Fraud through manipulation 

If top executives lack accounting expertise, deception is even easier 

 Lack of accounting knowledge and too much dependence are thriving grounds for fraud. Generally, most CEOs or top level executives rely upon the financial information presented to them by their treasurers. Apart from verification by auditors, which is usually much later, and application of their own judgement, these top managers accept in good faith the reports submitted by their finance departments. 

If such top level executives lack accounting expertise, accounting manipulation is even easier. The objective could be to influence judgement and allow wrong decisions, which could provide personal gains or benefits to the accountants.

 The following is one such example. A CEO of an advertising company had developed high esteem for the expertise of his treasurer and depended completely on him for all fund management decisions. The CEO was a creative person with no knowledge of accounts. This ad company was being merged with an international ad company, which had sent its own risk assessment audit team to study the financial health of the company. This team went through certain financial reports and one of them was the ‘cash flow report’. The cash-flow projection for the next month was also worked out and appended, along with the cash-flow report to facilitate the CEO to understand how funds were to be managed in the next month. The auditors found something strange in this cash projection report. The total payments clue to be made in the next month exceeded the available resources by about Rs 2 million. 

When this was discussed with the CEO, he said that there was no need to worry, since the treasurer had good personal relations with the bank, and they would allow a temporary overdraft to help out the company. In fact, he added, this kind of a thing happened quite frequently and credit was to be given to the treasurer. Of course, he conceded, privately, some favours had to be given to the cooperative managers. Not satisfied, the auditors went through the last two years’ cash flow reports. They were amazed to note that the temporary overdrafts were far from temporary. In fact, the bank seemed to be funding the company regularly for balance deficits exceeding Rs 2 million regularly without even charging interest! This was incredible. The auditors scrutinised the bank statement in detail. They found the explanation there. The inns was not really funding the company through any temporary overdraft at all. There were sufficient funds in the bank account of the company itself, but not reflected in the books of account. This was cleverly done by ignoring ‘stale cheques’. 

 To understand this fraud, the concept of stale cheques needs to he explained: Under banking laws, a cheque can be encashed within a period of six months from the date of issue. Thus cheques issued more than six months ago, if not encashed, would become invalid or ‘stale‘ and not encashable. The effect of such stale cheques is that the issuer continues to hold the funds until the payee is issued a fresh cheque. Since a transaction became historical data once a cheque was issued such stale cheques remained concealed from everyone, except a few in the accounts department. The appropriate accounting treatment should have been to increase the bank balance on one side and revive the liability to pay on the other. 

The auditors had been reporting that stale cheques were not being accounted correctly, but as in respect of most audit observations, the management had not taken serious note. The treasurer knew that the CEO never went into details. He did not disclose the margin of Rs 20 Iakh (hidden funds on account or stale cheques) while compiling the cash flow report). A detailed examination or all the stale cheques revealed a major revenue leakage. Quite a few or the cheques had become stale because they were not physically delivered to the payee and were actually lying with the treasurer. Most at these cheques related to fictitious vendors, or duplicate bills or other artificial payees created over a period of time. At an opportune time such state cheques were revalidated in favour of accomplices of the treasurer. This was relatively simple because no one paid much attention to disposal or unencashed cheques. 

In order to minimise such frauds, prolonged dependence on one individual for any purpose is dangerous. Forced rotation, or vacations are essential to deter and unearth such frauds and to improve procedures and controls through different viewpoints.


One thought on “Fraud through manipulation 

  1. Rotation is very important. System should not be person centric, however many companies including giant corporations are not taking this seriously and sometimes causing issues to genuine employees who are then not allowed much leaves even in urgency. But many are now improving upon this with the help of internal auditors and experts.

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