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Session IV

Modus operandi of fraud and factors influencing fraud

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Session Overview

General modus operandi of financial fraud

Understand the individual and organizational environments in motivating fraud in workplace.

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Learning Objectives

Participants will develop an insight on modus operandi of frauds and also the motivational and organisational factors responsible for the crime.

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Modus Operandi of frauds• Misappropriation of cash or

embezzlement of cash• Receipts side of cash book

omitting to enter cash received under-recording of cash recording lower amount on counterfoils

than actual receipt fictitious payment over-recording of actual payment

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Modus Operandi of frauds (Contd.)

Payments side

• False charging of personal expenses

• Double payments against single transaction

• Inclusion of dummy workers in wage bill

• False credit to various personal accounts for withdrawal later

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Modus Operandi of frauds (Contd.)• Other forms of embezzlement

Teeming & lading Depositing funds at one branch by using inter-

branch account settlement process and withdrawing funds from a different branch.

Using correction entries to embezzle money from accounts, transferring funds from other accounts to make up shortages

Kiting-withdrawals against cheques that have not been collected

Lapping-stealing of cash from accounts receivable

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Modus Operandi of frauds (Contd.)

Mis-appropriation of goods & services

Omitting to enter goods received Recording less quantity than received Recording excess issue than actually issued Procurement of low quality goods Hiring services at high cost

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Modus Operandi of frauds (Contd.)• Manipulation of accounts

Under valuation of stock Over valuation of stock Fictitious purchase Wrong allocation of revenue and capital exp. Recording next year’s revenue as income for

current period as income for current period Overstatement of profit or understatement of profit Over or under invoicing

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Fraud & corruption may co-exist in certain ways

• Conflict of interest situation• Non existent company whose invoice is presented by an

official involved in purchase process• Excess purchases with a view to divert for personal use• Split purchases to evade competitive bidding in exchange

of favours• Extortion• Nepotism• Tax or duty evasion through false representation

involving negligence of Govt. official

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Factors influencing fraud & corruption

Why need to examineTo enable auditor to appreciate potential risk

of fraud emanating from individual & organizational causes

• Motivational

economic – financial gain greed prestige or recognition moral superiority

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Factors influencing fraud & corruption (Contd.)

• Organisational

insensitive management that judges employees on short term results

vague policies, inadequate internal control & accountability, history of abuse

low compliance of regulatory requirement, high turnover of employees, lack of transparency in reward systems

rationalization of actions that ends justify the means, either at the individual level or at the level of organization, the external perpetrator/accomplice might argue that corruption is a cost of doing business.