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

13. CHECK TAMPERING SCHEMES
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

30. EXPENSE REIMBURSEMENT SCHEMES
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

35. REGISTER DISBURSEMENT SCHEMES
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
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