Accounts Receivables Frauds Fraudulent credit approvals

Employee, Vendor, and
Other Frauds against the
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
The Fraud Problem
 Organizations
in the United States lose hundreds of billions
of dollars per year to fraud.
 Many believe that most frauds against organizations are
never reported to law enforcement authorities to avoid
negative publicity and legal liability.
 Many companies actually consider employee or vendor
theft as a cost of doing business.
 Law enforcement is likely to choose not to pursue an
embezzlement case involving a only few hundred or even
thousand dollars.
 Frauds can sometimes be hard to prove without a
Who Commits Fraud
 The
fraud triangle helps to explain who commits fraud.
 Pressure
Usually related to financial pressure such as large
medical bills, gambling problems, drug habits, and
extravagant living.
 Opportunity Required to commit fraud.
 Rationalization Likely depends on the type of criminal and
the criminal’s personality type or possible personality
Corporate Culture and
Revenue Cycle Fraud
 Cash
Collection Fraud
 Basic Sales Skimming
 Advanced Sales Skimming
 Checks Swapped for Cash
 Cash Box Robbery
 Shortchange Sales
 Mail Room Theft
Cash Processing Frauds
(These frauds overlap revenue cycle frauds)
 Cash stolen in transmission
 Lapping of accounts receivables
 Short bank deposits
 Noncustodial theft of money
 Check tampering
 Check washing
 Check laundering.
Check Washing
Accounts Receivables Frauds
 Fraudulent
credit approvals Dishonest employees could
intentionally engage in fraudulent credit approval by
granting credit accounts to fictitious customers.
 Improper credits Accounts receivable clerks could make
improper credits to friends’ accounts.
 Improper write-offs Employees also could make
improper write-offs to friends’ accounts instead of sending
the accounts to collection.
Expenditure Cycle Frauds
Improper Purchases and Payments
 Unauthorized Purchases
 Fraudulent Purchases to Related Parties
 Misappropriation of Petty Cash
 Abuse of Company Credit Cards or Expense Accounts
 Unauthorized Payments
 Theft of Company Checks
 Fraudulent Returns
 Theft of Inventory and Other Assets
 Payroll Fraud
 Improper hiring
 Improper changes to employee personnel files for pay raises
 Improper work-related reporting
Production Cycle and Other
 Production
cycle fraud involves theft of raw materials and
finished goods.
 Waste, Scrap, and Spoiled Goods
 Other Types of Employee Fraud
 Financial Statement Fraud
 Insider Trading
 Employee Fraud in General
 Many other employee fraud schemes are not discussed
Vendor Frauds
 Short
shipments A company is susceptible to paying for
goods not received if it does not count its incoming
shipments and match the counts against purchase orders
and vendors’ invoices.
 Balance due billing Some vendors send their customers
statements that show only the balance due. Companies
whose vendors bill this way are at high risk for being
 Substandard goods Vendors can ship substandard
goods if the receiving company does not have a method of
receiving and inspecting goods.
 Fraudulent cost-plus billing
Employee Fraud Methods In
Electronic AISs
 Input
manipulation (the most common mode of attack)
Abuse of Access Privileges
 Unauthorized Access.
 Direct
File Alteration (bypass normal access software)
 Program Alteration (requires access and technical skill)
 Data Theft (hard to detect and prove)
 Sabotage (typically by disgruntled employees)