Audit of Fraud & Fraud Detection TechniquesRTI, Nagpur

CASE STUDY NO 2.5 ( Based on material supplied by A.G.(A&E) A.P )

Please read the following case and suggest on the basis of your audit/work experience at what stage the internal and external controls failed and reasons for its failure: -

1. A Medical Officer of Primary Health Centre “ X” was permitted to draw pay and allowances and Offices Expenses of his staff from Sub Treasury “ Y’’.

2. The grants for the office of Medical Officer ware allocated by Deptt of Medical Education and Research and Public Health through Director of Medical and Health Services.

3. During the period from 1991-92 to 1996 –97, the Medical Officer had operated two MH i.e. 2210 – Medical and Public Health and M.H 2211 Family Welfare.

4. While Checking the list of payment for the month August /1996 in the office of AG (A& E), it was noticed that the total members of employees as per Vouchers were disproportionate to any unit of Primary Health Centre. Further Verification of Vouchers for the month of June, July and August /1996 also revealed that names of employees on pay roll differed from Month to Month.

5. Salaries and Allowances were drawn at the average of 9 bills every month for a staff of 50 members under the MH 2211 Family Welfare. The verification of bills under the M.H 2210. Medical and public revealed that similar drawals were made by the M.O.P.H.C under the M.H 2210 Medical and Public Health, although M.O was not empowered to operate the above M.H. The bills of dummy employees debited to MH 2210 did not contain subscription towards GPF and recoveries such as MCA advance, Festival advance, PLI and Income Tax etc.

6. All types of advances and reimbursements like, Children Marriage advance, APCO Loan, festival advance, reimbursement of ChildrenSchool fees were drawn by DDO.

7. Double drawals during the period 1991-92 to 1996-97 by DDO and payment by S.T.O. detected in A.G. (A&E)’s office amounted to Rs. 45 lakhs.

8. The matter was brought to the notice of Director of Medical and Health Services and as a result, after four years the senior Assistant of the Primary Health Centre and Sub Treasury Officer were charge sheeted and it appears the departmental action was still in progress.

9. Shri “ A’’ Senior Asstt. was holding the post of cashier during the period 1991-92 to1996-97 was also entrusted with the work relating to preparation of bill, presentation of bill to S.T.O bringing cash from the bank and reconciliation of expenditure with S.T.O.

Suggested Solution to case study No.2.5

The Internal and External Controls that were required to be exercised in respect of monetary transactions pertaining to Primary Health Centre at various levels were as follows:

Controls

Internal External

Internal Controls

  1. Cashier:- In order to exercise sound financial controls in each office the work relating to preparation of bill, preparation of reconciliation statement and verifying it with treasury payment register and forwarding it to Budget Controlling Authority is done by an individual different from the cashier dealing with work relating to presentation of bill to STO/TO, bringing cash from the bank, accounting the withdrawals in cash book, undisbursed pay and allowances register. However in the instant case, the entire work was handled by one person for prolonged period of time. This had resulted in giving chance to the cashier to plan overdrawal of Government funds. Had the authorization and payment functions had been segregated, the excess drawals would not have been facilitated.
  2. Drawing & Disbursing Officer:- It is the duty of D.D.O. to see that the full account classification must be recorded on each bill together with its allocation to the Department concerned. Besides, on the backside of the bill, the balance of sanctioned allotment must be indicated to enable the TO/STO to satisfy himself that the funds are available for payment. As evident from the case study, the D.D.O. was permitted to operate only M.H. 2211 Family Welfare not the M.H. 2210 Medical and Public Health. When the bill for payment under the M.H. 2210 Medical and Public Health was presented to him for approval, the approval to the bill ought to have been withheld and investigation ordered to know the real intention of the Senior Asstt. “A” in presenting such bill for approval.
  3. Assuming that checks described at Para 2 escaped the notice of D.D.O., this could have, however been detected at the time of approving expenditure statement. Under the extant orders each D.D.O. has to furnish expenditure statement to the Budget controlling Authority every month duly reconciled with the payment register of Treasury/S.T.O. While approving the statement, the difference between the S.T.O. figures of expenditure and D.D.O. under the M.H. 2211 Family Welfare, would have given enough clue to order detailed investigation against the Sr. Asstt. “A”, since expenditure statement under M.H. 2210 Medical and Public Health would not be sent to Budget Controlling Authority, as there was no authority to operate this M.H.

Non exercise of mandatory checks by D.D.O. while approving the bills cast serious doubt on his honesty and integrity and inquiry could have been ordered when over-drawal came to notice.

  1. District Health Officer :- The functions of Medical Officer of P.H.Cs are supervised by the District Health Officer by conducting periodical checks of the records of Primary Health Centre. Such regular checks do not appear to have been exercised.
  2. Director of Medical and Public Health :- Although the un-authorised drawals were brought to the notice of Director of Medical and Public Health in August 1996, the inquiry was ordered after 4 years against Sr. Asstt. “A” and S.T.O. In fact the un-authorised drawals should have come to the notice of the Director Medical and Public Health during the course of reconciliation of figures of expenditure with the figures booked in A.G. (A&E) office. It appears that proper reconciliation of expenditure was not done. The system of handling the cash and establishment section by one person was generally in vogue in all the Public Health Centres. Using this case as a pointer, the Director of Medical and Public Health could therefore have ordered detail check of accounts of Public Health Centre in question and accounts of other Public Health Centres also by Internal Audit wing of his office.
The detail check of accounts of Public Health Centre in question and all the Public Health Centres would have brought to notice complete picture of un-authorised drawals not only in the Public Health Centre in question but state of accounts of other Public Health Centres also. Consequently limiting the scope of the inquiry to the extent of over drawals reported by A.G. (A&E), that too against Sr. Acctt. “A” and S.T.O. was not sufficient.
  1. Administrative Department of Government. It should have been possible for the concerned department to order detailed investigation not only in respect of Public Health Centre where un-authorised drawals were made but also in respect of all the Public Health Centres where functions relating to handling of cash and establishment is manned by singe official.

External Checks

  1. Before passing the bill, the following checks are to be exercised by TO /STO.

a) Comparison of signature with reference to signature available in TO /STO office.

b) Supported by sanction of Competent Authority.

c) Claim is 100 % arithmetically accurate and consistent with inner totals of the bill.

d) Classification of expenditure recorded on the bill is correct.

e) Besides, Other Checks applicable to the types of bill presented should also be applied.

f) The Checks enumerated at (a) to (e) are mandatory and failure on the part of TO /STO is to be taken as treasury irregularity and reported to Government for appropriate action by audit.

In the instant case STO had failed to exercise checks at (b) and (e), which is evident from the facts mentioned below: -

i) TO/STO also receives the copy of sanction from the Govt regarding budget grants on which, DDO’s are permitted to operate.

ii) The pay bill is supported by schedule of GPF recoveries, advances paid, house rent, PLI and I.T deductions if any. As could be seen from the case study, the recoveries towards GPF and other recoveries were not shown in bill drawn under the MH 2210 Medical & Public Health.

Theses facts were enough to lead the STO to examine whether bill presented was in respect of in genuine employees working in the concerned department.

Besides, if a demand of any kind is presented at a treasury for a payment which is not authorised by general or special orders from the Accountant General, the T.O./S.T.O. shall decline payment for want of authority. Viewed thus, the possibility of collusion between, S.T.O. of Sub Treasury “Y” and Sr. Asstt. “A” of Primary Health Centre “X” cannot be ruled out in drawing the un-authorised amount. Looking from this angle, the act of un-authorised drawals became more serious as internal and external controls had failed completely t because of total lack of compliance of controls at all levels.

Treasury Officer :- Daily accounts of Sub Treasury are incorporated in the District Treasury’s account on the same day or at the latest on the day following the day of its receipts in the treasury. It is the duty of the Treasury Officer to scrutinize and examine every item of receipts and payments shown in the daily accounts and watch against all irregularities in the same way as those at the District Treasury. He shall examine and regulate the procedure of sub-treasuries as far as he can from the daily examination of their accounts. In case T.O. owing to volume of Sub Treasury transaction finds it difficult to scrutinize each and every sub treasury voucher, he may at his discretion leave over the work to the Accountant, a percentage of check not less than 20% being effected by him. All vouchers checked by the T.O. himself must be initialed by him as a token of the fact that he has exercised the check.

Had the procedure prescribed above been followed by the T.O., the un-authorised drawals by Sr. Asstt. “A” could have been detected in the very first month. This also shows that the supervision at the level of T.O. were not being exercised effectively.

  1. Collector :- Treasury officer works under the direct control of collector at the District level. Besides, he also does the administrative inspection of treasury annually. It should have been possible to detect these irregularities during treasury inspections.
  2. Deputy Director Accounts and Treasuries :- The annual inspection of Treasuries and sub-treasuries is also done by the Dy. Director of Accounts and treasuries. When the matter of un-authorised drawals came to his notice, the detail check of treasury and sub treasuries where system of handling the cash and establishment section is vested in one person in Public Health Centres could have been conducted by him. This would have brought the entire un-authorised drawals to the notice.
  3. Director of Accounts and Treasuries :- On being pointed out, the un-authorised drawals from sub treasury “Y”, only action taken was chargesheeting the Sub Treasury Officer. The action appears inadequate on the ground that the figures of over drawals reported by A.G. (A&E) was limited to some months. The detail investigation of the Sub Treasury would have brought to light the complete picture of un-authorised drawals. Besides, he could have also ordered detailed investigation of other Sub Treasuries also where the practice of handling the cash and establishment work is manned by one and the same person.

Finally, the Director of Accounts and Treasuries should have reported the matter to Finance Department to initiate remedial measures both through better monitoring of compliance of controls and through initiating disciplinary action.

In view of the above, the action of D.A.T. appears to be inadequate.

  1. Accountant General (A&E):- As could be seen from the case, the un-authorised drawals were done right from the year 1991-92, however this came to light in August 1996. In fact, this could have been noticed much earlier during the course of reconciliation. The figures of expenditure booked in the office of Accountant General (A&E) under the M.H. 2210 Medical and Public Health will be more as compared to the figures available with Director Medical and Public Health.

The case study also shows that the amount of Rs.45 lakhs were worked out only on the basis of dummy bills available in the Accountant General (A&E) office. This could be further followed by detail inspection of Sub Treasury and Treasury Accounts. Besides detail inspection of other sub treasuries could also be ordered as per discretion to ensure whether proper checks were being exercised

Accountant General (Audit):- On detection of un-authorised drawals, the matter could also be reported to Accountant General (Audit) to enable them to conduct detail check of accounts of Public Health Centre in question and a few others where case and establishment functions were handled by a single individual. This could be been done in combination with detail check of sub treasuries.

Case Study 2.51