Fraud Story #4 Needs Recognition

Amar, a packing material inventory handling personnel of a multi-national company is responsible for preparing/editing the designs for the packing material and getting it approved by the Engineering Team of the company. Part of his responsibilities included overseeing the activities of ordering the log to be sent to the sub-contractor and the receipt of wood packing materials from the sub-contractor to the factory.

Part 1: Material Receipt & dispatch to Sub-Contractor

Logs ordered from the vendors are received at the factory, a quality check is performed and then GRN is passed for the accepted quantity. Basis the packing material requirement as per the finished goods plan for dispatch, packing materials are to be ordered and received from the sub-contractor. An inter-plant transfer entry is passed, and the logs are sent to the sub-contractor.

Part 2: Receipt of Completed Packaging Material

Once the logs are sent to the sub-contract and an order is placed for the different types of packing materials for which the designs were approved by the Engineering Team, the finished packing materials are received within the agreed timeline.

Part 3: Quality Check, Invoice booking & Payment

Quality check is performed by Amar and is cleared for the dimensions as approved by the Engineering team. The invoices are sent to accounts payable for invoice booking & payment.

Part 4: Things we didn’t know until Internal Audit found it out

• Gets the design changed by the Engineering team stating the finished goods are fragile in nature, so the dimensions need to be increased. Eg., 7x4x2 (56 m^3) dimension changed to 8x4x2 (64 m^3) thereby increasing the wood requirement by 8 m^3.
• Sends the old blueprints to the sub-contractor and informs him to prepare the packing material in the dimensions they were earlier made.
• The logs that were sent to the sub-contractor were prepared only after they were aged so that the wood quality is reduced, and the rejected packing materials cannot be debited to the sub-contractor. Sells these rejected packing materials to a preferred vendor.

How did the Internal Auditors find it out?

•  Multiple design changes were noted during the same period.
• The quality check did not have a maker-checker or another employee doing the QC apart from Amar.
• The input-Output ratio as per the order placed for the packing material was computed to find the theoretical consumption of the wood and cross verified with the physical stock lying at the sub-contractor location. E.g. 70 M^3 log with the vendor, ordered to make 8x4x2 (64 m^3), had 14 m^3 logs left instead of 6 m^3.
• The packing materials in the factory were taken out on random sample and measured against their approved design to find out in majority of the cases the output was not in line with the design.
• During physical verification, old logs were noted that were not supposed to be used for the packing material, raising doubts as to whether the procured logs by the company in fact reached the sub-contractor.
• Correlating the sudden increase in the damaged goods in transit, increased insurance claims were used as corroborative evidence.

Questions to ponder upon?

• Is it possible the design change was approved despite knowing the fact that the size is more than what is required by the Engineering team?
• Would be preferable to have a maker-checker at the QC point? or should there be a design change team that reviews such changes on a timely basis?