top five employee fraudsters love cash! fraud schemes 5 fraud schemes.gasbo.pdf · thomas buckhoff,...
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Thomas Buckhoff, Ph.D., CPA/CFF, CFE 2015 GASBO Conference
Top Five Employee Fraud Schemes Page 1
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
Thomas Buckhoff, Ph.D., CPA/CFF, CFE 2015 GASBO Conference
Top Five Employee Fraud Schemes Page 2
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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.
Thomas Buckhoff, Ph.D., CPA/CFF, CFE 2015 GASBO Conference
Top Five Employee Fraud Schemes Page 3
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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
Thomas Buckhoff, Ph.D., CPA/CFF, CFE 2015 GASBO Conference
Top Five Employee Fraud Schemes Page 4
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.
Thomas Buckhoff, Ph.D., CPA/CFF, CFE 2015 GASBO Conference
Top Five Employee Fraud Schemes Page 5
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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
29 30
Thomas Buckhoff, Ph.D., CPA/CFF, CFE 2015 GASBO Conference
Top Five Employee Fraud Schemes Page 6
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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Thomas Buckhoff, Ph.D., CPA/CFF, CFE 2015 GASBO Conference
Top Five Employee Fraud Schemes Page 7
Pass-through scheme illustrated
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
Pass-through scheme illustrated
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.
Pass-through scheme illustrated
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
Thomas Buckhoff, Ph.D., CPA/CFF, CFE 2015 GASBO Conference
Top Five Employee Fraud Schemes Page 8
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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
Thomas Buckhoff, Ph.D., CPA/CFF, CFE 2015 GASBO Conference
Top Five Employee Fraud Schemes Page 9
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 2015 GASBO Conference
Top Five Employee Fraud Schemes Page 10
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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