Employee, vendor and other frauds against the organization



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 confession.


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 disorder.

Corporate Culture and



Revenue Cycle Fraud

Cash Collection Fraud

 Basic Sales Skimming

“Your meal free if you don’t get a receipt.”

 Advanced Sales Skimming

 Forged receipt for service

Anecdote about “business on the side”

 Checks Swapped for Cash

Automated check approval; don’t take checks?

 Cash Box Robbery

 If sales, cash not reconciled

 Shortchange Sales (by the clerk)

 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 writeoffs 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

 Many other employee fraud schemes are not discussed here.


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 overbilled.

 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)