Audit of Fraud & Fraud Detection TechniquesRTI, Nagpur

Case Study 2.6

Smt. MGS functioned as Chief Accounts Officer (CAO) ZP., ‘A’ during November 1995 to June 1998 and from July 1998 till State Government suspended her in December 1999 as CAO., ZP. ‘B”..

During audit it was noticed that there were 54 SB Accounts in operation in 11 banks in ZP ‘A’ during 1994-99 of which the transactions in 28 bank accounts involving an amount of Rs.10.60 crore were not accounted for in the records of ZP. Of these, MGS had opened at least 32 accounts during April 96 to June 1998 in five banks. The schemes to which the accounts related were not specified in the case of seven accounts while one account was opened as a miscellaneous account. She had closed 5 accounts of 32 accounts within 3 to 141 days of opening these accounts. Similarly in ZP ‘B’ , 67 accounts were operated during 1997-2000. Of these, MGS had opened 45 accounts in 14 branches of 7 banks and closed 31 of them during her tenure from July 1998 to December 1999. Of these, 12 accounts were in operation for only 1 to 3 months and the remaining 19 were closed after 5 to 17 months. The transactions in 18 out of 45 accounts involving a total amount of Rs. 7.48 crores did not figure in the records of ZP ‘B”.

MGS drew Rs.29.32 crore through 428 bills during November 1995 to December 1999 from ZPs, ‘A’ and ‘B’ under various heads of account out of the funds adjusted to ZP Fund and obtained cheques in favour CAO. These cheques were unauthorisedly credited to the above bank accounts. Of these, 83 cheques for Rs.10.60 crore drawn from Treasury‘A’ and 53 cheques for Rs.7.48 crore drawn from Treasury ‘B’ relating to major heads of accounts 2202, 2501, 2505, 2515 etc. did not figure in any of the relevant records of ZPs., ‘A’ and ‘B’ respectively. The vouchers (paid bills) for these 136 treasury cheques for a total amount of Rs.18.08 crore were not available in the ZPs. However 111 cheques (Rs.14.88crore) lot of 136 cheques were traced by audit in the bank accounts unauthorisedly opened which did not figure in the records of ZPs. Audit verified the end use of the money drawn by MGS at ZPs ‘A’ and ‘B’ by a scrutiny of deposits and withdrawal as reflected in the ledger extracts and copies of paid cherques obtained from the banks where MGS had operated SB Accounts.

The following serious violations were noticed.

(a)Out of the investment of Rs.17.93 crore made in short term deposits with banks without Government sanction, only 56 deposits for Rs.7.46 crore had been reflected in the records of ZP ‘A’. The proceeds of the deposits were credited to unauthorized SB Accounts.

(b)CAO obtained loan of Rs.5.08 crore from a bank without Government sanction against the security of fixed/term deposits. She cleared the loan account and the interest of Rs.7.18 lakh partly out of the proceeds realized on maturity of the deposits and partly by transferring funds from SB Accounts.

(c)CAO availed overdrafts of Rs.38.87 lakh from a bank and did not account for them in ZP records.

(d)MGS indulged in frequent and unnecessary transfer of funds from one SB Account to another and consequently, there was total mixing up of funds relating to several schemes. She misappropriated funds from the SB Accounts by (i) drawing huge funds on self-cheques and through cheques on banks for demand drafts/pay orders in favour of fictitious persons, (ii) issuing cheques in favour of officials of ZPs and/or their relatives; and (iii) issuing cheques for huge amounts in favour of persons/firms who had not rendered any service or supplies to the ZPs. Smt MGS misappropriated total Rs.340.59 lakh in ZP’A’ and Rs.530.30 lakh in ZP’B’.

Questions:

  1. What do you understand from the above case study?
  2. What factors facilitated Smt.MGS to commit misappropriation?

Suggested Solution to case study 2.6

Failure of treasury Officer: Treasury Officers ignored serious deficiencies in the bills preferred by

the CAO and passed them for payment.

(I)Grants released by State Government for certain State/Central Schemes and adjusted to ZP funds are not to be drawn by CAO from the treasury. However, DTOs overlooked this procedure, passed irregularly preferred grant-in-aid bills by the CAO almost routinely and issued cheques in favour of CAO. (OBB Rs.3.02 crore, GE Rs.93.40 lakh and GP grants Rs.27.99 lakh).

(II)Under the Centrally Sponsored Scheme of “Supply of Improved Tool Kits to Rural Artisans”, MGS paid Rs.9.47 lakh in December 1998 from the bank account of the scheme to supplier firm which supplied the tool kits to Taluka panchayats. MGS prepared claims on two bills for Rs.9.47 lakh (Dec 98/June 99) based on carbon copies of bills of supplier for which payment to supplier had already been made in December 1998. The DTO passed these bills and issued two cheques. The DTO ignored that bills preferred on the basis of carbon copies were not to be entertained and thereby facilitated the fraud.

(III)DTOs passed 25 Grant-in-aid bills of Rs.3.98 crores, even though CEO countersigned none of them and the sanction orders were irregularly signed by MGS on behalf of CEO. In 17 other cases of Rs.3.32 crore CEO had countersigned but sanction orders were signed by MGS on behalf of CEO.

Failure of CEO:

MGS did not maintain cashbooks for a large number of schemes. Monthly accounts were not prepared. Wherever cashbooks had been maintained, the balances as per cashbooks were not reconciled with the bank balances, though prescribed. CEO failed to review the monthly accounts and notice the lapses, which facilitated continued misappropriations of funds. Reconciliation of ZP balances with those of the treasury had not been done. The CEO failed to ensure reconciliation. The Irregular drawal of funds by the CAO and parking them in unauthorized SB account was within in the knowledge of the CEO but he never intervened.

Involvement of Bank: The CEO and the Dy Secretary of ZP were the Directors of the Bank where MGS used to divert the funds and subsequently misappropriating.

In respect of 17 SB accounts, entries relating to many drawals and deposits of funds in the ledger extract of the SB Accounts of the CAO furnished by Bank were not entered in the passbooks issued by the bank to ZP. The bank issued two sets of passbooks in respect of these SB accounts, one to suit the manipulation of MGS and other containing details of all the transactions. Scrutiny of copies of paid cheques indicated that 34 cheques issued by MGS for Rs.44.42 lakh in favour of the bank for demand drafts and pay orders were found encashed by MGS herself.

Failures of Chartered Accountants.: The guideline of Centrally sponsored Schemes (like JRY, EAS etc) operated through bank accounts prescribe that the account of the schemes should be got certified by Chartered Accountants every year. The Chartered Accountant however professionally failed in pointing out the lapses.

Case Study 2.61