Thomas Buckhoff, Ph.D., CPA/CFF, CFE
2015 GASBO Conference
Top Five Employee
Fraud Schemes
Fraudsters love cash!
Cash is the asset
most commonly
stolen by
dishonest
employees.
To catch these
people we must
first learn how
fraudsters divert
cash into their
pockets.
Forensic Solutions, LLC
Forensic accounting and litigation support services
Presented by:
Thomas Buckhoff, Ph.D., CPA/CFF, CFE
2015 GASBO Conference
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Top 5 Fraud
Schemes
Fraud and Internal Controls
Theft of cash
receipts
All of the Top 5 fraud
schemes exploit one
or more deficiencies
in basic internal
controls.
Best way to prevent
the schemes:
Implement and
adhere to basic
internal controls!
Theft of cash
disbursements
Skimming #1
(Off-book)
Billing
Schemes
Cash larceny #2
(On-book)
Fictitious #3
Vendor
Pass-through #4
schemes
Personal #5
Purchases
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Theft Act
Scheme #1: Skimming
Skimming may
occur at any
point where
cash enters a
business, so
those who
receive and
process cash
are likely
perpetrators.
The theft of an
organization’s
cash before it
has been
recorded in
the
accounting
system
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Top Five Employee Fraud Schemes
Methods:
Ring “no sale”
Alter register tape
No receipts issued
Pocket money
Off-hours sales
Off-site sales
Extra cash register
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Thomas Buckhoff, Ph.D., CPA/CFF, CFE
2015 GASBO Conference
Conversion
Concealment methods
 Destroy record of
transaction
 Lapping
 Alter customer
statements
 “Write off” customer
account receivable
 Pad inventory to conceal
shortage
 Fabricate new records
Currency can
simply be
pocketed
but checks
must be
converted
to cash.
Check conversion
methods:
Dual endorse checks
Forge endorsements
Alter payee
Open accounts with
similar name
Swap checks for cash
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Example #1: Skimming
X
Theft act (Loss: $200,000)
– “Sharon” stole the cash
receipts from one of five
cash boxes
Concealment
– Destroyed summary
sheet for stolen box
Conversion
– Swapped checks
for cash
Sharon steals the $200 from
Sheet 5. She swaps the $50 of
checks from Sheet 5 for $50 of
cash from Sheet 4. Sharon then
deposits the $800 from Sheets 14 into the bank. The actual detail
regarding cash and checks on
the deposit ticket does not match
the $600 of cash and $200 of
checks on the summary sheets
for Sheets 1-4. Gotcha!
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Example #3: Lapping schemes
Example #2: Skimming
Theft act (Loss: $75,000)
– “Bill” stole incoming
customer payments
Concealment
– Credited customer’s
account and debited
“courtesy discounts”
Conversion
– Altered payee on
checks
Mary steals
Customer
A’s $500 A/R
payment.
No entry made to record $500 stolen from A.
1. Cash
500
2. Cash
1,000
A/R—Cust. A 500
A/R—Cust. B 1,000
1. To record $1,000 payment received from Customer B.
Mary steals remaining $500.
2. To record $1,000 payment from Customer C.
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Top Five Employee Fraud Schemes
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Thomas Buckhoff, Ph.D., CPA/CFF, CFE
2015 GASBO Conference
Skimming: Prevention
Scheme #2: Cash larceny
Maintain management presence
at point of cash receipt
Encourage customers to
request receipts
Rotate job duties/schedules
among employees
Two employees open mail
Install surveillance cameras
Separate cash handling from
record keeping
The theft of an
organization’s
cash after it
has been
recorded in
the accounting
system
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Theft Act
Concealment methods
Methods:
Cash larceny
may be
perpetrated
by anyone
who has
access to
cash.
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Steal from the
cash register
Steal any cash on
hand (e.g. petty
cash)
Steal cash from
bank deposit
Most times
no attempt is
made to
conceal
cash larceny
schemes
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Example #4: Cash larceny
Conversion
Currency can
simply be
pocketed
but checks
must be
converted
to cash.
Check conversion
methods:
Dual endorse check
Forge endorsement
Alter payee
Open account with
similar name
Swap check for cash
Other
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Top Five Employee Fraud Schemes
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Theft act (Loss: $200)
– Cashier A stole from
Cashier B’s drawer
while B was on break
Concealment
– None. Cashier B
got blamed for the
shortage.
Conversion
– None needed
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Thomas Buckhoff, Ph.D., CPA/CFF, CFE
2015 GASBO Conference
Fraudulent disbursements
Example #5
 Theft act (Loss: $50,000)
– “Sue” stole from the
company’s deposits
 Concealment
– Simply forced the
cash receipts journal
to match the bank
statement
 Conversion
– None, stole only
If added correctly, the total
currency
should be $100,000.
Employee
causes the
improper
distribution
of on-book
funds.
Methods:
Billing schemes
Expense
reimbursement
schemes
Check tampering
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Billing schemes
Shell company schemes
Methods:
Involve the
purchase of
goods or
services that
are
nonexistent,
overpriced,
or not
needed.
Shell company
schemes
– Fictitious
vendor
– Pass-through
Personal
purchases
Shell company
schemes are
typically
perpetrated
by those with
purchasing
duties.
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Theft Act
Fraudster sets
up a shell
company
and then
submits
invoices for
fictitious
goods of
services.
Concealment methods
Debit fraudulent
disbursement to
legitimate expense
account.
Alter/fabricate
disbursement
documentation.
Alter/pad inventory
counts to conceal
shortage.
Variations:
Fictitious
vendor
scheme
‘Passthrough’
scheme
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Top Five Employee Fraud Schemes
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Thomas Buckhoff, Ph.D., CPA/CFF, CFE
2015 GASBO Conference
Conversion
Scheme #3: Fictitious vendors
Register shell company
with the Secretary of State.
Open bank account and PO
box in shell company name.
Submit false invoices and
approve them for payment.
Mail checks and retrieve
from PO box and then
deposit into shell company
bank account.
Fraudster uses
shell company
to invoice
victim
company for
goods/services
never received.
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Fictitious vendor scheme illustrated
Victim
company
Invoice sent
Shell
company
Invoice paid though
nothing is received
Fraud loss is total amount
of payment made: $15,000
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Example #6: Fictitious vendor scheme
 Theft act (Loss: $170,000)
– Steve set up shell
companies and sent
invoices to his employer
 Concealment
– Employer did not
control inventory
 Conversion
– Retrieved checks
from PO box and
deposited into bank
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Top Five Employee Fraud Schemes
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Thomas Buckhoff, Ph.D., CPA/CFF, CFE
2015 GASBO Conference
Steve’s fictitious vendor scheme
North Central
Construction
Invoices sent
Industrial Supply
Specialty Supply
Invoices paid though
nothing is received
Fraud loss is total amount
of payments made: $170,000
Scheme #4: Pass-through
Fraudster inserts
himself as an
unnecessary
intermediary—
usually via a shell
company—between
a legitimate vendor
and his employer
and makes an
unauthorized profit
on the transaction.
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Example #7: Dairy farm
Pass-through scheme illustrated
Theft act:
Victim
company
Product/service provided
Vendor
– ‘Phil’ stole about
$2M via numerous
fraud schemes
Concealment:
$15,000
$10,000
Shell
company
Fraud loss: $5,000
– None. Barry did
not monitor his
activities.
Conversion:
– Money went into
various bank
accounts.
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Forensic Audit Findings
Finding
Unaccounted for cows
Amount
$1,700,000
Checks payable to cash
160,000
Payroll disbursements to kin
304,000
Payments to Red Oak Feed
4,157,668
Investments in milk futures
528,254
Total
$6,849,922
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Top Five Employee Fraud Schemes
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Thomas Buckhoff, Ph.D., CPA/CFF, CFE
2015 GASBO Conference
Pass-through scheme illustrated
Dairy
Product/service provided
Lowcountry
Feed, Inc.
Farm, Inc.
$40,748.29
$25,388.34
Red Oak
Invoice 06-243
Invoice 1014
Feed Co.
Fraud loss: $15,359.95
Fraud Losses
Pass-through scheme illustrated
Total payments made
Dairy
Product/service provided
Allegation
Lowcountry
Feed, Inc.
Farm, Inc.
Potential loss
Unaccounted for cows
$1,700,000
Checks payable to cash
160,000
Payroll disbursements to kin
304,000
Pass-through scheme
$4,157,668
1,420,000
$2,737,668
Red Oak
Investments in milk futures
Feed Co.
Fraud loss: $1,420,000
528,254
Total potential losses
$4,112,254
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Example #8: Pass-through scheme
Some government
contractors will use shell
companies to make it
appear like they hired
minority companies.
The pass-through entity
receives a token payment
for doing nothing.
Sports and
Exhibition
Authority
Product/service provided
$3,300,000
Hirschfield
Steel Co.
$3,200,000
Industrial
Fabricating
Systems, Inc.
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Top Five Employee Fraud Schemes
Pass-through scheme illustrated
Commission: $100,000
Woman-owned business
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Thomas Buckhoff, Ph.D., CPA/CFF, CFE
2015 GASBO Conference
Scheme #5: Personal Purchases
with Company Funds
Personal Purchases: Methods
Submit invoices for
personal purchases
to accounts payable
as business
expenses.
Charge personal
expenses on
company credit
cards.
Fraudster
purchases
goods or
services for
personal use
and tricks
employer into
paying for
them.
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Example #9: In Rita they trusted
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Quarter Horse breeding
 Theft act: A variety of
fraud schemes.
 Concealment: No
one monitored Rita’s
activities closely.
 Conversion: Stolen
funds diverted to an
account Rita
controlled.
 Loss: $54 million
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Liberty Coach
The Horse Farm
Purchased for $2.1M, sold for $800K
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Top Five Employee Fraud Schemes
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Purchased for: $540 K
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Thomas Buckhoff, Ph.D., CPA/CFF, CFE
2015 GASBO Conference
The Primary Residence
The Florida vacation home
Value: $468K
Value: $382K
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Other expenditures
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Into Rita’s pocket went $54M
 Paid $2.5 million on
her personal
American Express
card
 Spent $339K on
jewelry
 Spent > $200K on
trucks and SUVs
 Spent hundreds of
thousands on horse
trailers
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Billing schemes: Prevention
Who has the first question?
 Proper authorization for disbursements
 Document receipt of goods and services.
 Documentation supporting disbursement
requests should be reviewed for
completeness and accuracy.
 Conduct frequent inventory counts and
reconcile to inventory as per the books.
 Review credit card statements carefully
 Segregate duties of:
–
–
–
–
Approving vendors
Creating purchase orders
Verifying receipt of goods
Approving payment on invoices
Top Five Employee Fraud Schemes
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Thomas Buckhoff, Ph.D., CPA/CFF, CFE
2015 GASBO Conference
Forensic Solutions, LLC
Forensic accounting and litigation support services
Thomas Buckhoff, Ph.D., CPA/CFF, CFE
130 Hazelwood Drive
Statesboro, GA 30458
Phone: (912) 486-0809
tbuckhoff@gmail.com
linkedin.com/pub/thomas-buckhoff/20/465/277
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Top Five Employee Fraud Schemes
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