Internal Audit has been gaining importance over the years. This has been due to:
a. Statutory requirements including recent ones through the Companies Act 2013, like mandatory appointment of an Internal Auditor in certain cases, importance for Internal Financial Controls (IFC) under the Directors’ Responsibility Statement, where Internal Auditor could be of significant assistance to the Audit Committee.
b. Growing complexity in the way businesses are being conducted,
c. Limited feasibility for yearend Statutory Audit to cover all aspects desirable, and the need to rely on Internal Auditor’s Reports, and
d. Possibility for the Internal Auditor to review business processes in a more detailed manner, through continuous engagement, and being able to give recommendations for strengthening controls and fraud prevention.
Consequently scope for Internal Audit is also extending to many areas, which were not covered earlier. Thus from Financial Operations like Accounts Payable, Cash and Bank, Revenue, Accounts Receivable, Payroll, Employee Reimbursements, Fixed Assets, and Financial Reporting, Internal Audit is extending to Operational areas and Other Processes like Human Resources, Administration and so on.
In this article, I am sharing my experiences on Human Resource related processes and transactions.
1. Recruitment Process:
The company offered Joining Bonus to some candidates, with a stipulation that they continue in employment for at least one year. Some employees were also paid relocation expenses to move to their new place of posting, with a similar requirement of continuing for one year in service. Where candidates are fetched through recruitment consultants, certain fee is paid to the consultant, with a proviso that the fee is to be refunded to the organization, if the employee leaves the organization within 6 months. Selecting data of exits during a specific period and verification of recoveries made from Full & Final Settlements from employees where joining bonus or relocation expenses were paid and separation was in less than one year, or in cases it was less than 6 months and recruitment fee was paid to consultants, many omissions were spotted by the Internal Auditor, and it amounted to millions of rupees. Process was streamlined to preserve proper data. As it was a manual process, automation was recommended.
2. False Travel Claims:
In employee overseas travel, forex advance was loaded on travel card issued to each employee, with a stipulation that they swipe these cards at the hotels, while settling lodging claims. They could also use these cards at ATMs for cash withdrawals. Employees were entitled to reimbursement of actual lodging expenses. One of the employees submitted an invoice from a hotel, where he claimed that he could not swipe the card at the hotel and had to draw cash from an ATM and settle the lodging bill, week after week. As the hotel invoice did not appear genuine to the Internal Auditor, accounts department was asked to obtain transactions statement from the Card Company. This showed a completely different picture. This employee actually settled the lodging expenses by swiping the card at the hotel, and the amount was actually half of what was claimed by the employee in the fake invoice submitted by him.
3. Multiple LTA Claims by a HR employee:
The company’s LTA Rules permitted accumulation of LTA entitlement up to 4 years in a block. Any employee interested in going on travel, using LTA, would make a claim for LTA advance. HR resource verifies the entitlement and makes a recommendation to Finance for releasing payment. In actual practice, HR resource prepares a list of employees seeking LTA advance, their bank account numbers and the individual amounts, generally once a week, with a covering letter addressed to the bank to be signed by the authorized signatories, obtains the required signatures from Finance and submits the document to the bank. Internal Auditor noticed that the covering letter addressed to the bank only was signed by the authorized signatories, and the attachment which was containing the list of employees with individual amounts was unsigned. When verified at the bank, it was noticed that the HR resource who was handling the entire process was replacing the list after obtaining the signature from Finance, by including his own name against one fake claim amount he inserted earlier. Thus he was taking one LTA home every week! This was going unnoticed because proper LTA records, which made provision at employee level, and squaring up such provision when a claim was made was not maintained and the dishonest HR resource took advantage of this control weakness, coupled with the banker permitting credits based on signature on the covering letter, without insisting on signatures on the supporting list as well.
4. Variable Pay Computation using excel – Large excess payments due to a formula in a cell getting disturbed:
This company had a significantly large component of salary, about one third of CTC, as Variable Pay, for a certain category of employees. Computation of entitlement and release were done once a quarter. The concerned employee had the option to carry forward his earned Variable Pay, if he was planning to procure any asset at a later date, utilizing his Variable Pay, through the organization. HR Executive maintained workings for all the employees who are entitled to Variable Pay, in excel, with one sheet for each employee, as a running account. This sheet contained the employee’s salary particulars, Variable Pay Component at 100% achievement, and balance at the credit of the employee from the previous quarter. Variable Pay computation for a quarter included an input on assessment by the employee’s superior, in the form of a percentage. Rest of the calculations were automatic, and formula driven, where for each month’s Variable Pay earning is calculated, adding it to the opening balance at the credit of the employee and carried forward to the next month. One of the cell’s formula got disturbed when the sheet was extended to a new Quarter, which was also copied to all the employees’ sheets. Earning for the first month was erroneously got added to the second month as well, and such an accumulation got added to the 3rd month as well. Thus variable pay earnings increased multiple times. Not realizing the lapse, monies were released. Being a large company, at the time of P&L Analysis, noticing Variable Pay going up by millions, with no apparent increase in performance level, CFO commissioned an enquiry, Recovery of excess paid, templatizing excel workings freezing formulae, and not permitting carry over of balances were some of the decisions taken.
5. Gaps in Employee Exit Process – Failure to recover cost of Laptop where an employee did not return the asset:
While the fixed asset record contained the name of the employees to whom Laptops were issued, failure to use this data at the time of Full & Final settlement lead to this gap. Once internal audit identified such lapses, process was suitably amended.
For more articles from me, please read my book Translating Operations into Money – Cases in Business Management, available for online purchase at notionpress.com, Amazon.in or Flipkart or visit www.operationstomoney.com .
Thank you for your attention
Tulasi S Sastri
FCA., CISA
CAclubindia
