Cash is King- Fraud Schemes and Traps

Cash is the most popular target of fraudsters. But, that doesn’t mean forensic experts can’t discover cash fraud schemes and the perpetrators behind them.

Identifying cash traps

How do thieves get their hands on your cash? According to the Association of Certified Fraud Examiners, there are three main categories of cash fraud: 1) theft of cash on hand, 2) theft of cash receipts, and 3) fraudulent disbursements.

The last category includes the most frequently done schemes, such as overbilling and “ghost” vendor or employee schemes. For example, in overbilling scams, vendors usually submit inflated invoices by overstating the price per unit or the quantity delivered. A dishonest vendor also might submit a legitimate invoice multiple times. Overbilling may involve collusion with employees of the victim organization, who typically receive kickbacks for their assistance.

Employees also can conduct billing fraud on their own, submitting bogus invoices payable to a fake vendor and keeping the payments to themselves. Similarly, an employee might set up payroll disbursements to nonexistent ghost employees.

Tracing the schemes

Cash can be difficult to trace once it’s in the hands of a fraudster. But forensic experts can uncover fraud by tracing the path stolen cash took before the cash was pocketed, including who and what prompted its flow out of the organization. The connections they find may point to the guilty party.

For example, inflated invoices often leave signal red flags. Experts look for invoices that bill  charges with no explanation. They analyze cash receipt and disbursement journals, ledger accounts, invoices and other documentation for irregular charges, round dollar amounts, or amounts just below the threshold that requires management’s signoff. They also search for discrepancies between invoice amounts and purchase orders, contracts, or inventory counts.

If forensic experts suspect fictitious billing has occurred, they often investigate accounts with no tangible deliverable — such as those for consulting, commissions and advertising — and check vendor addresses against employee addresses. Invoices  payable to post office boxes also may raise suspicion.

Returned checks can supply experts with useful information, too.  Fraudsters are more likely to cash checks, whereas legitimate businesses will deposit them and rarely endorse checks to third parties. Moreover, checks generally are stamped with the name of the endorser and, if deposited, the financial institution of deposit. Experts can use that information to discover a perpetrator’s identity.

Exposing ghosts

Ghost employee schemes also can also be traced. Forensic experts match nonexistent employees to current or former employees who receive the fraudulent paychecks by examining:

  • Payroll lists,
  • Current and former employee lists, with start and termination dates and Social Security numbers,
  • Authorized deductions,
  • Withholding forms,
  • Personnel files, and
  • Employment applications.

The information collected from these sources can provide connections between actual and ghost employees that wouldn’t otherwise be apparent.

Conclusion

The best defense against any type of fraud are strong internal controls. But even the strongest of controls sometimes fail. When that happens, an experienced forensic accountant can help you track down the fraud and its source. Contact our experts today.


Odysseus Lanier
Partner
Risk Advisory Services

 

 

Darlene Brown
Director
Risk Advisory Services