Top Five Employee Fraudsters love cash! Fraud Schemes 5 Fraud Schemes.GASBO.pdf · Thomas Buckhoff,...

Thomas Buckhoff, Ph.D., CPA/CFF, CFE 2015 GASBO Conference

Top Five Employee Fraud Schemes

Top Five EmployeeFraud Schemes

Presented by:

Thomas Buckhoff, Ph.D., CPA/CFF, CFE

2015 GASBO Conference

Forensic Solutions, LLCForensic accounting and litigation support services

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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.

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Fraud and Internal Controls

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!

Top 5 FraudSchemes

Theft of cashreceipts

Theft of cashdisbursements

Skimming #1(Off-book)

Cash larceny #2(On-book)

BillingSchemes

Fictitious #3Vendor

Pass-through #4schemes

Personal #5Purchases

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Scheme #1: Skimming

The theft of an organization’s cash before it has been recorded in the accounting system

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Theft Act

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



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Concealment methods

Destroy record of transaction

LappingAlter customer

statements “Write off” customer

account receivablePad inventory to conceal

shortageFabricate new records

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Conversion

Currency can simply be pocketed but checks must be converted to cash.

Check conversion methods:Dual endorse checksForge endorsementsAlter payeeOpen accounts with

similar nameSwap checks for cash

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Example #1: SkimmingTheft act (Loss: $200,000)

– “Sharon” stole the cash receipts from one of five cash boxes

Concealment– Destroyed summary

sheet for stolen boxConversion

– Swapped checks for cash

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

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Example #2: Skimming

Theft act (Loss: $75,000)– “Bill” stole incoming

customer paymentsConcealment

– Credited customer’s account and debited “courtesy discounts”

Conversion– Altered payee on

checks12

Example #3: Lapping schemes

No entry made to record $500 stolen from A.1. Cash 500 2. Cash 1,000

A/R—Cust. A 500 A/R—Cust. B 1,0001. To record $1,000 payment received from Customer B.

Mary steals remaining $500.2. To record $1,000 payment from Customer C.

Mary steals Customer A’s $500 A/R payment.



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Skimming: Prevention

Maintain management presence at point of cash receiptEncourage customers to

request receiptsRotate job duties/schedules

among employeesTwo employees open mailInstall surveillance camerasSeparate cash handling from

record keeping14

Scheme #2: Cash larceny

The theft of an organization’s cash after it has been recorded in the accounting system

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Theft Act

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

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Concealment methods

Most times no attempt is made to conceal cash larceny schemes

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Conversion

Currency can simply be pocketed but checks must be converted to cash.

Check conversion methods:Dual endorse checkForge endorsementAlter payeeOpen account with

similar nameSwap check for cashOther

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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



Example #5

Theft act (Loss: $50,000)– “Sue” stole from the

company’s depositsConcealment

– 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.

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Fraudulent disbursements

Employee causes the improper distribution of on-book funds.

Methods:Billing schemesExpense

reimbursement schemesCheck tampering

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Billing schemes

Involve the purchase of goods or services that are nonexistent, overpriced, or not needed.

Methods:Shell company

schemes– Fictitious

vendor– Pass-through

Personal purchases

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Shell company schemes

Shell company schemes are typically perpetrated by those with purchasing duties.

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Theft Act

Fraudster sets up a shell company and then submits invoices for fictitious goods of services.

Variations:

Fictitious vendor scheme

‘Pass-through’ scheme

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Concealment methods

Debit fraudulent disbursement to legitimate expense account.Alter/fabricate

disbursement documentation.Alter/pad inventory

counts to conceal shortage.



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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.

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Scheme #3: Fictitious vendors

Fraudster uses shell company to invoice victim company for goods/services never received.

Fictitious vendor scheme illustrated

Victimcompany

Shell company

Invoice sent

Fraud loss is total amount

of payment made: $15,000

Invoice paid though nothing is received

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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

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Steve’s fictitious vendor scheme

North Central Construction

Industrial Supply Specialty Supply

Invoices sent

Fraud loss is total amount

of payments made: $170,000

Invoices paid though nothing is received

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Scheme #4: Pass-through

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.

Pass-through scheme illustrated

Victimcompany

Shellcompany

VendorProduct/service provided

$10,000$15,000

Fraud loss: $5,00034

Example #7: Dairy farmTheft act:

– ‘Phil’ stole about $2M via numerous fraud schemes

Concealment:– None. Barry did

not monitor his activities.

Conversion:– Money went into

various bank accounts.

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Forensic Audit Findings

Finding AmountUnaccounted 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 $6,849,922

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Dairy

Farm, Inc.

Red Oak

Feed Co.

Lowcountry

Feed, Inc.Product/service provided

$25,388.34$40,748.29

Fraud loss: $15,359.95

Invoice 06-243 Invoice 1014


Dairy

Farm, Inc.

Red Oak

Feed Co.

Lowcountry

Feed, Inc.Product/service provided

$2,737,668$4,157,668

Fraud loss: $1,420,000

Total payments made

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Fraud Losses

Allegation Potential lossUnaccounted for cows $1,700,000

Checks payable to cash 160,000

Payroll disbursements to kin 304,000

Pass-through scheme 1,420,000

Investments in milk futures 528,254

Total potential losses $4,112,254

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Example #8: Pass-through scheme

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.


Sports and Exhibition Authority

Industrial Fabricating

Systems, Inc.

Hirschfield Steel Co.

Product/service provided

$3,200,000$3,300,000

Woman-owned businessCommission: $100,000



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Scheme #5: Personal Purchases with Company Funds

Fraudster purchases goods or services for personal use and tricks employer into paying for them.

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Personal Purchases: Methods

Submit invoices for personal purchases to accounts payable as business expenses.Charge personal

expenses on company credit cards.

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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

Quarter Horse breeding

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Liberty Coach

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Purchased for $2.1M, sold for $800K

The Horse Farm

48Purchased for: $540 K



The Primary Residence

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Value: $468K

The Florida vacation home

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Value: $382K

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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

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Into Rita’s pocket went $54M

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Billing schemes: Prevention

Proper authorization for disbursementsDocument 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 carefullySegregate duties of:

– Approving vendors– Creating purchase orders– Verifying receipt of goods– Approving payment on invoices

Who has the first question?

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Thomas Buckhoff, Ph.D., CPA/CFF, CFE

130 Hazelwood DriveStatesboro, GA 30458Phone: (912) [email protected]

linkedin.com/pub/thomas-buckhoff/20/465/277

Forensic Solutions, LLCForensic accounting and litigation support services

Top Five Employee Fraudsters love cash! Fraud Schemes 5 Fraud Schemes.GASBO.pdf · Thomas Buckhoff,...

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