Conversion. Concealment methods. Example #1: Skimming. Example #2: Skimming GASBO Conference. Thomas Buckhoff, Ph.D.

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1 Top Five Employee Fraud Schemes Forensic Solutions, LLC Forensic accounting and litigation support services Presented by: Thomas Buckhoff, Ph.D., CPA/CFF, CFE Fraudsters love cash! Cash is the asset most commonly stolen by dishonest employees. To catch these people we must first learn how fraudsters divert cash into their pockets. 2 Fraud and Internal Controls Top 5 Fraud Schemes All of the Top 5 fraud schemes exploit one or more deficiencies in basic internal controls. Best way to prevent the schemes: Implement and adhere to basic internal controls! Skimming #1 (Off-book) Cash larceny #2 (On-book) Theft of cash receipts Fictitious #3 Vendor Pass-through #4 schemes Personal #5 Purchases Theft of cash disbursements Billing Schemes 3 Scheme #1: Skimming Theft Act The theft of an organization s cash before it has been recorded in the accounting system Skimming may occur at any point where cash enters a business, so those who receive and process cash are likely perpetrators. Methods: Ring no sale Alter register tape No receipts issued Pocket money Off-hours sales Off-site sales Extra cash register 5 6 Top Five Employee Fraud Schemes Page 1

2 Concealment methods Conversion Destroy record of transaction Lapping Alter customer statements Write off customer account receivable Pad inventory to conceal shortage Fabricate new records Currency can simply be pocketed but checks must be converted to cash. Check conversion methods: Dual endorse checks Forge endorsements Alter payee Open accounts with similar name Swap checks for cash 7 8 Example #1: Skimming Theft act (Loss: $200,000) Sharon stole the cash receipts from one of five cash boxes Concealment Destroyed summary sheet for stolen box Conversion Swapped checks for cash 9 Sharon steals the $200 from Sheet 5. She swaps the $50 of checks from Sheet 5 for $50 of cash from Sheet 4. Sharon then deposits the $800 from Sheets 1-4 into the bank. The actual detail regarding cash and checks on the deposit ticket does not match the $600 of cash and $200 of checks on the summary sheets for Sheets 1-4. Gotcha! X Example #2: Skimming Theft act (Loss: $75,000) Bill stole incoming customer payments Concealment Credited customer s account and debited courtesy discounts Conversion Altered payee on checks Example #3: Lapping schemes Mary steals Customer A s $500 A/R payment. No entry made to record $500 stolen from A. 1. Cash Cash 1,000 A/R Cust. A 500 A/R Cust. B 1, To record $1,000 payment received from Customer B. Mary steals remaining $ To record $1,000 payment from Customer C Top Five Employee Fraud Schemes Page 2

3 Skimming: Prevention Scheme #2: Cash larceny Maintain management presence at point of cash receipt Encourage customers to request receipts Rotate job duties/schedules among employees Two employees open mail Install surveillance cameras Separate cash handling from record keeping 13 The theft of an organization s cash after it has been recorded in the accounting system 14 Theft Act Concealment methods Cash larceny may be perpetrated by anyone who has access to cash. Methods: Steal from the cash register Steal any cash on hand (e.g. petty cash) Steal cash from bank deposit Most times no attempt is made to conceal cash larceny schemes Currency can simply be pocketed but checks must be converted to cash. Conversion Check conversion methods: Dual endorse check Forge endorsement Alter payee Open account with similar name Swap check for cash Other Example #4: Cash larceny Theft act (Loss: $200) Cashier A stole from Cashier B s drawer while B was on break Concealment None. Cashier B got blamed for the shortage. Conversion None needed Top Five Employee Fraud Schemes Page 3

4 Example #5 Fraudulent disbursements Theft act (Loss: $50,000) Sue stole from the company s deposits Concealment Simply forced the cash receipts journal to match the bank statement Conversion None, stole only currency If added correctly, the total should be $100,000. Employee causes the improper distribution of on-book funds. Methods: Billing schemes Expense reimbursement schemes Check tampering 20 Involve the purchase of goods or services that are nonexistent, overpriced, or not needed. Billing schemes Methods: Shell company schemes Fictitious vendor Pass-through Personal purchases Shell company schemes Shell company schemes are typically perpetrated by those with purchasing duties Theft Act Concealment methods Fraudster sets up a shell company and then submits invoices for fictitious goods of services. Variations: Fictitious vendor scheme Passthrough scheme Debit fraudulent disbursement to legitimate expense account. Alter/fabricate disbursement documentation. Alter/pad inventory counts to conceal shortage Top Five Employee Fraud Schemes Page 4

5 Conversion Register shell company with the Secretary of State. Open bank account and PO box in shell company name. Submit false invoices and approve them for payment. Mail checks and retrieve from PO box and then deposit into shell company bank account. 25 Scheme #3: Fictitious vendors Fraudster uses shell company to invoice victim company for goods/services never received. 26 Fictitious vendor scheme illustrated Victim company Invoice sent Invoice paid though nothing is received Fraud loss is total amount of payment made: $15,000 Shell company Example #6: Fictitious vendor scheme Theft act (Loss: $170,000) Steve set up shell companies and sent invoices to his employer Concealment Employer did not control inventory Conversion Retrieved checks from PO box and deposited into bank Top Five Employee Fraud Schemes Page 5

6 Steve s fictitious vendor scheme Scheme #4: Pass-through North Central Construction Invoices sent Invoices paid though nothing is received Fraud loss is total amount of payments made: $170,000 Industrial Supply Specialty Supply Fraudster inserts himself as an unnecessary intermediary usually via a shell company between a legitimate vendor and his employer and makes an unauthorized profit on the transaction. 32 Pass-through scheme illustrated Victim company $15,000 Product/service provided Shell company Vendor $10,000 Fraud loss: $5,000 Example #7: Dairy farm Theft act: Phil stole about $2M via numerous fraud schemes Concealment: None. Barry did not monitor his activities. Conversion: Money went into various bank accounts. 34 Forensic Audit Findings Finding Amount Unaccounted for cows $1,700,000 Checks payable to cash 160,000 Payroll disbursements to kin 304,000 Payments to Red Oak Feed 4,157,668 Investments in milk futures 528,254 Total $6,849, Top Five Employee Fraud Schemes Page 6

7 Pass-through scheme illustrated Dairy Farm, Inc. Product/service provided Lowcountry Feed, Inc. $40, Red Oak $25, Invoice Invoice 1014 Feed Co. Fraud loss: $15, Pass-through scheme illustrated Fraud Losses Total payments made Allegation Potential loss Dairy Farm, Inc. Product/service provided Lowcountry Feed, Inc. Unaccounted for cows $1,700,000 Checks payable to cash 160,000 Payroll disbursements to kin 304,000 $4,157,668 Red Oak $2,737,668 Pass-through scheme 1,420,000 Investments in milk futures 528,254 Feed Co. Fraud loss: $1,420,000 Total potential losses $4,112, Example #8: Pass-through scheme Pass-through scheme illustrated Some government contractors will use shell companies to make it appear like they hired minority companies. The pass-through entity receives a token payment for doing nothing. 41 Sports and Exhibition Authority $3,300,000 Commission: $100,000 Product/service provided Industrial Fabricating Systems, Inc. Hirschfield Steel Co. $3,200,000 Woman-owned business Top Five Employee Fraud Schemes Page 7

8 Scheme #5: Personal Purchases with Company Funds Fraudster purchases goods or services for personal use and tricks employer into paying for them. 43 Personal Purchases: Methods Submit invoices for personal purchases to accounts payable as business expenses. Charge personal expenses on company credit cards. 44 Example #9: In Rita they trusted Theft act: A variety of fraud schemes. Concealment: No one monitored Rita s activities closely. Conversion: Stolen funds diverted to an account Rita controlled. Loss: $54 million 45 Quarter Horse breeding 46 Liberty Coach The Horse Farm Purchased for $2.1M, sold for $800K 47 Purchased for: $540 K 48 Top Five Employee Fraud Schemes Page 8

9 The Primary Residence The Florida vacation home Value: $468K 49 Value: $382K 50 Other expenditures Paid $2.5 million on her personal American Express card Spent $339K on jewelry Spent > $200K on trucks and SUVs Spent hundreds of thousands on horse trailers 51 Into Rita s pocket went $54M 52 Billing schemes: Prevention Proper authorization for disbursements Document receipt of goods and services. Documentation supporting disbursement requests should be reviewed for completeness and accuracy. Conduct frequent inventory counts and reconcile to inventory as per the books. Review credit card statements carefully Segregate duties of: Approving vendors Creating purchase orders Verifying receipt of goods Approving payment on invoices 53 Who has the first question? 54 Top Five Employee Fraud Schemes Page 9

10 Forensic Solutions, LLC Forensic accounting and litigation support services Thomas Buckhoff, Ph.D., CPA/CFF, CFE 130 Hazelwood Drive Statesboro, GA Phone: (912) linkedin.com/pub/thomas-buckhoff/20/465/ Top Five Employee Fraud Schemes Page 10