Sample Forensic Audit Report

Project Galaxy
- Bright Rays Pvt. Ltd
October 2015
Page 1 Project Galaxy Strictly private and confidential

Glossary of Terms
Acronym Description Acronym Description
AGM Assistant general manager Jr. Junior
AM Assistant manager BRPL Bright Rays Private Limited
Amt. Amount LDO Light diesel oil
ARC Annual rate contract Mgr. Manager
BOQ Bill of quantity MW Mega watt
BRM Bar mill NFA Note for approval
CPP Captive power plant OEM Original equipment manufacturer
Dept. Department PO Purchase order
Desg. Designation PPC Production planning and control
DGM Deputy general manager PR Purchase requisition
Exec Executive RFQ Request for quotation
MMC Mitesh Mehta & Co. SOB Share of business
FO Furnace oil SOR Service order rates
GM General manager Sr. Senior
GRN Goods receipt note VAF Vendor assessment form
HOD Head of department WRM Wire and rod mill

Contents
1• Background and objective
2• Our approach
3• Executive Summary
4• Detailed Observations
5• Process understanding
6 • Scope and approach limitations

1• Background and objective

1.1 Background and objective
BRPL has taken over the assets of the closed Bihar Alloys & Steel Limited located at Patratu in Jharkhand. At present the company is having two
operational units:
► Wire and Rod Mill (WRM) – The first unit of steel plant at Patratu. It was commissioned in March 2010, with an annual production capacity of 0.6 MT
► Bar Mill (BRM) – The second unit was commissioned in March 2014 with an annual production capacity of 1.0 MT
Key features:
► Both mill are designed and set up by Morgan Construction Company India Pvt. Ltd., a group company of Siemens Ltd.
► “Billet” is the key raw material used by both mills, which is sourced from BRPL Raigarh
► Billets are heated in furnace and passed through various stages to produce coil and bars
► Apart from billets, both mills majorly consume, FO for heating of their furnaces. Prior to March 2015, LDO was used for furnace heating
► Stores and spares for both mills are OEM item and procured either by Morgan or Siemens or of make recommended by them
Objective:
► “Fraud vulnerability assessment of “Procurement to Pay” and “Dispatch process” at BRPL, plant
Coverage:
► Review will cover a sample of indigenous and imported purchases for key raw material and operational items for the period 01 October 2014 to 31
March 2015

2 Our approach

2.1 Our approach
1. Understanding of business model and key processes to assess areas for fraud vulnerability assessment
Discussion with key officials (for details refer to slide 8) Process walkthrough (for details refer to slide 8)
2. Performed fraud vulnerability assessment around following areas
Billets LDO/ FO Services Stores & spares Scrap sale Gate entry Weighment
3. Data analytics and transaction testing to ascertain (for details refer to slide 9)
Exceptions Significant variances Irregular transactions
4. Identify fraud vulnerable areas and map fraud risk

2.2 Detailed approach
Walkthrough of the following processes
Vendor code creation
Budget and NFA approval
RFQ, vendor selection and rate finalization
PO creation and release
Billets receipt and consumption
LDO/ FO receipt and consumption
Gate entry, weighbridge and stores

2.3 Detailed approach
Data analytics performed on the following data-
Gate in and gate Consumption

Vendor master PO dump GRN dump out dump Payment dump data
Reviewed sample transactions relating to
Vendor registration PO GRN Payment Scrap sale

3• Executive Summary

3.3 Executive summary
This executive summary is not intended to be all inclusive.
It should be read in conjunction with the detailed report and not as a substitute thereof. Period 01 October 2014 to 31 March 2015
Sr# Area Observation Amount Fraud risk scenario

Involved (In
INR cr)
1. Jobs given to ► In 38 cases, number of jobs given to the family - ► Favoured vendors are included in the list of
“land sellers” members of the land seller exceeds the eligibility of land seller, so that they do not have to
jobs as per land area purchased compete in bidding process and secure
► 83 number of extra jobs given to land sellers contract easily
2. Vendors ► 23 vendors appearing in the list of 48 vendors under 1.25 ► Favoured vendors are included in the list of
under “land seller category” doesn’t appear either as a land land seller, so that they do not have to
category seller or as their nominee in the records of the land compete in bidding process and secure
“land sellers” department. However, they have been awarded civil contract easily
contracts on SOR basis without any bidding since they

are deemed to be land sellers.
► No supporting documents available with contract cell
for19 out of those 23 vendors
► In 4 cases, land department recommendation was
available with contract cell

Sr# Area Observation Amount Fraud risk scenario
Involved (In
INR cr)
3. Vendors ► No recommendation of senior management was 2.98 ► Favoured vendors can be included in the list
under available with contract cell for the 17 out of 19 vendors of vendors with political influence, so that
category under the category “political influence” they do not have to compete in bidding
“political process and secure contract easily
influence”
4. Services ► Lack of transparency in vendor selection- Vendors are 1.23 ► Potential instance of vendor favouritism
selected and finalised by HOD Projects and HOD
Admin
► Vendor quotes invited post start of work by the vendor, 0.22 ► Potential instance of vendor favouritism
who was not part of the initial negotiations ► Managing quotations to show adherence to
► Extension of the work order at the same rate to the company policies
same vendor without negotiation with other vendors
► Similar language and format of quotations submitted by 2.46

different vendors
► Related parties- service vendors 2.19 ► Vendor cartelisation leading to high
procurement cost

Sr# Area Observation Amount Risk implications
Involved (In
INR cr)
5. Billets ► Excess consumption of 1198 mt booked in SAP as 3.97 ► Potential risk of misappropriation of billets shown
compared to the MIS as excess consumption
► As per physical verification done by IA team of 3.74 ► Possibility of physical stock of WRM lying in Bar
BRPL Patratu, shortage in stock of 1131.46 mt was mill area
found
► Physical verification was done only for WRM and
not Bar mill whereas the segregation of stock in the
mills is not sacrosanct
► Adjustment entry of 179.64 mt was made in the SAP 0.59 ► Stock siphoned off can be covered up via
consumption to reconcile book stock with physical adjustment entry in consumption
stock
► Historical record of log book is not maintained - ► Audit trail missing to verify the actual consumption
► Calibration is not done on regular basis and - ► Possible chance of consumption data being
certificate provided for calibration is undated inaccurate

Involved
(In INR cr)
5. Billets ► GRN is done by PPC via “MIGO” option 4.81 ► Excess GRN shown to cover up the short receipt at gate
without gate entry. Quantity received as per
GRN is1,458 mt more than quantity received
as per “gate in-gate out” data
► GRN quantity is recorded as per DO of BRPL 0.61 ► Unaccounted loss/ theft in-transit
Raigarh. GRN quantity is 184 tons less than
DO quantity
6. Fuel ► 186.93 kl of excess consumption of LDO 1.03 ► Excess material shown as consumed , stand risk of being
consumpt booked in SAP as compared to the log book of siphoned off
ion the mill
► 172.80 kl of excess consumption of FO 0.78
booked in SAP as compared to the log book of
the mill
► Inconsistency in consumption booking- NA ► Misappropriation of fuel from utility tank or short receipt of
Consumption is booked either as per the figure fuel by the utility tank shall get covered via excess
confirmed by CP1 or by stores over phone to consumption booking
match book stock
► Inconsistency in conversion factor used by NA ► Variance between actual consumption and SAP consumption
both mills for conversion from kl to mt. for figures
FO
Involved
(In INR cr)
6. Fuel ► As confirmed by CP1, historical record of log NA ► Audit trail missing to verify the actual consumption
consumpt book is not maintained
ion ► Operations team books the consumption in
SAP as per figures confirmed over phone and
there is no written record basis which the
figures has been booked in SAP
► Calibration of flow meter is not done on NA ► Error in consumption recording
regular basis. Last calibration of flow meter
was done on 18 June 2014
6. Vendor ► Vendor master is not comprehensive with NA ► Multiple code for same vendor can be created
code important data fields like pan number, tin ► Dummy codes can be created
creation number and contact number missing ► Dummy codes can be created without appropriate documents
► Inadequate documentation- VAF II not
available in 14 cases out of 48 samples
reviewed
► Vendor code creation is controlled by NA
purchase department
► Absence of periodic assessment and NA ► Poor quality vendors getting orders resulting in procurement of
blacklisting of vendors sub-standard material and services

involved
(INR cr)
7. Stores ► OEM item vacoline oil 525 was earlier procured from 0.29 ► Increased cost of production
and Shell India Markets Pvt ltd @ INR 65 per ltr
spares ► In February 2015, on recommendation of Morgan, the
oil make was changed from shell to mobil
► Quotation was only obtained from Modi Sales
Agency and not from the manufacturer Mobil
► Order has been awarded to a vendor, who didn’t 5.00 ► Potential instance of vendor favouritism
participate in the bidding process, at the rate of L1
vendor
► In 7 cases of PO value more than 5 lacs, rate 1.56 ► Lack of fairness in rate negotiation
negotiation done by purchase department in violation
of the unit ‘s policy to refer such cases to rate
committee
8. Scrap ► Quotes invited and accepted from the same group of 0.06 ► Group vendors can rig the auction to gain a favourable
sale vendors price

ti Area Observation Risk implications
m
9. Others ► GRN amount can be changed during invoice ► Payment in excess to receipt of material
processing
► Advance given to a vendor is adjusted manually ► Full payment made without settlement of advance
and there is no system in-built control of advance
adjustment during subsequent payments
► Lack of segregation of duty- Stores and purchase ► Dummy procurement and GRN entry can be passed to release
have single line of control. Stores head and payment
purchase head report to GM, Commercial

4• Observations

4.0 Detailed observations
Our observations have been divided under four sections:
► 4.1 Procurement of services
► 4.2 Billets consumption
► 4.3 Fuel consumption
► 4.4 Vendor code creation and master maintenance
► 4.5 Procurement of stores and spares
► 4.6 Scrap sale
► 4.7 System flaw

4.1 Procurement of services – Overview
As understood from discussion with contract cell:-
► There are three category of service vendors:
► Local residents who have sold land to BRPL
► Local residents with political influence
► Others, who don’t fall in either of the above category
► Contract cell provided a list of 67 vendors, to whom the civil contracts are awarded on SOR basis without any bidding:
1. 48 vendors are land sellers
2. 19 vendors are those with political influence
Share of business

Value (INR cr.)
Sr# WO# value WO# value

Vendor Category No. of vendors
(Oct’14 – Mar’15) (Feb’13 – Mar’15)
1. Land Seller 48 3.86 37.18
2. Political 19 3.26 16.47
3. Others 321 16.71 378.17
Total 23.84 431.82

4.1.1 Benefits extended to land sellers
► As understood from discussion with contract cell officials, land department officials, HOD admin and HOD projects:-
A. As per company norms, for every acre of land acquired, company commits a job to the land seller or their nominee. However, no written
policy shared with us confirming the same.
B. There is a constraint on number of jobs that the company can provide. Incase company is unable to provide job to the land seller or their
nominee, company provides them with an alternative source of income through allocation of civil contracts to them on SOR basis, without any
bidding process
► As per SAP, company has spend INR 47 cr for purchase of land from the local residents
► Job has been given to 436 family members of land sellers
► Work order for sum of INR 37.18 cr has been awarded to vendors who are deemed to be land sellers (48 such vendors as confirmed by contract cell)
during the period Feb’13 to Mar’15
A. Discrepancy in jobs given to land sellers’ family:
Sr# Observation Fraud risk implication Remarks
1. ► In 38 cases, number of jobs given to the family members of the land ► Extra jobs awarded in lieu of kickbacks Refer annexure
seller exceeds the eligibility of jobs as per land area purchased
Total Jobs eligibility Total jobs given Excess jobs

Purchased given
area (Acre)
50.3189 68 151 83

4.1.1 Benefits extended to land sellers
B. Discrepancy in contracts awarded to vendors deemed as land sellers:
► To validate the land seller list, maintained by contract cell, we performed the Test results
three way match on the following data: A
•48 vendor names provided by contract cell who are land

19
A sellers
22
•Name of land sellers and their nominee provided by land C
B dept. for the period from inception till December 2014 3
4
B
•Supporting documents provided by contract cell for 7
vendors out of the 48
C
Value (INR cr.)

WO value WO value
Sr# Observation Fraud risk implication (Oct’14- (Feb’13-
Mar’15) Mar’15)
1. ► 19 vendors were included in the list of 48 by contract cell ► Favoured vendors can be included in 1.08 18.31
without any recommendation by land department. These 19 the list of land seller, so that they do
vendors are neither appearing in the list of land sellers not have to compete in bidding
provided by land department process and secure contract easily
2. ► 4 vendors out of list of 48 were certified by land department as 0.07 0.84

land sellers whereas their name doesn’t appear in land seller
records of land department

4.1.2 Vendors with political influence
► Contract cell confirmed that the list of 19 vendors under category of non-land seller are local residents with muscle power or political influence
► To validate the list of 19 vendors maintained by contract cell, we performed the two way match on the following data:
Test results
•19 vendor names provided by contract cell who fall under A
the category of “vendors with political influence”
A 17
B
2
•Supporting documents provided by contract cell for 2
vendors out of the 19
B
Value (INR cr.)

WO value WO value
Sr# Observation Fraud risk implication (Oct’14- (Feb’13-
Mar’15) Mar’15)
1. ► 2 out of the 19 vendors have been approved by senior ► Favoured vendors can be included in 2.98 16.05
management, in rest 17 cases contract cell couldn’t evidence the list of land seller, so that they did
approval of senior management not have to compete in bidding
process and secure contract easily

4.1.3 Service procurements – Lack of transparency in vendor selection
SR# Observation Risk implication
1. ► SOR has been made basis the previous work order and as per contract cell ► Lack of transparency in SOR and vendors willing to work at
the rate is fixed for last two years that rate indicates that the rates may be on the higher side
► On sample basis, we verified the rates with previous work orders, but
couldn’t find the link to the source of the initial rate
► Vendor selection is done by HOD Projects solely or jointly with HOD ► Potential risk of vendor favouritism
Admin
Date PO No. V.Code Vendor name Service activity Value of PO Remarks

01-Mar-12 4571501917 33179 Allied Infrastructure & Construction of RCC Box 0.12
Projects Pvt Ltd culvert
16-Mar-12 4571501939 33179 Allied Infrastructure & Construction of RCC Box 0.66
Projects Pvt Ltd culvert
31-Jan-12 4571501840 32700 J K Enterprises Civil Work 0.06
11-May-12 4571502131 32708 J K Enterprises Tiles fixing & paint at A 0.02
gate GET Hostel
22-Mar-12 4571501960 32705 M/s Om Construction Civil work 0.03
26-May-12 4571502165 32350 Surya Construction Flooring & WBM at Bar 0.12
bending yard
7-Apr-12 4571502006 34427 Sudarshan Construction Misc job at WRM and 0.06 Vendors are
13-Apr-12 4571502016 36127 M/s Gayatri Enterprises Bar Mill utility area 0.06 recommended by HOD
13-Apr-12 4571502004 32544 M/s Tirupati Construction 0.05 admin and HOD projects
13-Apr-12 4571502005 32306 Bhuneshwar Singh 0.05
Total 1.23

4.1.4 Service procurements – Other fraud vulnerable area
Sr# Observation Risk implication
2. ► Rate negotiation post start of work by the vendor. Vendor who ► Potential instance of vendor favoritism. The process of vendor selection
was awarded the work order was not part of initial negotiation and rate finalization by inviting quotations and negotiations with
vendors seem to be mere formality
WO No. Vendor Service PO Value Observations / Remarks
description (INR Cr.)
4571501893 M/s Om Construction Bending 0.06 ► Order created on 22 Feb 2015 with service start date as 09 Feb 2015.
Works TMT Bar However, as per 1st running bill paid against this order, the work had
already started on 28 January 2015 by Om Constructions
► It was observed that initially contract was awarded to Khushbu
Enterprise on 01 February 2015., which is post the work start date by
Om Constructions. No quotations received from Om Constructions at
that time. Khushbu Enterprise refused to accept the offer, hence fresh
quotations were invited
► Quote from Om Construction was received on 06 February 2015, and
the contract was finally awarded to Om Construction on 07 February
2015
4571502147 M/s Om Construction Bending 0.16 ► Extension of work order no. 4571501893
Works TMT Bar ► No vendor selection or rate negotiation carried out for the same
Total 0.22

3. ► Similar language and formats on quotations submitted by ► Potential instance of bid rigging. Vendors may submit their quotes in
different vendors collusion with each other resulting in work orders being awarded at
unfair prices
► Potential instance of managing quotations from vendors. Buyer may be
managing quotes to award business to favored vendor
WO No. Vendor Service description PO Value Observations / Remarks
(INR Cr.)
4571502159 M/s Om Material handling at 0.74 ► Quotes received from nine vendors
Construction Bar mill
Work ► Similar language and format of quotes submitted by:
► Hind Construction and M M Enterprise (In quotation of Hind
Construction, M M Enterprise is mentioned in the signatory
details)
► Sai Construction, Ram Prasad Yadav and Raj Enterprise(Prop.
Amar Yadav)
► Owner of Raj Enterprise (Prop. Prem Prasad) and Sai Construction are
brother-in-law
4571501830 Raj Enterprises Loading, shifting 1.38 ► Quotes received from three vendors
and stacking of wire
rod ► Similar language on quotes submitted by Raj Enterprises (Prop. Amar
Yadav) and M/s Sai Construction

WO No. Vendor Service description PO Value Observations / Remarks

(INR Cr.)
4571501857 M M Enterprise Rail alignment work 0.09 ►Quotes received from four vendors
►Similar handwriting and language on quotes submitted by M M
Enterprise and Jessy Rajan
4571501828 B K Enterprises Cold Inspection of 0.25 ►Quotes received from four vendors
Rounds
►Same address and mobile number mentioned on the letter head of quotes
submitted by M/s Raj Technical Services and Prashant Enterprises
Total 2.46

4. ► Service vendors likely to be related parties ► Potential risk of bid rigging. Vendors may submit their quotes in
collusion with each other resulting in work orders being awarded at
unfair prices
Group Vendor Vendor name Owner Oct’11- Feb’09- Remarks

Code Mar’12 Mar’12
32992 Raj Enterprise Amar Yadav 1.44 3.48 ► As per vendor master, pan number of
32350 Raj Enterprise Prem Prasad 0.07 0.72 one Raj Enterprise is mentioned in the
32353 Sai Construction Man Mohan Mahto 0.13 1.14 Pan ref. no. of the other
I 33216 Ram Prasad Yadav Ram Prasad Yadav Nil 0.91 ► Prem Prasad is brother-in law of Man
Mohan Mahto
► Ram Prasad Yadav earlier worked
with Sai Constructions
32322 Harsh Constructions Sanjay Prasad 0.21 1.11 ► Owner of Harsh Constructions and Om
II
32339 Om Constructions Pramod Prasad 0.19 1.20 Constructions are brothers
32705 Ashtavinayak Manu 0.07 0.82 ► Owners of Ashtavinayak, Saumya

III 34012 Saumya Constructions Sumit Kumar Pathak 0.04 0.37 Constructions and Prateek
34356 Prateek Constructions Anil Kumar Pathak 0.04 0.17 Constructions are cousins
Total 2.19 9.92

4.2.1 Booking of excess Billet consumption by plant
As understood from discussion with officials of Bar Mill and WRM:-
► Load cell (weighbridge) are installed at the charging point of furnace near CP-1 (Control Pulpit-1) to measure the weight of each billet charged into the
furnace. Weight is displayed in the online system of CP-1.
► The weight as displayed in the online system is recorded billet wise, in a manual log book maintained by CP-1. CP-1 makes entry for discharge of
billets in SAP as per log book records
► CP-4 makes the release in SAP for each billet discharged by CP1, if there is not hot out. In case there is a hot out, CP1 reverses the entry
► MIS reports being circulated to the senior management is prepared based on log book records
Sr# Test description Observation Risk implication
1. ► MIS report of CP-1 compared with ► Excess consumption booked in SAP ► Excess billets shown as consumed , stand risk of
consumption booked in SAP being siphoned off
2. ► Discussion with CP1 executives ► Historical record of log book is not ► Audit trail missing to verify the actual
maintained consumption
3. ► Calibration report checked ► Calibration is not done on regular ► Error in consumption recording
basis and certificate provided for
calibration is undated
Excess
Consumption as Consumption as
Operating unit Period Consumption in Value (INR cr.) Remarks
per SAP (in mt) per MIS (in mt)
SAP (in mt)
Bar Mill Oct’11 – Mar’12 72,925 72,389 536 1.77
Wire and Rod Mill Oct’11 – Mar’12 151,903 151,239 664 2.19
Total 224,828 223,630 1,198 3.96

4.2.2 Write-off of shortage in billets stock by plant
► As understood from discussion with IA Head, Finance Head and Billet shop in-charge:-
► Physical verification was conducted on 07 January 2015 where-in shortage of 1,131.46 mt was found in physical stock.
► Physical verification was conducted only for the stock of WRM and not for Bar mill.
► Adjustment entry for consumption of 179.64 mt was booked in SAP on the following dates:
§ 23-Feb-12- 22.80 mt § 27-Feb-12- 43.67 mt
§ 25-Feb-12- 22.80 mt § 28-Feb-12- 24.37 mt
§ 26-Feb-12- 22.80 mt
► Write-off of 959.45 mt was done on 24 March 2015 based on the PV report of 07 January 2015
► The quantity of write-off in books was done for 1139.09 mt , however there was shortage of 1131.46 mt as per PV of 07 January 2015
Amount involved
(in INR cr)
1. ► Physical verification was done only for WRM and not Bar 3.74 ► Possibility of physical stock of WRM lying in Bar
mill mill area
► Segregation of Billet yard mill wise is not sacrosanct
2. ► Adjustment entry of 179.64 mt was made in the SAP 0.59 ► Stock siphoned off can be covered up via
consumption to reconcile book stock with physical stock adjustment entry in consumption

4.2.3 Discrepancy in Billets receipt at plant
We have observed following gaps around material handling of billets:
Sr# Observation Risk implication Remarks
1. ► GRN is done by PPC via MIGO option in SAP without gate ► Excess GRN shown to cover up the short receipt at Refer “Table (i)”
entry gate
► Quantity received as per GRN is1,458 mt more than
quantity received as per SAP “gate in-gate out” data
2. ► GRN quantity is recorded as per DO of BRPL Raigarh ► Unaccounted loss Refer “Table (ii)”
► GRN quantity is 184 tons less than DO quantity
Table (i) Table (ii)

Description Quantity (in Description Quantity (in
mt) mt)
Quantity received as per 224,412 Quantity received as per DO 224,596
SAP GRN of Raigarh
Less: Quantity received as per 222,169 Less: Quantity received as per 224,412
SAP Gate-in Gate-out SAP GRN
Excess GRN qty 2,243 Excess GRN qty 184
Less: Quantity received as per 785 Excess GRN amounting to INR 0.61 Cr.
gate entry but not captured (taking average price of INR 33,000 per MT)
in SAP
Net excess GRN qty 1,458
Excess GRN amounting to INR 4.81 Cr.
(taking average price of INR 33,000 per MT)

4.2.4 Possible leakage points- Billets
1 2
Misappropriation in-transit Misappropriation at plant
Quantity of billets
Quantity of billets
dispatched by Raigarh
plant received by Patratu plant
Excess
consumpti
on booked
in SAP
Shortage
write-off
in books
Cover up the misappropriation

4.3.1 LDO- excess consumption booked in SAP
► Flow meter is installed at the charging point of furnace near CP-1 (Control Pulpit-1) to measure the quantity of LDO consumed in heating the furnace.
Quantity in litres is recorded in the displayed system of CP-1.
► The quantity as displayed in the online system ,for each shift, is recorded in a manual log book maintained by CP-1.
► Daily MIS reports being circulated to the senior management is prepared basis the log book
► Consumption in SAP is booked by operations team based on the consumption figure received from CP1 over SMS and cross-verification with
measurement of the utility tank confirmed by the stores over phone
► Consumption is not booked in SAP on daily basis
1. ► MIS report of CP-1 compared with ► Excess consumption booked in SAP ► Excess LDO shown as consumed , stand
consumption booked in SAP by CP-4 risk of being siphoned off
Consumption as Consumption as Excess Consumption Value

Name of the Mill Period Remarks
per SAP (in kl) per MIS (in kl) in SAP (in kl) (INR cr.)
Bar Mill Oct’11 – Feb’12 2,165.39 2,121.24 44.15 0.24 For details refer
Wire Rod Mill Oct’11 – Feb’12 4,219.47 4,076.69 142.78 0.79 annexure 14
Total 6,384.86 6,197.93 186.93 1.03

4.3.1 LDO consumption- Fraud vulnerable areas
2. ► Calibration report checked ► Calibration of flow meter is not done on ► Error in consumption recording
3. ► Discussion with operations team ► Inconsistency in consumption booking ► Misappropriation of fuel from utility
► Consumption is usually booked as per the tank or short receipt of fuel by the utility
figure confirmed by CP1 over phone, but on tank shall remain undetected
some days the consumption is booked as per
figure confirmed by stores over phone to
match book stock
4. ► Discussion with CP1 executives and ► As confirmed by CP1, historical record of log ► Audit trail missing to verify the actual
operations team book is not maintained consumption
► Operations team books the consumption in

4.3.2 Furnace oil- excess consumption booked in SAP
► Flow meter is installed at the charging point of furnace near CP-1 (Control Pulpit-1) to measure the quantity of FO consumed in heating the furnace.
Quantity in litres is recorded in the displayed system of CP-1.
► The quantity as displayed in the online system ,for each shift, is recorded in a manual log book maintained by CP-1..
► Since FO is accounted in SAP in mt and the flow meter gives the reading in KL, the reading of flow meter is converted into mt by use of conversion
ratio. Both mills use different conversion factor. Bar Mill divides the flow meter reading by 0.91 to arrive at the consumption figure in mt, whereas
WRM multiplies the flow meter reading by 0.85.
► Daily MIS reports being circulated to the senior management is prepared basis the log book records
► Consumption in SAP is booked by operations team based on the consumption figure received from CP1 over SMS and cross-verification with
measurement of the utility tank confirmed by the stores over phone
► Consumption is not booked in SAP on daily basis
1. ► MIS report of CP-1 compared with ► Excess consumption booked in SAP ► Excess FO shown as consumed , stand
consumption booked in SAP by CP-4 risk of being siphoned off
Excess
Consumption as Consumption as Value (INR
Name of the Mill Period Consumption in Remarks
per SAP (in mt) per MIS (in mt) cr.)
SAP (in mt)
Bar Mill Feb’12-May’12 3,326.97 3,297.68 29.31 0.13 For details refer
Wire Rod Mill Feb’12 – May’12 3,740.83 3,597.34 143.49 0.65 annexure 15
Total 7,067.80 6,895.02 172.80 0.78

4.3.2 Furnace oil- Fraud vulnerable areas
2. ► Calibration report checked ► Calibration of flow meter is not done on ► Error in consumption recording
3. ► Discussion with operations team ► Inconsistency in consumption booking ► Misappropriation of fuel from utility
► Consumption is usually booked as per the tank or short receipt of fuel by the utility
figure confirmed by CP1 over phone, but on tank shall remain undetected
some days the consumption is booked as per
figure confirmed by stores over phone to
match book stock
4. ► Discussion with CP1 executives and ► As confirmed by CP1, historical record of log ► Audit trail missing to verify the actual
operations team book is not maintained consumption
► Operations team books the consumption in
5. ► Discussion with CP1 executives ► Inconsistency in conversion factor used by ► Variance between actual consumption
both mills for concersion freom kl to mt. and SAP consumption figures

4.4.1 Vendor code creation and vendor master – Key findings
40
1500
30
1000
20
Available
500 10
Unavailable 0
0
Pan TIN Bank Pan copy Other VAF II
Account documents
Available
Unavailable
Total no. of vendor code created by
purchase department = 1279 1. Vendor master
2. Inadequate
is not
comprehensive documentation 48 samples reviewed
•Vendor code is created by buyer of

4. Inactive codes 1 purchase department
3. Process Gap
are not blocked
Vendor master mapped with last
•No checker maker control in SAP
two years PO dump 2
•Absence of vendor master review

•Out of 1890 active vendor codes, it 3
has been observed that there has been
no activity against 712 vendor codes •Absence of periodic vendor
for last two years 4 assessment
•Absence of blacklisting of vendors

5 in SAP

4.4.2 Vendor code creation– Fraud vulnerable areas
Sr# Observation Risk implication Data analytics result
1. ► Vendor master is not comprehensive ► Multiple code for same vendor can be created
► Important fields like pan no., contact no. ► Dummy code can be created
and address are not mandatory fields ► Out of 1890 vendors, 121
► Lack of review of vendor master vendors codes were found to
2. ► Conflict of interest- Vendor code ► Dummy code can be created for personal favour contain certain common details
creation is controlled by purchase ► Vendor master can be manipulated
department
3. ► Absence of periodic assessment of ► Poor quality vendors getting orders resulting in
vendor procurement of sub-standard material and services
► Absence of blacklisting of vendors
Sl.No. Discrepancies noted in Vendor codes (VC) Count

1 Different VC having similar contact number 99
2 Different VC having similar PAN 5
3 Different VC having similar fax number 16
4 Different VC having similar CST, TIN, LST, Excise or service tax number 13
5 Different VC having similar Email id 27
6 Different VC having similar bank contact person 4

4.5 Procurement of materials – Overview
As per PO dump analysis, we noted:-
► Billets is the key raw material consumed by both the mills. This is a captive item and constitutes 95% of total material procurement.
► Besides billets, major procurement is of LDO/ FO which constitutes 2.74% of total material procurement. It is procured from public sector companies.
► Third major category is procurement of stores and spares, which constitutes 1.13% of total material procurement. Under stores and spares, major
procurement is of “OEM” items, which constitute 40% of the total stores and spares procurement.
Grand Risk
Material procurement Capex Opex Percent
Total Category Grand
Category %
Raw Materials - 2,203.51 2,203.51 95.07 Low Total
Fuel and Lubricants 0.29 63.13 63.42 2.74 Low OEM 10.25 39.06
Stores and Spares 16.80 9.44 26.24 1.13 High ARC 0.91 3.47
Power - 22.24 22.24 0.96 Low Others 15.08 57.47
Others 1.63 0.73 2.37 0.10 High Total 26.24 100.00
Total 18.73 2,299.05 2,317.78 100.00

4.5.1 Procurement of stores and spares- Fraud vulnerable areas
1. ► OEM item is procured from single vendor single quote basis. There ► High cost of procurement
is no rate negotiation
► No quotation obtained from the manufacturer
Procurement of Vacouline 525
Lack of transparency
In the month of january,

Since february 2015, the
Prior to february 2015, Morgan recommended
procurement of this item Quotation obtained directly from
the procurement of this that for better
was made from Modi Modi Sales and not the
item was made from Shell performance the company manufacturer
Sales Agency@ INR 135
India @ INR 65 per ltr should shift from shell
per ltr
make to mobil make
No communication from Mobil
evidencing that Modi Sales is it’s
only authorised distributor in the
region
Increase in cost of production
Date PO # Vendor Vendor Name PO_Qu New Rate Old Rate Increased cost
antity (INR per (INR per (INR cr)
in ltrs ltr) ltr)
1-Feb-12 4571005232 17035 MODI SALES AGENCY 29,120 135.00 65.00 0.20
16-Feb-12 4571005291 17035 MODI SALES AGENCY 7,696 135.00 65.00 0.05
30-Mar-12 4571005524 17035 MODI SALES AGENCY 4,160 134.50 65.00 0.03
Total 0.29

2. ► Contract has been awarded to a vendor different from the vendor ► Potential instance of vendor favouritism
approved by the rate committee
PO# 4571004890 dated 19 November 2014 for amount INR 5.10 lacs
Name of Volta Belting is

struck on the comparative
As per comparative and Lakhotia’s name written,
approved by rate committee, without any ratification
order was awarded to Volta approval from rate
Belting 18 November 2014 committee 19 November 2014
12 November 2014 Quotation obtained from PO raised on Lakhotia

Lakhotia Enterprises 19 November 2014 Enterprise at same rate as
Volta Belting
Remarks
► Buyer told us that order was given to Lakhotia since Volta had submitted dealership certificate of Lakhotia and not of the original
manufacturer, Gates Unitta Asia.
► However, as per dealership certificate of Lakhotia, it’s dealership of Gates has expired on 31st December, 2010 whereas this
order was awarded in the month of Nov'11. The expiry date on the certificate has been manipulated to 2016.

3. ► As per process flow explained to us by Purchase Head, vendor and ► Potential cases of lack of fairness in rate negotiation
rate finalisation is done by rate committee for every procurement of
INR 5 lacs and above
► Exception to the above process was found in sample cases reviewed
prior to mid December 2014
Date of Amount
Sr# PO # Vendor name Approved by
creation (INR cr)
1. 22-Oct-11 4571004714 Amardeep Steel Center 0.09 Purchase Head, Aml Kumar Roy
2. 08-Dec-11 4571005018 Amardeep Steel Center 0.12 Purchase Head, Aml Kumar Roy
3. 15-Nov-11 4571004848 Gontermann Peipers (India) Limited 0.33 Purchase Head, Aml Kumar Roy
4. 11-Nov-11 4571004819 Sanura Packsys 0.53 Purchase Head, Aml Kumar Roy
5. 10-Dec-11 4571005039 Technomech Solutions 0.30 Purchase Head, Aml Kumar Roy
6. 27-Oct-11 4571004743 Wendt India Limited 0.13 Purchase Head, Aml Kumar Roy
7. 24-Oct-11 4571004723 WMI Konecranes India Limited 0.06
Total 1.56

4.6.1 Potential fraud risk – Scrap sale
During review of scrap sale documents, we noted:-
► During offline auction for sale of 15 kl of used and waste oil, quotes were received from three parties Meghani Enterprises, North East Lubricants and
Mangalam Lubricants (P) Ltd.
► It was observed that Meghani Enterprises and North East Lubrica Pvt Ltd have same owner. The auction was closed in favour of North East Lubrica
Pvt Ltd on 13 October 2014 @ INR 34.50 per ltr. No evidence of negotiation with the only non-related vendor Mangalam observed.
► On 20 October 2014, revised auction was done for the same material and a new bidder, Shrishti Lube (India) Pvt Ltd was included apart from the
earlier bidders. The auction was closed in favour of Shrishti Lube @ INR 35.60 per ltr
► On 26 November, 2014, earlier decision was superseded by new decision in favour of Meghani Enterprises @ INR 40.50 per ltr. No subsequent trail of
negotiations with Shrishti Lube and Mangalam could be found.
► The concerned official who dealt with scrap sale knew that both Meghani Enterprises and North east Lubrica Pvt Ltd is one and the same party. The
said vendors were also recommended by that official to Metal junction for e-auction
1. ► Quotes invited and accepted from same group of vendors ► Group vendors can rig the auction to gain a favourable price

4.7.1 Others
1. ► GRN amount can be changed during IV processing ► Payment in excess to receipt of material
3. ► Advance given to a vendor is adjusted manually and there is no ► Full payment made without settlement of advance
system in-built control of advance adjustment during subsequent
payments
4. ► Lack of segregation of duty- Stores and purchase have single line ► Dummy procurement and GRN entry can be passed to release
of control. Stores head and purchase head report to GM, payment
Commercial

5• Process understanding

5.1 Procurement of services – Process flow chart
Creation of NFA including: WBS

Approval
a. Scope of work identification
User from User
b. BOQ (Bill of quantity) by Project Purchase department
department department
c. Technical specification Monitoring
HOD
d. Cost estimation Department
Vendor selection and rate finalization
Civil and structural work Other services
For civil and structural

work contract, vendor is New Floating of enquiry and inviting
recommended by HOD Activity existing in schedule of rates
activity quotations from vendors
(P&A) and HOD (Projects)
Preparation of cost estimate Preparation of comparative sheet and

and rate analysis negotiation with vendors
Approval by HOD Purchase Discussion and approvals by contract cell committee

Release of purchase order**
a) Up to INR 5 lacs – HOD PO creation by PR creation

plant Audit Finance
Purchase Purchase by user
head department department
b) INR 5 lacs to INR 50 lacs – department department
HOD Purchase and HOD
Projects
c) Above INR 50 lacs – HOD
Purcahse, HOD Projects and
Plant Head (** In case of PO of 1 lakh and above, PO documents will be released post audit clearance)

5.2 Procurement of material – Process flow chart
Vendor selection and rate finalisation Budget Approval upto INR 1 cr

Budget code assignment
by Project Monitoring Finance department
Department Purchase department:
a. Identifies vendor
b. Floats enquiry Audit department
c. Receive offers
Approval by user
department HOD Plant Head
Technical recommendation by
user department
Creation of NFA including:
PR creation
a. Quantity Required
by user
b. Cost estimation Preparation of comparative sheet by
department
the purchase department
No PO creation by
Purchase
Rate negotiation and vendor department
User Budget finalization
department exists
Release of purchase order in
Order SAP*:
Yes value
YES NO` a. Up to INR 5 lacs – HOD
>= Purchase
PR creation INR 5 b. INR 5 lacs to INR 50 lacs – HOD
by user lacs Purchase and HOD Projects
department
c. Above INR 50 lacs – HOD
(* In case PO amount exceeds INR1 lakh, PO Rate Purchase Purchase, HOD Projects and
documents will be released post audit clearance) committee Head Plant Head

5.3 Billet procurement and receipt – Process flow chart
PPC assesses the requirement

Purchase department Receipt of Billets from Unloading at Railway
of billets mill wise and raises
raises PO Raigarh Unit by rail/rake siding
PR in SAP
Issue of gate entry slip Security personnel at gate Material arrives at

Loading into trailor and
and stamping on the verifies Challan against security gate along with
shifting to Patratu plant
Challan PO # Challan
Gross weight of each vehicle at

the weighbridge which is
captured in SAP
Counting, unloading and

Vehicle moves to Preparation of
stacking of materials as per
PPC department “Receiving material
material grades by respective
(Billet stockyard) slip”
mill’s Billet shop supervisor
Tare weight of vehicle

GRN posting by PPC
personnel
Gate out of the vehicle

by PPC in SAP system
Physical check and gate out of

vehicle by security personnel

5.4 Vendor code creation – Process flow chart
Vendor Code is
User raises purchase requisition (PR) which flows to generated against
purchase department (PD)
vendor name in SAP
by two “buyers” in
purchase department
Details provided in VAF- designated for the
I & VAF-II is checked purpose
Based on material, PR is routed to particular buyer in with the supporting
PD documents provided with
them. In case of any
discrepancies, purchase /
user department is asked
to revert for rectification /
necessary documents
Buyer identifies Vendor
prospective suppliers code Yes No new
through existing vendors/ already code
references / search / exist in required
business directories SAP
No
VAF-I consists of details VAF-II consists details of

viz. name, address, plant / site visit,
contact number, product performance of existing
Potential vendors are identified Apart from VAF-I, VAF-II (an vendors, recommendation
details, technical details, & are asked to submit their internal form) is prepared by
registration numbers, for specific items,
brief profile along with Vendor buyer and approved by HOD
bank account details, justification for proposing
Assessment Form (VAF-I) to purchase department and HOD the vendor along with the
major client details and PD user department
annexure of checklist. approval of HOD(Material)

5.5 Material receipt – Process flow chart
Material arrives at Security personnel at gate Issue of gate entry slip

Gate entry security gate along with verifies Challan against and stamping on the
Challan / Invoice PO # Challan / Invoice
Gross weight of each vehicle at the weighbridge
Receiving Stores item

of
materials
Stores department (Receiving section)
Unloading and Unloading and physical counting / verification by

verification stores personnel
Documentation GRN prepared by stores personnel
Verification / Quality
Tare weight of vehicle
check of material by the
Quality check user
and GRN
posting Gate out of the vehicle
by Stores / PPC in SAP
Approval / Rejection of system
GRN by the user
Physical check and gate out of

vehicle by security personnel

6• Scope and approach limitations

6.1 Scope and approach limitations
► When conducting the review, MMC did not
► Act on behalf of management in reporting to the Board of Directors, or Audit Committee

► Authorize, execute or consummate transactions or otherwise exercise authority on behalf of the Client
► Perform routine activities in connection with the Client’s operating or production processes
► Prepare source documents on transactions
► Have custody of assets
► Act in any capacity equivalent to a member of management or an employee
► The following points should be borne in mind while reading these observations:
► The engagement was carried out in accordance with our engagement letter dated xxxxxx and the terms & conditions mentioned therein
► The scope, coverage and approach mentioned in this report was arrived at based on discussions with Mr. Sudesh Mehra
► All matters, issues and information referred to in this report arise from our discussions with identified personnel involved in
overseeing/managing the operations at the Client
► Our findings are based on the sample transactions reviewed by us and are based on the information/documents (including photocopies/scan
copies and emails) furnished to us and to the extent reviewed by us. Though our endeavor was to analyze/review the documents in their
complete perspective and present our findings thereupon, such findings are based only upon data/information to the extent reviewed by us.
Should additional relevant statements or documents be made available subsequently, it may be necessary to revisit the findings accordingly
► We have relied on the documents/information furnished to us by the Client and its officials. It may not be possible to check the accuracy and
authenticity of all the information provided to us. We were provided only with the photocopies of documents in some cases and our
observations are based on analysis of those documents.

► This review is in the nature of a fact finding engagement and is not a re-audit / audit of the accounts balances/financial statements or parts thereof.
The procedures performed for this fact finding review do not constitute an audit conducted in accordance with Indian GAAS or any other national or
international auditing or accounting standards.
► The sufficiency of the work steps/procedures is solely the responsibility of the management. Consequently, we make no representation regarding
the sufficiency of the procedures performed either for the purpose for which the report was requested or for any other
► Our findings cannot be taken to be exhaustive, in view of the fact that only specific sample of transactions were reviewed. Our findings are based on
information and documents to the extent provided to us. For this reason, it is possible that our observations may have been different had we
reviewed the whole documentation/ information on a particular matter
► Our scope did not require and our work steps were not tailored to identify regulatory / statutory non-compliances. Our observations on statutory
regulations, if any, do not purport to be an opinion, expert or otherwise. It merely represents our understanding of the facts and possible
interpretations of law. Management is advised to take expert opinion before initiating any action
► Management shall be fully and solely responsible for applying independent judgment, with respect to the findings included in this fact finding
report, to make appropriate decisions in relation to future course of action, if any. MMC shall not take responsibility for the consequences resulting
from decisions based on information included in the report
► While MMC made appropriate efforts to ensure confidentiality and discreteness of the engagement, employees of the Client or the Subject (or the
Target/Entity or the Individual) may have come to know about the same. MMC will not be liable for any loss/damage of whatsoever nature arising
due to such disclosure/ knowledge /awareness
► Our findings in this report are based on the fieldwork which was substantially completed as on 14 February 2015. We undertake no responsibility to
update this report for events or circumstances occurring after the date of completion of fieldwork
► Under no circumstances shall we be liable, for any loss or damage, of whatsoever nature, arising from information being withheld or concealed from
us or misrepresented to us by any person/agency to whom information requests were made.

► We are not intending or agreeing to act as an expert witness or provide an expert opinion or expert testimony during the course of any legal
proceeding or be deemed as representing or advocating any position on behalf of any party in any legal matter or proceeding
► This report is furnished solely for the information of the Client management with its request to MMC to conduct a fact finding review vide
engagement letter dated XXXX and should not be used, circulated, quoted or otherwise referred to for any other purpose, nor included or referred to
in whole or in part in any document without our prior written consent
► MMC assumes no responsibility to any user of the report other than the Client. Any other persons who choose to rely on our report do so entirely at
their own risk
► We have not given any part of our report to the process owners at the Client/Target, a practice we sometime adopt to be able to identify information,
if any, in our reports that may not be factually correct, if any. For this reason, it is possible that there are factual inaccuracies where we have not
been provided with the complete picture/information/ documentation on a particular matter by the process owners
► Please note that limited information was made available to us during the engagement, and the project cannot be interpreted as being complete in terms
of the scope agreed in our engagement letter. Following relevant information was not available/ provided:
► Land seller list for the period 01 January 2015 to 31 March 2015
► Monthly calibration report for Bar Mill and WRM

Thank you

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Project Galaxy

- Bright Rays Pvt. Ltd

Page 1 Project Galaxy Strictly private and confidential

Acronym Description Acronym Description

AGM Assistant general manager Jr. Junior

AM Assistant manager BRPL Bright Rays Private Limited

Amt. Amount LDO Light diesel oil

ARC Annual rate contract Mgr. Manager

BOQ Bill of quantity MW Mega watt

BRM Bar mill NFA Note for approval

CPP Captive power plant OEM Original equipment manufacturer

Dept. Department PO Purchase order

Desg. Designation PPC Production planning and control

DGM Deputy general manager PR Purchase requisition

Exec Executive RFQ Request for quotation

MMC Mitesh Mehta & Co. SOB Share of business

FO Furnace oil SOR Service order rates

GM General manager Sr. Senior

GRN Goods receipt note VAF Vendor assessment form

HOD Head of department WRM Wire and rod mill

Page 2 Project Galaxy Strictly private and confidential

1• Background and objective

6 • Scope and approach limitations

Page 3 Project Galaxy Strictly private and confidential

Page 4 Project Galaxy Strictly private and confidential

Page 5 Project Galaxy Strictly private and confidential

Page 6 Project Galaxy Strictly private and confidential

2. Performed fraud vulnerability assessment around following areas

Exceptions Significant variances Irregular transactions

4. Identify fraud vulnerable areas and map fraud risk

Page 7 Project Galaxy Strictly private and confidential

Walkthrough of the following processes

Vendor code creation

Budget and NFA approval

RFQ, vendor selection and rate finalization

PO creation and release

Billets receipt and consumption

LDO/ FO receipt and consumption

Gate entry, weighbridge and stores

Page 8 Project Galaxy Strictly private and confidential

Data analytics performed on the following data-

Gate in and gate Consumption

Reviewed sample transactions relating to

Vendor registration PO GRN Payment Scrap sale

Page 9 Project Galaxy Strictly private and confidential

Page 10 Project Galaxy Strictly private and confidential

Sr# Area Observation Amount Fraud risk scenario

► 83 number of extra jobs given to land sellers contract easily

contracts on SOR basis without any bidding since they

Page 11 Project Galaxy Strictly private and confidential

► Similar language and format of quotations submitted by 2.46

Page 12 Project Galaxy Strictly private and confidential

Page 13 Project Galaxy Strictly private and confidential

Page 15 Project Galaxy Strictly private and confidential

Page 16 Project Galaxy Strictly private and confidential

Page 17 Project Galaxy Strictly private and confidential

Page 18 Project Galaxy Strictly private and confidential

Our observations have been divided under four sections:

► 4.1 Procurement of services

► 4.2 Billets consumption

► 4.3 Fuel consumption

► 4.4 Vendor code creation and master maintenance

► 4.5 Procurement of stores and spares

► 4.6 Scrap sale