The Most Common Types of Fraudulent Disbursements

by James Marasco , CPA, CFE, CIA
Fraud Matters, Summer 2005

It’s been said “cash is king.” This is especially true for perpetrators of fraud.

But businesses beware: You can become a victim of fraud when no cash is involved.

The Association of Certified Fraud Examiners’ 2004 Report to the Nation on Occupational Fraud and Abuse found nearly two-thirds of cases involve some form of fraudulent disbursement. These can be divided into five distinct categories: check tampering, billing schemes, payroll schemes, expense reimbursement schemes and register disbursements.

CHECK TAMPERING

Forged payee or endorsement. One of the simplest and most popular ways to steal from an organization is to simply write checks to yourself and/or forge the endorsement. Inappropriate controls and the lack of segregation of duties allow this to prosper.

Reissuing old outstanding checks. Checks that have existed on the outstanding list for a long time represent an expenditure already recorded and the cash previously appropriated. To clean these up, the checks are either written off and returned to cash or reissued. Loose or poor controls can allow your employees to reissue them but alter the payee to themselves.

Fraudulent wire or account transfers. Business owners may review their cancelled checks, but do they examine all account and wire transfers? Loopholes may exist allowing individuals the opportunity to sweep money into company accounts they control or directly into their own accounts. Or, they might issue electronic funds transfer payments that benefit them, i.e., paying their credit card bills or personal bank loans.

BILLING SCHEMES

False vendor payments. Organizations without a formalized purchase order and approval process could be more vulnerable to paying false vendors. These bogus vendors may be their own employees who set up post office boxes to divert money from the company or represent collusion involving outside parties.

Petty cash disbursements. How strong are the controls that govern this area in your organization? Many companies rationalize this area as being immaterial. We’ve all heard there is no level of immateriality on fraud or theft. Expenditures should be well-documented with the original receipts from the individuals requiring reimbursement. Someone independent of the custodian should be replenishing this fund, reviewing supporting documentation and conducting surprise audits of petty cash.

PAYROLL SCHEMES

Forged payroll checks. Many organizations fail to regularly reconcile their payroll account. They fall into a false sense of security in that it may be an imprested (loan or advance) account or the shear volume is simply overwhelming to timely reconcile. Fraud perpetrators like to either manipulate the amounts on the checks or attempt to reproduce the check’s likeness.

Payroll disbursements. Are employees promptly terminated in your system or can they continue to receive checks or have checks written against their record? Controls should exist that prevent your human resource or payroll personnel from issuing themselves unauthorized pay raises, bonuses, extra vacation, etc. Some organizations could fall prey to having “ghost” employees exist on their payroll. Outsourcing your payroll process doesn’t automatically safeguard your organization.

EXPENSE REIMBURSEMENT SCHEMES

Expense report fraud. Employees may submit reports for reimbursement on expenses that were never incurred, inappropriate reimbursable items or duplicated requests for reimbursement. Periodically, communicate your fraud policy to your employees and enforce it. An independent party should review all reports before payments are authorized.

REGISTER DISBURSEMENTS

Credit card processing. Do you restrict access to your credit card terminals? Enterprising finance employees may have the opportunity to issue credits to their own accounts through your organization and reconcile around them on the bank or merchant statements. Insist on adequate documentation and detail for credits issued.

Credits issued to accounts or paid in cash. Someone independent of billing should authorize credits to accounts or authorize refunds from the organization. Since this area could foster collusion among individuals, transactions should be scrutinized for suspicious patterns.

You can prevent your business from falling victim to these practices by screening those likely to commit frauds before they’re hired.

For example, perform background/reference checks, transcript confirmation and drug testing. Reduce the opportunity to commit fraud by rotating job responsibilities, insisting on mandatory vacations and communicating your fraud policy and its consequences. Tighten your internal controls and segregate duties.

Create an environment in which dishonest acts are not tolerated and are punished.

James I. Marasco, CPA/CFF, CFE, CIA
Jim is a partner at EFP Rotenberg. He brings more than 18 years of public accounting and auditing experience. He is a full-time management consultant and travels extensively throughout the country while leading StoneBridge Business Partners (an EFP Rotenberg affiliate company).

Article republished with the permission of CPAmerica.

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