Underestimating fraud risk is a common problem. Fraud rarely ranks as a pressing concern for top executives, with the exception of cyber threats.
Finance professionals are instrumental in both the prevention and investigation of fraud. Therefore, it is important to first understand the schemes that pose the greatest risks to organizations.
Billing schemes. These are fraudulent disbursement schemes in which a person causes his or her employer to buy goods or services that are nonexistent, overpriced or not needed. While most billing schemes are used to illegally generate cash, they can also result in the illicit gain of goods or services for the fraudster. They are a common risk in construction, government, manufacturing, healthcare, and technology.
Non-cash schemes. Examples of such instances include an employee-stealing inventory from a warehouse or misusing confidential customer information. Non-cash schemes are most common in the technology, retail, manufacturing, and transportation and warehouse sectors.
Expense reimbursement schemes. The individual concocts a false expense report and submits it for reimbursement, as opposed to overstating real business expenses or seeking to be reimbursed for personal expenses. While it can strike any industry, government, professional services, and construction sectors seem to face the greatest risk.
Check and payment tampering. A person steals his or her employer’s funds by intercepting, forging, or altering a check or electronic payment drawn on one of the victim organization’s bank accounts in these schemes. Such schemes are more commonly reported within professional services, construction, and religious, charitable, or social services sectors.
Cash larceny. In the occupational fraud setting, cash larceny is when an individual takes an employer’s cash (this includes both currency and checks) without the employer’s consent. It is known as “on book” fraud because it involves the theft of money that has already appeared on a victim organization’s books. It often affects such industries as arts, entertainment and recreation, professional services, and education.
Given the inflow of money at all times, accounts receivable is extremely vulnerable to fraud. The most common fraud schemes that occur within accounts receivable include:
Lapping. This is one of the more common fraud schemes and can easily become complex. Consider the following example: Customer A owes money and sends a check to the accounts receivable clerk, who then pockets the money. Customer B also owes money and sends in a check. The fraudster credits Customer B’s payment to Customer A’s account to replace that missing money. Customer C also owes money and sends in a check, which is then credited to Customer B’s account. The fraudster will continue this pattern, continuously recording one customer’s payment to another customer’s account until the scheme is detected.
Fictitious receivables. These schemes are usually set up to disguise fictitious sales. Once a sale is booked, the corresponding journal entry is to a receivable that is never collected and eventually written-off.
Improper posting of credits. This is when a credit is posted in a customer‘s account either as a discount, return, or write-off of the account. For an account that has been written-off, for example, the employee may collect the receivable and then divert the funds to him or herself.
The act of fraud usually involves not only the scheme itself but also efforts to cover up the crime. As a result, it can be challenging organizations to uncover the activity in a timely manner. By adopting and implementing the proper technology, organizations can quickly detect fraud and mitigate losses.