Chapter 4Pop QuizLearning ObjectivesSlide 4Slide 5Frequency of Fraudulent DisbursementsMedian Loss of Fraudulent DisbursementsBilling SchemesShell Company SchemesShell CompanySlide 11Preventing and Detecting Shell Company SchemesSlide 13Slide 14Slide 15Billing Schemes – Non-Accomplice VendorsPreventing and Detecting Non-Accomplice Vendor FraudPersonal Purchases With Company FundsPersonal Purchases Through False InvoicesPersonal Purchases on Credit Cards, Purchasing Cards, or Other Company AccountsPreventing and Detecting Personal Purchases1Billing SchemesChapter 42Pop QuizWhat is a pass-through billing scheme?3•List the five major categories of fraudulent disbursements.•Define the term “billing schemes.”•List the three categories of billing schemes.•Understand what a shell company is and how it is formed.•List and understand the four ways false invoices are approved for payment.•Understand why most shell company schemes involve the purchase of services rather than goods.•Understand how a pass-through scheme differs from the usual shell company schemes.•Be familiar with the methods identified in this chapter for preventing and detecting shell company schemes.Learning Objectives4•Understand how pay-and-return schemes work.•Understand how non-accomplice vendor schemes work.•Be familiar with the methods identified in this chapter for preventing and detecting non-accomplice vendor schemes.•Understand how personal purchases schemes work.•Be familiar with the methods identified in this chapter for preventing and detecting personal purchases schemes.•Be familiar with proactive audit tests that can be used to detect billing schemes. Learning Objectives5Billing SchemesBilling SchemesNon-AccompliceVendorNon-AccompliceVendorPersonal PurchasesPersonal PurchasesShell CompanyShell Company6Frequency of Fraudulent Disbursements7Median Loss of Fraudulent Disbursements8Billing Schemes•The perpetrator uses false documentation to cause a payment to be issued for a fraudulent purpose•Fraudulent disbursement is issued in same manner as a legitimate disbursement •Schemes–Shell company schemes–Non-accomplice vendor schemes–Personal purchases schemes9Shell Company Schemes•Fictitious entities created for the sole purpose of committing fraud•Bank account is usually set up in the company’s name•Forming a shell company–Certificate of incorporation or assumed-name certificate set up–Shell company may be formed in someone else’s name–Best way is to set up company under a fictitious name–Set up entity’s address – home address, post office box, or friend/relative’s address10Shell Company•Submitting false invoices–Invoice is manufactured using a professional printer, personal computer, or typewriter•Self-approval of fraudulent invoices–Most fraudsters are in a position to approve payment–Approvals may be forged•“Rubber stamp” supervisors–Don’t check the documentation –Approve whatever is submitted•Reliance on false documents–Without approval authority, fraudster submits false documents – purchase order, invoice, and receiving report11Shell Company•Collusion–Two or more employees conspire to steal–More difficult to detect–Circumvents controls implemented to prevent fraud•Purchases of services rather than goods–Purchases of service are preferable to purchases of goods–Services are intangible and fraud is more difficult to detect•Pass-through schemes–Goods or services are purchased by the employee and resold to the victim company at an inflated price12Preventing and Detecting Shell Company Schemes•Maintain and regularly update an approved vendor list•Independently verify all vendors before payment•Identifying shell company invoices–Lack of detail on the fraudulent invoice–Invoice that lacks detailed descriptions of the items billed–Mailing address may be an indicator of fraud–Consecutively numbered invoices over a period of time–Reviewing payables and sorting payments by vendor and invoice number13Preventing and Detecting Shell Company Schemes•Testing for shell company schemes–Investigate budget overruns and departments that regularly exceed their budget–Conduct horizontal analysis of expenses –Investigate unexplained increases in “soft” accounts–Investigate unexplained increases in quantity of items purchased14Preventing and Detecting Shell Company Schemes•Testing for shell company schemes–Monitor trends in average unit price–Investigate goods and services that would not normally be purchased–Compare vendor addresses to employee addresses–Run reports of average turnaround time for invoices to look for unusual payment patterns15Preventing and Detecting Shell Company Schemes•Verifying whether a shell company exists–Use the phone book to verify the vendor –Contact others in the industry–Verify vendor’s address through a site visit or by using satellite imaging software•Identifying the employee behind a shell company–Conduct a public records search of the company’s registration–Be alert for related names, addresses, phone numbers, Social Security numbers, and other identities–Match vendor payments with payroll checks–Conduct surveillance of mail drops to see who picks up the checks16Billing Schemes –Non-Accomplice Vendors•Vendor is not a part of the scheme•Pay-and-return schemes–Payments owed to legitimate vendors intentionally mishandled–Double pay an invoice–Pay the wrong the vendor–Overpay the invoice amount–Purchase excess merchandise•Overbilling with a non-accomplice vendor’s invoices–Fake invoice is created for a vendor that regularly does business with victim organization–Rerun an invoice already paid17Preventing and DetectingNon-Accomplice Vendor Fraud•Incoming checks should be photocopied and attached to the remittance advice•Regarding overpayments, banks should be instructed not to cash checks payable to an organization•Spot check past accounts payable files when a pay-and-return scheme is suspected18Personal Purchases With Company Funds•Employees make personal purchases for themselves, their businesses, their family, or their friends using company money•Perpetrator causes the victim company to order and pay for an unneeded asset19Personal Purchases Through False Invoices•The fraudster is authorizer of invoices•Falsifying documents such as purchase orders to obtain authorization•Altering