Question

Find a court case where fraud occurred over several years and discuss the responsibility for detection and prevention of this fraud on the part of management, internal auditors, and external auditors. Evaluate what "red flags" were missed in this court case you found and which internal controls you think were missing that allowed this fraud to continue over several years.

Answer 1

Management is responsible for prevention and detection of fraud and error and in most of the frauds are occured due to lack of controls in the organisation. Here

Take the example of Satyam Scandal,

In Satyam Communications Company reported Fictitious Cash Balance, Interest Income on Fictitious Fixed deposits, Fictitious foreign Exchange Gain,Employee costs booked for 53000 employees but Actually there are only 40000 employees

Therefore Everything is fictitious here(Fictitious Expenses,Revenue,Assets)

Lack of Controls:

1) External Confirmation of Fixed deposits not done - To get rid of Fictitious Interest Income

2) Employee Payroll System - KYC norms of employees not monitored and no check in physical existence of employees

3) Foreign Exchange Gains not monitored by Comparing with Export Sales/services and Reinstatement of debtors

4) Physical Verification of cash balance not done properly

5) Proper segregation of duties should be present

Auditors should have check proper controls exists or monitor in the company but they relied on the inaccurate,incomplete information not complies with Regulatory requirements