Our case studies have been developed from our experience in working with clients over many years. They are intended to provide guidance on resolving common ethical and procedural problems. A skilled auditor can decipher the outcome of management decisions, process inefficiencies, deliberate malpractice, and much more just with access to the published annual report of the company. Upon analyzing the contents thereof, auditors can grasp the flow of information, discrepancies and their root causes.

Background:

We were asked by a client in the Alcohol Industry to do a routine internal audit. The company was making good profits and was in robust financial health. The client was expending over 6 crore rupees annually on hoardings, signage, POS, posters etc. Though all the supporting documents such as budgetary allocation, sanction, approval, copy of photographs, bills, payment etc. looked proper, upon closer examination, we noticed peculiarity.

Although the process looked seemingly right, however the basic principles of Internal Check were not being followed. We decided to go beyond the records and did some investigation.

Trigger Points:

  • No Change in major vendors – Even though tender is done on an annual basis, there had been no changes in vendors for a long time.
  • Over reliance on marketing team – The tendering and independent verification of quoted price was handled entirely by the marketing team.
  • Lack of physical inspections - Payment by finance department was released solely based on photographs and approval of bills by marketing team. On-site checks were not conducted.

Observations:

  1. The payment was made just on the basis of approved photographs and as a result, there was no focus on the quality of material being used or deviation on agreed quality of items vis-à-vis actual used items. For example, once hoardings, signages, etc are installed, it is difficult to find whether the material used inside is approved quality or  inferior quality products were used.
  2. As per the agreed rate chart provided to us, the quoted rates were inclusive of GST and applicable taxes. However, in all of the invoices, GST and applicable taxes were charged in addition to agreed rates. Also, in the agreement with vendors this inclusive tax point was written in such a manner that it is difficult to find it in the long jargon of agreement points.

 

  1. The rate contract contained a finite list of agreed standard of items. This process ensures that spurious products and materials do not enter the process. However, the invoices carried only a generalized description of items, creating room for inferior materials to be used in place of the approved ones.

 

  1. Best practice states that an independent quality check team must physically inspect the site of installation of marketing collaterals. However, such checks were not conducted.

 

  1. In the absence of an independent Quality Control team visiting the site of the hoardings, the size of signboards, flex banners, standees can be altered without informing the necessary authorities. When the collateral size claimed on the invoice isn’t physically cross checked, it causes an absence of documented evidence. There may be unchecked tampering of material, its dimensions, and perhaps even the existence of such hoardings. Additionally, the price of signboards, flex or banners vary depending on their dimensions. If a 10x10 signage is invoiced as 13x10, then there is a 30% inflation in costs incurred.

 

  1. We suspected a close nexus between the marketing team and external vendors involved in the process. When we did independent market survey, we found that the agreed price rate is higher by 25-30% of the market price. We also used the services of a technical expert and found that many photographs were the result of Photoshop skill.

 

Conclusion:

The major doubt factor was the continuity of major vendors for a long time. Often times, a single observation can lead to the discovery of major financial irregularities. Many other financial irregularities were later discovered related to expenses incurred by the concerned department.