Kinds of embezzlement-arthashastra,auditing and tax

Lekshmi (Chartered Accountant) (1285 Points)

27 November 2011  

 KINDS OF EMBEZZLEMENT-ARTHASHASTRA,AUDIT AND TAX

Fraud, embezzlement, concealment of material facts, misappropriation, the list seem endless when the auditor is involved in the examination of financial statements.

Chanakya who lived in India, is considered to be Indian’s excellent leadership guru, economist, and a  political science teacher who authored the treatise, Arthashastra. He  summaries the following 40 types of embezzlement in the eighth chapter, Book 2 of Arthashastra titled Detection of Embezzlement by Government Audits. Even though the chapter deals with propriety aspects, it can be seen that it can be related to other organizations too.

In my humble effort, I am trying to make a connection with the types of embezzlements mentioned by the great pundit with our present day auditing.

 

The various types of embezzlements are:

 what is realized earlier is entered later on

 what is realized later is entered earlier

 what ought to be realized is not realized

 what is hard to realize is shown as realized

 what is collected is shown as not collected

 what has not been collected is shown as collected

 what is collected in part is entered as collected in full

 what is collected in full is entered as collected in part

 what is collected is of one sort, while what is entered is of another sort

what is realized from one source is shown as realized from another

 what is payable is not paid

 what is not payable is paid

 not paid in time

 paid untimely

 

 The above items can be traced on an analysis of teeming and lading errors while auditing the statements.

 

Items such as

 small gifts made large gifts

 large gifts made small gifts

 what is gifted is of one sort while what is entered is of another

 the real donee is one while the person entered as donee is another;

 what has been taken into is removed while what has not been credited to it is shown as credited

can be pointed out on a detailed examination of books of accounts, purchase policies of the company ,related parties, and the advantages received by the officials while authorizing the deals.

 

Embezzlements such as

materials that are not paid for are entered, while those that are paid for are not entered

an aggregate is scattered in pieces

scattered items are converted into an aggregate

 commodities of greater value are bartered for those of small value

 what is of smaller value is bartered for one of greater value

 price of commodities enhanced

 price of commodities lowered

 can be discovered while examining the cut off procedures, inventories, sales, purchases, inventory valuation procedures, and principles etc.

The next four types viz;

 number of of nights increased

 number of nights decreased

 the year not in harmony with its months

 the month not in harmony with its days

 can be found out by examining the daily wage sheets, daily time keeping records, records of output produced etc.

Certain inconsistencies like

 inconsistency in the transactions carried on with personal supervision

can be found  out on an  analysis of governance of the organization and internal check procedures

misrepresentation of the source of income

can be well remembered with the example of Satyam scam

inconsistency in giving charities

by verifying proper authority of giving donations, its limits, procedures

lack of congruence in representing the work turned out

by evaluating the production records

inconsistency in dealing with fixed items

 through periodical verification and valuation of fixed assets, application of AS-28 etc adopted by the entity.

 

The remaining items like

 

misrepresentation of test marks or the standard of fineness

misrepresentation of prices of commodities

 making use of false weight and measures

deception in counting articles

making use of false cubic measures                                

can be exposed by checking the purchases and sales, excise duty related factors and other taxation matters.

Chanakya points out  that under the above circumstances, the persons concerned such as the person in charge of the payments of the government treasury, the person who authorized the transaction, the receiver, the payer, the person who caused the payment, the servants of the officer  shall each be separately examined.

 

 To quote Otto von Bismarck who said,

With a gentleman I am always a gentleman and a half, and with a fraud I try to be a fraud and a half.”

Similarly, an auditor should also exercise his judgment,  skill, and reason while examining the financial statements to obtain the best results.

 

Source: Arthashastra by Chanakya and its translations.