Fraud Theories-Analysis

Awadhoot Apte
Chandni Thapar
The intentional misrepresentation or alteration of accounting
records regarding sales, revenues, expenses and other factors for
a profit motive such as inflating company stock values, obtaining
more favourable financing or avoiding debt obligations.

Employees who commit accounting fraud at the request of
their employers are subject to personal criminal prosecution.


CASH

Most often stolen by dishonest employees.

Target cash as it enters or leaves the business

Inadequate cash flow controls

Understanding these controls
FRAUDS
ON-BOOK
FRAUDS
OFF-BOOK
FRAUDS
Theft of cash after it has appeared on a companys
books
Examination of the victim companys records can easily
reveal the cash shortage
CASH LARCENY SCHEMES
Intentional taking away of an employers cash without
the consent and against the will of the employer.
Can occur under any circumstance where an employee
has access to cash :
At the point of sale
From incoming receivables
From the victim organizations bank deposits

ON-BOOK FRAUDS
BILLING
SCHEMES
PAYROLL
SCHEMES
EXPENSE
REIMBURSEMENT
SCHEMES
CHEQUE
TAMPERING
SCHEMES
REGISTER
DISBURSEMENT
SCHEMES
Fraud aimed at the payments system of a business.
Manipulate that system and cause the business to make
a fraudulent payment to the employee.

TYPES OF BILLING SCHEMES :
Shell company schemes
Pass-through schemes
Pay-and-return schemes
Personal-purchase schemes

Segregation of duties

Before approving a new vendor, its legitimacy should be evaluated
by:
Obtaining its corporate records and other relevant documents
Checking its credit rating
Confirming that it is listed in telephone directories
Contacting its references from clients and others
Being particularly cautious about a vendor with a post-office box
address or a name composed entirely of initials.

Determining whether its business address matches any
employees home address
Once the company approves a new vendor, the account should be
closely monitored by:
Watching for increases in the amount or frequency of billings
Observing variances from budgets or projections
Comparing its prices with those charged by other sources

Can take place in any kind of business that issues
payroll checks to employees.

Employee causes his or her employer to issue a
payment by making false claims for compensation.

FALSIFIED WAGES INVOLVES :
Employees claiming compensation for hours not
worked or falsifying their timesheets or timecards in
some fashion.
Manipulating the rates of pay or the hours worked.
Pay themselves bonuses when none are warranted.

Sophisticated time clocks or systems that require a
unique employee pass code to be entered when
clocking in.
Executive approval of all bonus-type compensation.
Mandatory vacations for those with payroll
responsibilities with another employee performing
this function in their absence.
Executive approval of all pay checks.
The ability to modify wage rates, add employees, etc.
within the system should be restricted to only those
necessary. These individuals should have their records
periodically reviewed.

Employees are reimbursed for expenses paid on behalf of
the employer
Airfare, hotel bills, business meals, mileage, ground
transportation and so on
Business purpose explained and receipts attached per the
organizations guidelines

FOUR MAJOR VARIANCES TO THESE SCHEMES:
Mischaracterized Expense Claims
Inflated Expense Claims
False Expense Claims
Multiple reimbursements




Perpetrator physically prepares the
fraudulent check

Must have:
Access to checks
Access to bank statements
Ability to forge signatures or alter other
information on the check


CHECK TAMPERING SCHEMES INCLUDE:

Forged maker schemes, which involve forging an
authorized signature on a company check
Forged endorsement schemes, which consist of forging
the signature endorsement of an intended recipient of a
company check
Altered payee schemes, which involve changing the payee
designation on the check to the perpetrator or an
accomplice
Authorized maker schemes, which occur when employees
with signature authority write fraudulent checks for their
own benefit

Nonexistent employees are added to the payroll
and another employee benefits by receiving their
wages.
Ghost employees may never have existed, or they
may no longer be current employees of the
organization, but are intentionally left on the
payroll.
Typically more prevalent in larger organizations
with large numbers of employees and weak internal
controls.


Periodic payroll audits in which all employees have to
physically sign and show proper identification to receive
their pay check.
Cross-reference the payroll roster for duplicate addresses or
Social Security numbers.
Verify Social Security numbers with the Social Security
Administration.
Randomly inspect your payroll database for employees with
P.O. boxes or those with no deductions (i.e., healthcare,
state/fed withholdings).
Require direct mailing of checks or have management
distribute them physically to employees.


Refunds and voided sales are transactions processed at
the register when a customer returns an item of
merchandise purchased from that store. The transaction
entered on the register indicates the merchandise is being
replaced in the stores inventory and the purchase price is
being returned to the customer. In other words, a refund
or void shows a disbursement of money from the register
as the customer gets his money back.
Since these schemes appear on the books as legitimate
disbursements of funds from the cash register, they are
classified as fraudulent disbursements.
In practice, an employee physically removes cash from his
cash register and absconds with it. In that respect, such
schemes are very similar to cash larceny schemes.

OFF-BOOK
FRAUD
SCHEMES
SKIMMING
UNRECORDED
SALES
UNDERSTATED
SALES AND
RECEIVABLES
THEFT OF
CHEQUES
THROUGH THE
MAIL
Cash is removed from the entity before it enters the
accounting system.
Receipt of the cash is never reported to the entity.
The most common skimming schemes are:
Unrecorded sales
Understated sales
Theft of incoming check
Swapping checks for cash
Theft of cash from a victim entity prior to its entry in an
accounting system
No direct audit trail
Its principal advantage is its difficulty to detect

SALES SKIMMING
Employee makes a sale of goods or services, collects the
payment, and makes no record of the transaction
Pockets the proceeds of the sale
Without a record of the sale, there is no audit trailCash
register manipulation
No Sale or other non-cash transaction is recorded
Cash registers are rigged so that sales are not recorded on
the register tapes
No receipt is issued

AFTER HOURS SALES
Sales are conducted during non-business hours without the
knowledge of the owners


SKIMMING
SKIMMING BY OFF-SITE EMPLOYEES
Independent salespeople
Employees at remote locations branches or satellite offices away
from the primary business site
Poor collection procedures

UNDERSTATED SALES
Sales is recorded for a lower amount than was collected
Sales item is reduced in price or the number of units sold

THEFT IN THE MAIL ROOM INCOMING CHECKS
Incoming checks are stolen and cashed
Customers account is not posted
SKIMMING
Illegal copying of information from the magnetic strip of a credit or ATM
card. It is a more direct version of a phishing scam.
The scammers try to steal your details so they can access your accounts.
Once scammers have skimmed your card, they can create a fake or
cloned card with your details on it. The scammer is then able to run up
charges on your account.
A way for scammers to steal your identity (your personal details) and use
it to commit identity fraud. By stealing your personal details and account
numbers the scammer may be able to borrow money or take out loans in
your name.
SAFETY
Keep your credit card and ATM cards safe. Do not share your personal
identity number (PIN) with anyone. Do not keep any written copy of your
PIN with the card.
Check your bank account and credit card statements when you get them.
If you see a transaction you cannot explain, report it to your credit union
or bank.
Choose passwords that would be difficult for anyone else to guess.


SKIMMING
Gentlemen's Club featuring
exotic dancers
Primary source of revenue
Cover Charges
Sale from food and
beverages
Only legally operating bar
offering such service- No
competition
Responsibility:
Servers:
To serve food and
beverages
Bartenders:
To provide Servers
per order
Register sales in cash
register
Responsibility:
Count the cash,
close cash register
Deposit the cash
Responsibility:
Ownership
Overview of business
Larry
Swenson
Manager-
Besty Smith
Server
Bartender
Cover Charges of $6 were charge per customer for
entrance
Customer placed order with servers for food, Beer and
beverages
Server has $40 cash at the beginning of shift
$3 for beer to bartender and charge customer $4 each
Food item charge to customer $12.5
Server shall return $40 at end of shift
All transactions were carried in cash
Per Cost-Volume-Profit analysis:
Profit Margin: 35% at least
At actual Profit Margin was mere 10%
Total estimated loss: $379974/year
Items Sales
($)
Cost of
Sales
($)
Sales
Marku
p (%)
Estimat
ed
Fraud
Actual Beer 853448 228972 373
Food 40753 51726 79
Budget Beer 114486
0
228972 500 291412
Food 129315 51726 250 88562
0
100000
200000
300000
400000
500000
600000
700000
800000
900000
1000000
1100000
1200000
1300000
Beer Food
Fraud Size
Actual Fraud
On-Book Fraud
(Cash Larceny)
Off-Book Fraud
(Skimming)
Manager can steal part of
deposits
Employees collecting $6 as
cover charges either pocket
some money or allowed free
admission to acquaintances

Anyone having access to cash
register can steal money from
it
Servers and bartenders could
get drinks for customers and
do not ring them in cash
register as sale and pocket it
all instead

Financial statement analysis:
Total estimated loss: $379974/year
Undercover Surveillance:
40-Hrs in a week
Revealed that 90% of employees were stealing cash
including manager
Invigilation:
Revenue generated in week during invigilation period:
$30,960
Previous Week revenue: $25,775
Annual week average: $22,006
Total loss due to skimming: $259,250 to $447,700 per year
Change in Beer and liquor inventory was not
reconciled to drinks registered in cash register
Cash register tapes were not reconciled with cash
deposited in bank
Cash register ribbons were not replaced on timely basis
resulting in inconsistence cash registering
Profit Margin was 10% in stead of expected 35%
Access to alcohol and beer limited to head bartender
responsible for shortage
Change in inventory to be reconciled with cash register
Cash register and bank deposits to be checked by general
manager
Employee hotline to report any fraud
Surveillance cameras at cash registers
Surprise audits, Undercover surveillance, Interviews with
employees
Additional Recommendation:
Entry pass system for admission (Can be online/ offline)
All though businesses are vulnerable to Frauds, it can be
detected and prevented with investigative techniques and
careful control over the cash and other assets.
THANK YOU