Cook the Books and Book the Ledgers - Part 6

 

Scrap Management in some Manufacturing facilities tends to be sparsely controlled and is used as a medium to generate illicit cash and also save on taxes.

 

Let us take an example to drive home the point. Company A would like to dispose of Scrap from its production process to Company B of say 150 units at 15000. (Unit Price Rs. 1000 per unit)

 

The right approach to follow is to dispose of the whole amount and show the entire amount in the books of accounts with a corresponding entry for the full sale consideration in the Bank Book.Thereby taxes are paid on the full amount.

 

However Company A shows 50 units in the Books and takes 5000 to the Bank Account. The balance is received in cash from Company B. This is a novel method to generate illicit cash and save on taxes on the amount collected in cash.

 

While this practise is rampant and closely looked at by Investigators, IDEA can be suitably applied to detect such circumvention's.

 

Method 1 - the scrap sales quantity per day taken to the books of accounts can be compared with the Gate Out / Security Data file to identify mismatches in the two data sources. As an example we look to scrap sales of say 50 units on 02.10.2018 in the books of accounts having an outward movement of 150 units on 02.10.2018 in the Gate Out Data file. One can also look for entries missing all together in the books of accounts whilst present in the Gate Out Data file.

 

This approach is tenable when the Gate Out Data file is properly digitised and maintained accurately. With Scrap Management there tends to be collusion where the entries are managed to reflect the same sale quantity in both files. Then Method 1 will fail to provide the desired result.

 

Method 2 - using ratio analysis (Field Manipulation) and by applying industry benchmarks for Scrap generation in the City under review the Standard Scrap generated (using the benchmark ratio of Input to Scrap) can be compared with the Actual Scrap generated to look at shortfall's in generation and this can be validated / investigated.

 

In the next discussion post we look at identifying splitting of financial entries in the books of accounts below the threshold limit to bypass the internal financial approval limits.

 

Best Regards

 

Group Admin Team