Chapter 5: Cash Disbursement Schemes

Question 1

What are Billing Schemes?

Answer 1

Use of false documentation to cause employer to issue payment
- Legitimate in the sense the disbursement of funds is done by the org legitimately

Question 2

What are the three categories of billing schemes?

Answer 2

1. Shell Company Schemes
2. Non Accomplice Vendor Schemes
3. Personal Purchase Schemes

Question 3

What are Shell Companies

Answer 3

Fictituous entities created for the purpose of committing fraud
- Commonly, just a name and PO box used to collect $

Question 4

How are Shell Companies created?

Answer 4

1. File certification of incorp
2. Open bank account for shell comp
3. Name attached to entity
4. Address attached to entity
5. Docs used to start bank account can help determine who committed the fraud - emp often use someone else
6. Begin to bill the corrupt employee’s employer

Question 5

How does the employer begin paying the Shell Company?

Answer 5

Fraudster usually in position to approve payment on invoices submitted for payment
- Fraud more likely if: company fails to require proper supporting documentation for payments

Question 6

Circumstances allowing Shell Company schemes

Answer 6

• Overly trusting supervisors
• Reliance on false documents
• Collusion of employees to overcome internal controls
• Purchases of services instead of good- harder to verify
• Pass through Schemes: employee sets up shell comp and buys merchandise through false entity, then sells merchandise to employer at inflated price –> making a profit

Question 7

How to prevent and detect Shell Company Schemes?

Answer 7

Prevent: Maintain and regularly update aproved vendors list
Detect: How to identify fake invoice
1. Lack of detail
2. Lack of description of items
3. Mail drop or residential mailing adress
4. Consecutively numbered invoices by shell comp
5. Billed for same of similar amounts

Question 8

How to Test for Shell Company Schemes?

Answer 8

• Sort pmts by vendor, amount, & invoice number
• Alert to large budget over runs
• Horizontal analysis
• Analyze expense trend
• Match perpetual to physical inv
• Monitor trend in avg unit price
• compare vendor and employee addresses
• Report avg turnaround time on invoices by vendor

Question 9

How to identify whether a Shell Company exist and identify employee behind it?

Answer 9

Verify:
- Look up vendor in internet
- contact others to see if familiar with vendor
- Visit business address

Identify:
- Search comp regis
- Match checks converted by comp with parolls check deposited by suspected employee
- Surveillance of mai drop
- Search suspects office

Question 10

Billing Schemes involving Non-Accomplice Vendors

Answer 10

Pay and return schemes: keep returned $
- Purposely double pay invoice
- Intentionally pay wrong vendor
- Intentorionally overpay the vendor

Overbilling w/ Non-accomplice Vendors Invoice:
- Manufacture fake invoice of regular vendor
- Rerun and invoice that has already been paid

Question 11

How to prevent and detect fraudulent invoices from non-accomplice vendor?

Answer 11

• Largely depens on purchasing controls
• Maintain up to date approved vendor list
• Effective duplicate checking system
• Seperate purchasing, authorizing, and payment distribution
• copy each incoming check and attach remittance adv
• Instruct banks to not cash checks payable to the org

Question 12

Explain Personal Purchase through False Invoicing and who commits this fraud

Answer 12

Buy item and have company pay the invoices
- Avoid scrutiny of invalid invoice

**Likely culprit: **
- Fraudster is person who authorizes purchases
- Proper controls should prevent self authorization

Question 12

Personal Purchase w/ Company Funds

Answer 12

Heart of scheme is NOT taking inventory, BUT purchasing of inventory
- - Personal purchase through false invoices
- Personal purchase on credit cards or company accounts

Question 13

How to make personal purchases through False Invoicing?

Answer 13

1. If fraudster does not hav authority to approve purchase, falsify documents to obtain authorization like POs
2. Altering existing purchase orders, inflate orders of materials needed, increase on requisition
3. False purchase requisitions: Misrepresent nature of purchase, alter shipping address, alter receiving report

Question 14

Explain Purchases on Credit Cards or other Company Accounts

Answer 14

• Prior approval for purchases not required
• Charge accounts to vendors they do regular business with and authorization of designated company representative needed
• Returning merchandise for cash

Question 15

How to prevent personal purchases on credit cards?

Answer 15

1. Thourough reviews of credit card statements
2. Two diff indivs reconcile statements and compare results

Question 16

Check Tampering

What are Check Tampering Schemes?

Answer 16

Perpetrator physically prepares the fraudulent check and fools the company into handing over its money

Question 17

Check Tampering

What are the 5 methods for check tampering?

Answer 17

Forger maker schemes
- Employee misappropriates a check and fradulently affixes the signiture of authorized make
- Must have access to blank check, forge signiture, & conceal crime or could also counterfit checks
Forged Endorsement Schemes
- Employee intercepts already written check intended for 3rd pty and converts the check by cashing where ID not req or double endorsing
- Emp Intercepts: if involved in delivery, poor control of signed checks, theft of returned checks, rerouting deliv
Altered Payee Schemes
-Intercept check and alter payee designation by inserting new payee or taking on then coverting altered checks
Concealed Check Schemes
- Submit fraudulent check w/ legitimate checks, done by the person responsible for preparing checks, delivered during busy times
Authorized Maker Schemes
- Employee w/ signature authority writes fraudulent checks & signs own name, over ride through intimadation, poor controls

Question 18

How should an org safeguard its blankchecks?

Answer 18

• Blank checks locked and strictly limited
• Print checks on watermark paper
• Look for out of sequence check numbers
• Reconcile fist check in checkbook to last check written in the previous day

Question 19

Check Tampering

How to prevent and detect forged maker schemes?

Answer 19

• Strict Procedures for handling of outgoing checks
• Safeguard blank check stock
• Establish rules for check custody
• sep duties for check prep and signing
• Restrictive List of authorize check signers or rotate
• Verify signatures on returned checks

Question 20

Check Tampering

How to prevent & detect Forged Endorsement Schemes?

Answer 20

• Seperate functions of cutting, signing, and delivering checks
• Investigate vendor complaints
• Accounting system should detect duplicate payment
• Generate payables reports
• Restrict authority to make changes to vendor records
• Investigate cancelled checks w/ more than 1 endorsement
• chart date of mailing for every check
• Install surveillance cams in mail rooms

Question 21

Check Tampering

How to prevent and detect the alteration of company checks?

Answer 21

• Seperate duties of check prep, sign, and delivery
• Seperate duty or reconciling to the bank
• Use carbon copy check
• Draft all checks with permanent ink

Question 22

Check Tampering

How feasible is concealing check tampering?

Answer 22

**Tricky to conceal as they must: **
- Hide the identity of the criminal
- Hide the fact that the fraud has occurred
- must explain the check on the book

Question 23

Check Tampering

Issues with Reconciling when Check Fraud

Answer 23

Only person who reconciles accounts can hide by removing fraudulent check from returned checks

Can fix by: intercepting bank statement and altering it

Question 24

# Check Tampering Re- Altering Checks Concealment

Answer 24

When check returns, employee erases own name and enters proper employee - Works for altered payee, forged make, authorized maker, and concealed maker schemes

Question 25

# Check Tampering Falsifying Disbursement Journal Concealment

Answer 25

- Check payable to themselves but list different person as payee on the books - Falsely enter amounts of legitimate checks in disbursement journal --> overstate legitimate to account for fraudilent - Works best when: weak reconciling and coded to very active accounts

Question 26

# Check Tampering Reissue Intercepted Checks Concealement

Answer 26

Reenter invoices so vendor does not blow the whistle when their checks get intercepted - 2 sep invoices Employee purposefully does not mail a check and reissues payment to vendor - 2 checks for 1 invoice

Question 27

# Check Tampering Bogus Support Docs Concealment

Answer 27

Justify check by manufacturing fake support: invoices, purchase orders, receiving report - Only practical when check written to someone else

Question 28

# Payroll Schemes What are Payroll Schemes?

Answer 28

Causes organization to issue payment by making false claims for compensation

Question 29

What are the three main payroll schemes?

Answer 29

1. Ghost employee Schemes 2. Falsified hours and Salary Schemes 3. Commission Schemes

Question 30

# Payroll Schemes What are Ghost employee schemes and how do they happen?

Answer 30

Compensation to someone who does not work for the company, often an accomplice to fraudster Steps: 1. Ghost added to payroll - authority to add new emp 2. Timekeeping and wage info collected - fake timecard and approval 3. Paycheck issued to ghost 4. Check delivered to perp or accomplice

Question 31

# Payroll Scheme How to prevent ghost employee schemes?

Answer 31

* Seperate hiring function from other payroll duties * Personnel record maintain indep from payroll and timekeeping * Verify changes to payroll * Periodically check payroll to personnel records * Run report looking for employees who lack social security numbers * Distribution of checks independent of payroll

Question 32

# Payroll Scheme 2 Explain how the Falsified Hours & Salary Scheme works

Answer 32

Overpayment of Wages **Manually prepared time cards** - Forged a supervisor's signiture - Collusion w/ supervisor - Rubber stamp supervisor - Poor custody procedures **Time clocks ** - clocking someone else in - manipulating rate of pay

Question 33

# Payroll Scheme 2 How to prevent and detect Falsified Hours and Salary Schemes

Answer 33

- Supervisor authorization for OT, sick leave, vacay - Seperate payroll duties - Verify wage rate changes - Restrict access of approved time card - Supervisor Present when time cards punched - Actively test for OT abuse: comparisons, trend analysis, exception reports

Question 34

# Payroll Scheme 3 Explain the Commission Scheme

Answer 34

1. Falsify the amount of sales made through fake sales or higher prices 2. Increase the rate of commission

Question 35

# Payroll Scheme 3 How to detect commission schemes

Answer 35

- Linear correlation btw sales and commissions - Comparative analysis - Track uncollected sales by each member - Conduct random sample of Customers

Question 36

Expense Reimbursement Schemes

Answer 36

Employees make false claims for reimbursement of fictituous or inflated expenses - hard to detect

Question 37

# Expense Reimbursement Schemes Mischaractarized Expense Reimbursements: What and how to detect and prevent

Answer 37

Request reimbursement for personal expenses --> personal travel as business development --> Submit receipts with reports to show business purpose **Prevention** - Establish clear policy: stating what expenses can be reimbursed, explains invalid reasons for bus exp, and set limits to reimbursements - detailed expense reports - scrutinize expense reports approved by supervisor outside dep - Flag expenses made during Vacation

Question 38

Overstated Expense Reimbursements: What and how to detect and prevent

Answer 38

**Overstate actual cost** of business expense by altering receipts, overpurchasing, overstating other employees, orders to overstate exp **Preventing and detecting** - Require OG receipts - Comparison Report - Spot Check Expense Reports

Question 39

Fictituous Expenses Reimbursement Schemes: What and how to detect and prevent

Answer 39

Employee invents a purchase that needs to be reimbursed by Producing fictitious receipts, Obtaining blank receipts from vendors, or Claiming expenses of others. **Prevention and Detection** - Credit card for low dollar exp, cash for rest - Expenses consistently rounded off indicate fabrication - Patterns in expenses for same amount - Reimbursement request from employe falling right below org limit - Receipts over long pd but consecutively numbered - Receipts that do not look professional

Question 40

Multiple Reimbursement Schemes: What and how to detect and prevent

Answer 40

Submission of single expense several time to receive multiple reimbursements - least common **Prevention and Detection** - Enforce against accepting photocopies of support - Flag duplicate pmt amounts - State support required for expense report - Enter expenses within a certain time frame

Question 41

Register Disbursement Schemes

Answer 41

False transaction is recorded to justify the removal of money Two schemes: - False refunds - False void

Question 42

How do false refunds work?

Answer 42

Fictitious refunds: process refund even tho there is no actual return - take cash from registe Overstated refunds: Overstate the amount of legitimate refund Credit Card refunds: Ring up refund credit refund but use own credit card instead of customers - no cash taken

Question 43

How do false voids work?

Answer 43

Use customers receipt to void sale and pocket money Hard: manager must approve voided sales, have to forge managers signature

Question 44

How to Conceal Register Disbursements?

Answer 44

**Two methods** 1. Small disbursements - keep below management review level 2. Destroying record - prevent discovery of the thief Books in balance but inventory shrinkage

Question 45

How to prevent Register Disbursement Schemes?

Answer 45

* Management should approve all refunds and voided sales * Cashiers can't reverse own sales * Voided transactions must be documented properly * Register codes for each employee * Revise reversing transactions * Scrutinize multiple amounts below mngm review level * Customer services calls for returns