• Data & Evidence Collection – The audit team collected digital image of Accounting records for last 4 years from accounting software Tally ERP maintained by the company in the presence of company’s CEO & CFO. The team ensured that the data is collected in duplicate form and not in original i.e. a backup of all the freezed financial data in tally of previous years was taken by the team which was only readable and the same was used for verification purpose later by the team. The HASH value of data was generated to ensure its reliability and accuracy.
  The audit team took all the purchase data of individual years in MS Excel, based on which the team worked out the major purchases recorded during last 4 years and found that the purchases were made mainly from 15 different vendor which were almost fixed.
  Audit team also took vendor wise purchase detail in MS Excel from the digital image and made Relative Size Factor (RSF) test on individual vendor ledger to ascertain any irregularity for all the year individually. It was found that RSF of 5 vendors were more than 10. Further, it was noted that major purchases were made at a single point in last 4 years from these 5 vendors.
  Audit team obtained information about information about franchisees from the Interview of Purchase Department Head. Details of Interview given in point 2.1 below.
  As per the information provided by Purchase Department Head, to get detail information about franchisee closure transactions Audit team collected detail of nature of transaction from the Director along with the Contracts entered with the parties. As per directors such transaction was entered as the company was not getting payment from some franchisees on time as they were unable to sell the product. As per Directors, the balance goods lying with the franchisee to be purchased at the price at which they were sold to them before.
  Audit Team verified the contract and found that the rate at which the garments were taken back was MRP of goods minus 30% which was higher by approximately 20% of the price at which the goods were sold initially in previous years. The profit of 20% was passed on to the franchisee as commission. Even after clear instructions from directors the contract was made with conditions other than the agreed one to give gain to the franchisees.
  To find out more evidence to ensure that the benefit of such closure is passed on to franchisee, Email and Laptop backup of CEO & CFO was taken along with the HASH values.
  Audit Team recovered the deleted e-mails, photos and documents using data recovery tool. Audit team was able to find two photos of Letter written by CFO to 3 of the franchisees. The letter clearly mentioned that the remaining goods purchased back will be purchased at 20% higher price than the actual sale price to the franchisee as a commission and further 20% of the profit will be shared by CFO, CEO and franchisee out of the books in the ratio of 60:40.
  Based on the recommended contract by BOD, actual contract with franchisee and photo of letters Audit team went to Directors for further actions.
• Interview – The first person interviewed by audit team was Purchase Department Head for which written permission was taken from Directors. During interview the Purchase Department Head informed the audit team that the 5 major vendors were basically franchisees to whom company sells their product in bulk and subsequently they were closed one by one and the balance stock lying with them was purchased back and then those stores were made stores operated by the company as management operated stores.
  The second person interviewed was CFO to find out detailed information about the adjustment. The Audit team took written permission from Directors for interviewing CFO. During the interview the evidence obtained by audit team was put in front of CFO. On confronting CFO with the evidence obtained by audit team, CFO informed that 3 of the franchisees were relatives of CFO and all of them was given franchisee through CFO himself.
• All the franchisees were set up in 2015. The initial sale to all the franchisees in aggregate amounted to 180 crores in 2015. The franchisees paid initial amount of 40 crores to the company by the year end 2015 to prevent any doubt on transaction in that year.
• The balance amount was not paid by the franchisees giving the reason that they are unable to sell the goods of the balance value and hence by the end of 2016 one of the franchisees was converted to own store by entering into contract with them.
• Similar circumstances were found with other 2 franchisees also, out of which one was converted in 2017 and the other in 2018 into own store. The draft contract was approved by Directors. The draft contract’s a clause with respect to consideration stated that the goods shall be purchased back at the price at which it was initially sold, but this clause was changed, and the consideration was made at MRP less 30% discount by CFO with the help of CEO.
• Also, the amount over and above the Cost at which the garments were sold to franchisee was termed as commission to franchisee. Finally, CFO accepted that he made changes to the contract which was not communicated to Directors and rooted funds fraudulently to Franchisee. Further the extra money routed to franchisee was then distributed between CFO, CEO & Franchise.
• The Table shows the comparison of Sales and Purchase back figures of each of the 3 franchisees

All the franchisees were set up in 2015. The initial sale to all the franchisees in aggregate amounted to 180 crores in 2015. The franchisees paid initial amount of 40 crores to the company by the year end 2015 to prevent any doubt on transaction in that year.

The balance amount was not paid by the franchisees giving the reason that they are unable to sell the goods of the balance value and hence by the end of 2016 one of the franchisees was converted to own store by entering into contract with them.

Similar circumstances were found with other 2 franchisees also, out of which one was converted in 2017 and the other in 2018 into own store. The draft contract was approved by Directors. The draft contract’s a clause with respect to consideration stated that the goods shall be purchased back at the price at which it was initially sold, but this clause was changed, and the consideration was made at MRP less 30% discount by CFO with the help of CEO.

Also, the amount over and above the Cost at which the garments were sold to franchisee was termed as commission to franchisee. Finally, CFO accepted that he made changes to the contract which was not communicated to Directors and rooted funds fraudulently to Franchisee. Further the extra money routed to franchisee was then distributed between CFO, CEO & Franchise.

The Table shows the comparison of Sales and Purchase back figures of each of the 3 franchisees