   Determine how these risks can be exploited: Each of these risks can hamper the Scheme objectives and can lead to siphoning of the Government money. A long distribution channel may lead to leakages in resources at various stages. Similarly, a high illiteracy level in rural areas may lead to underpayments by the officials to the  beneficiaries,  howevetaking  their  signatureon  higher  amounts.  The presence  of  a  grievance  mechanism  acts  as  a  deterrent  for  the  officers  and officials in performing an illegal act, but if this mechanism is not in place it can encourage them to indulge into wrongful acts. Job cards are quite critical in the actual Scheme  implementatioanthis  makes  thprobabilitof their  abuse higher. Duplicate job cards can lead to creation of ghost workers in the Scheme. This can be checked by relating the issue of job card with the census data. These kinds of decentralized Schemes can function well only if there is a requisite level of awareness in the citizens of the country otherwise they can easily be exploited by the various intermediaries in the channel. Thus, each of these risks can be exploited and has got a potential for fraud and therefore needs to be addressed carefully.

3.   Determine  What  Information  is  Available  to  Test  for Fraud,  Waste  and Abuse: This is a significant aspect of any audit in general and forensic auditing in particularThe  form and content  of informatiohas a direct  bearing on any investigation. The auditors should be thoroughly familiar with the provisions of the Scheme to identify the source of information and also to determine how it can be used for drawing inferences. The actual expenditure should be linked to asset created in the Scheme and to compare it with some pre-established benchmarks for the Scheme. The actual expenditure should also be linked to overall improvements in the poverty data. For testing frauds, the documentation related to Job Cards should be thoroughly checked and matched with the Census data to ensure that the number of job cards issued is related to the population of the place. The  muster  rolls  should also  be  checked  and  analyzed  and  can reveasome interesting results as has been noticed in C&AGs audit report that the same set of workers working at two different places on the same day. Thus, getting hold of relevant information is very critical for any fraud investigation.

4.   Develop Forensic Testing Protocols: This step would require a proper design oforensic auditing protocols such as sample size for data testing, fraud risk questionnaire, developing operations flow chart and analyzing various aspects of those operations, developing a cause and effect relationship for various problems anticipated in the Scheme etc. There are three phases to  developinan effective anti-fraud program: assess, improve and monitor. A fraud risk assessment is a proactive step that can be taken to identify areas that pose a high risk of fraud. Once the risks are identified, a gap analysis can be completed and improvements can be recommended to mitigate the fraud risks, which can be subsequently monitored. The gap analysis and recommendations would typically be completed by a team separate from the team that will ultimately audit the improvements. A response plan should be put in place to ensure that there is a process to address any frauds that arise.

5.   Perform Data Mining: Data analysis and data mining is the most important aspect of any forensic audit protocol. Thus, digitization of the ground data is quite significant for generating essential forensic auditing protocol. The Ministry of Rural Development is using a Monitoring group at the Ministry level which gets data keyed into the system from various units located throughout the country right up to block and village level. The next step in NREGA Scheme should be the use of data mining software like ACL to generate exception reports which can be further be used for conducting an informed audit. The use of data mining software would imply that the entire database has been examined and the residual errors which are a characteristic of any sampling plan would automatically be eliminated from the system.

6.   Analyze the Results of Data Mining: Analysis of results of data mining would be significant for drawing conclusions regarding the Scheme audited. Analytical Procedures can be used for analyzing results of data mining. These procedures include comparing the trends in the current year with last year’s trend, projection of trend in various quarters of the current financial year, analysis of any abnormal variations in the trend, analysis of performance indicators of the Scheme etc. These analytical procedures can be applied on the data mined from the database to firm up conclusions regarding the operations of the Scheme. The analytical procedures help in proper interpretation of data.

7.   Use the Results of Data Mining: The results of data mining can be used in sending the audit teams at the places where the likelihood of fraud is high and significant deviations are noted in data mining and data analysis performed in previous stages. This woulhelp in saving lot on the total audiresources required in conducting the actual audit at the field level as the audit teams will not be required to go to all the field locations. This aspect is particularly important for Schemes like NREGA which have got a huge geographical spread and it would not be possible to audit all the units even by devoting all the audit resources of the Ministry. As a first step in this direction we should go for Sampling Techniques in identifying the auditable units and then as a further step data mining can be used for channelizing the audit resources.

8.   Sharing Experiences and Best Practices: Experience sharing and training would form a part of Forensic Auditing protocol as the success of this methodology would largely be dependent on trained audit resources available in the Ministry. A model methodology needs to be developed and a manual for generalized forensic auditing should be should be developed by the O/o CGA and then individual Ministries should develop Scheme specific guidelines related with the operations of the Ministry. The forensic auditing discipline needs to be cultivated further and there should be a concerted effort to develop this new area.


Forensi auditing   i  comprehensiv undertaking Once   it    i completed the organizations key stakeholders should capitalize on the work by implementing controls to reduce the risk associated with the event identified as having material and significant ratings and being most likely to occur. The strength of current controls in place and whether they are preventive controls or detective controls are taken into consideration. Can the current controls be overridden or circumvented? Future audit programs should include test on the design and implementation of these controls. If an event has been identified as inconsequential, forensic auditors may decide to take no action; even so, at least it would be documented, and management would be aware of its existence. The forensic risk assessment is not the end of the process. Circumstances change constantly and some changes may trigger the need to revise the assessment. A fraud risk assessment process should be ongoing, dynamic and reflect the organization’s current business conditions.
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