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Chapter 12 Cash Disbursement Schemes

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1 Chapter 12 Cash Disbursement Schemes
Forensic Accounting and Fraud Examination by Mary-Jo Kranacher, Richard Riley, Joseph T. Wells Prepared by Richard J. Campbell Copyright 2011, Wiley and Sons

2 Learning Objectives 12-1 Identify the five major categories of fraudulent disbursements Describe a shell company and explain how it is formed Discuss how pay-and-return schemes work Identify the five principal categories of check tampering Differentiate between forged maker and forged endorsement schemes Discuss ways to prevent and detect the theft and alteration of outgoing company checks Explain what is meant by a ghost employee, and describe the four steps needed to make this scheme work Describe the methods employees use to overstate legitimate expenses on their expense reports Identify red flags that are commonly associated with fictitious expense schemes Compare and contrast fraudulent disbursements at the cash register with other register frauds 12-1

3 BILLING SCHEMES Billing schemes generally fall into one of three categories: 1. Shell company schemes 2. Nonaccomplice vendor schemes 3. Personal purchases schemes 12-2

4 False Billings from Shell Companies
Figure 12-1 12-3

5 Forming a Shell Company Submitting False Invoices
Shell Company Schemes Forming a Shell Company Submitting False Invoices Self-Approval of Fraudulent Invoices ‘‘Rubber-Stamp’’ Supervisors Reliance on False Documents Collusion Purchases of Services Rather than Goods Pass-Through Schemes 12-4

6 Preventing and Detecting Shell Company Schemes
Identifying Shell Company Invoices Testing for Shell Company Schemes Verifying Whether a Shell Company Exists Identifying the Employee behind a Shell Company 12-5

7 Billing Schemes Involving Nonaccomplice Vendors
Pay-and-Return Schemes – In pay-and-return schemes, these employees do not prepare and submit the vendor’s invoices; rather, they intentionally mishandle payments that are owed to the legitimate vendors Overbilling with a Nonaccomplice Vendor’s Invoices - 12-6

8 Pay-and-Return Schemes
Figure 12-2 12-7

9 Preventing and Detecting Fraudulent Invoices from a Nonaccomplice Vendor
Organizations should maintain up-to-date approved vendor lists that include contact and mailing information for approved vendors Pay-and-return schemes can be mostly prevented if the duties of purchasing, authorizing, and distributing payments are separated and if all invoices are matched to purchase orders before payments are issued. 12-8

10 Personal Purchases with Company Funds
Personal Purchases through False Invoicing The Fraudster as Authorizer of Invoices - proper controls should preclude anyone from approving his own purchases 12-9

11 Invoice Purchasing Schemes
Figure 12-3 12-10

12 Invoice Purchasing Schemes
Falsifying Documents to Obtain Authorization Altering Existing Purchase Orders False Purchase Requisitions Personal Purchases on Credit Cards or Other Company Accounts Charge Accounts Returning Merchandise for Cash 12-11

There are five principal methods used to commit check tampering: 1. Forged maker schemes 2. Forged endorsement schemes 3. Altered payee schemes 4. Concealed check schemes 5. Authorized maker schemes 12-12

14 Forged Maker Schemes Figure 12-4 12-13

15 Forged Endorsement Schemes
Figure 12-5 12-14

16 Intercepting Checks before Delivery
Employees Involved in Delivery of Checks Poor Control of Signed Checks Theft of Returned Checks Rerouting the Delivery of Checks Converting the Stolen Check Preventing and Detecting the Theft of Outgoing Company Checks 12-15

17 Altered Payee Schemes Altering Checks Prepared by Others: Inserting a New Payee Altering Checks Prepared by Others: ‘‘Tacking On’’ Altering Checks Prepared by the Fraudster: Erasable Ink Altering Checks Prepared by the Fraudster: Blank Checks 12-16

18 Altered Payee Schemes Figure 12-6 12-17

19 Concealed Check Schemes
Figure 12-7 12-18

20 Authorized Maker Schemes
Overriding Controls through Intimidation Poor Controls Preventing and Detecting Check Tampering by Authorized Makers Concealing Check Tampering The Fraudster Reconciling the Bank Statement 12-19

21 Authorized Maker Schemes
Figure 12-8 12-20

22 Authorized Maker Schemes
Re-Altering Checks Falsifying the Disbursements Journal Reissuing Intercepted Checks Bogus Supporting Documents 12-21

23 PAYROLL SCHEMES There are three main categories of payroll fraud: 1. Ghost employee schemes 2. Falsified hours and salary schemes 3. Commission schemes 12-22

24 Ghost Employees Figure 12-9 12-23

25 Preventing and Detecting Ghost Employee Schemes
It is very important to separate the hiring function from other duties associated with payroll. The personnel department should also conduct background checks and reference checks on all prospective employees in advance of hire The duty of distributing paychecks should be rotated among several employees to further guard against fraud. 12-24

26 Falsified Hours and Salary
Figure 12-10 12-25

27 Preventing and Detecting Falsified Hours and Salary Schemes
As a rule, payroll preparation, authorization, distribution, and reconciliation should be strictly segregated. Organizations should have a rule stating that no overtime will be paid unless a supervisor authorizes it in advance 12-26

28 Commission Schemes There are two ways an employee on commission can fraudulently increase his pay: (1) falsify the amount of sales made, or (2) increase the rate of commission 12-27

29 Commission Schemes Figure 12-11 12-28

There are four methods by which employees typically abuse this process to generate fraudulent reimbursements: 1. Mischaracterized expense reimbursements 2. Overstated expense reimbursements 3. Fictitious expense reimbursements 4. Multiple reimbursements 12-29

31 Mischaracterized Expenses
Figure 12-12 12-30

32 Overstated Expenses Figure 12-13 12-31

33 Fictitious Expenses Figure 12-14 12-32

34 Multiple Reimbursement Schemes
This type of fraud involves the submission of a single expense several times to receive multiple reimbursements The most frequent example of a duplicate reimbursement scheme is the submission of several types of support for the same expense 12-33

Fictitious Refunds Overstated Refunds Credit Card Refunds False Voids 12-34

36 False Refunds Figure 12-15 12-35

37 False Voids Figure 12-16 12-36

38 Copyright “Copyright © 2011 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.”

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