Small Business FRAUD PREVENTION Manual

Transcription

1 Small Business FRAUD PREVENTION Manual

2 TABLE OF CONTENTS PREFACE... ix PART 1: INTERNAL FRAUD THREATS I. INTRODUCTION TO EMPLOYEE FRAUD The Shocking Cost of Employee Theft and Fraud... 1 The Cost of Fraud to Small Businesses... 2 Methods of Fraud in Small Businesses... 3 Why Employees Commit Fraud... 4 Donald R. Cressey and the Fraud Triangle... 4 Continuing Conduct Working Conditions and Fraud The Hollinger-Clark Study: The Effect of Workplace Conditions Who Is the Typical Fraudster? Who Is the Typical Fraudster? Analysis Report to the Nations II. HOW EMPLOYEES STEAL CASH FRAUD Introduction Cash Theft Types of Cash Theft Schemes Skimming and Larceny Unrecorded Sales Skimming Receivables Cash Larceny from the Deposit Deterring and Detecting Skimming and Cash Larceny Accounting Anomalies That Indicate Skimming Trend Analysis Using Customers to Detect Skimming General Control Objectives for Cash Receipts Maintaining Physical Security of Cash Billing Schemes Shell Company Schemes Non-Accomplice Vendor Schemes Personal Purchases with Company Funds Deterring and Detecting Billing Schemes Determining Who Is Involved in a Billing Scheme Determining Whether a Vendor Is Legitimate Control Objectives for Preventing Billing Schemes Payroll Schemes Falsified Hours and Salary i

3 II. HOW EMPLOYEES STEAL CASH FRAUD (CONT.) Ghost Employees Commission Schemes Deterring and Detecting Payroll Schemes Control Objectives for Preventing Payroll Schemes Expense Reimbursement Schemes Mischaracterized Expense Reimbursements Overstated Expense Reimbursements Fictitious Expense Reimbursements Multiple Reimbursements Deterring and Detecting Expense Reimbursement Schemes Red Flags of Expense Reimbursement Schemes Check Tampering Forged Maker Schemes Forged Endorsement Schemes Altered Payee Schemes Authorized Maker Schemes How Check Tampering Is Concealed Detection of Check Tampering Schemes Prevention of Check Tampering Schemes Electronic Payment Tampering Prevention and Detection of Electronic Payment Tampering Cash Register Disbursement Schemes Common Register Disbursement Schemes Control Weaknesses Detection of Register Disbursement Schemes Prevention of Register Disbursement Schemes III. HOW EMPLOYEES STEAL INVENTORY, EQUIPMENT, AND OTHER ASSETS Misuse of Inventory and Other Assets The Costs of Inventory Misuse Types of Noncash Theft Unconcealed Larceny Falsified Receiving Reports Fraudulent Shipments Fraudulent Write-Offs Concealing Inventory Shrinkage Altered Inventory Records Fictitious Sales and Accounts Receivable Write Off Missing Noncash Assets Physical Padding Detecting the Theft of Inventory, Equipment, and Supplies Review of Perpetual Inventory Records ii

4 III. HOW EMPLOYEES STEAL INVENTORY, EQUIPMENT, AND OTHER ASSETS (CONT.) Review of Shipping Documents Analytical Review Physical Inventory Counts Preventing Inventory Fraud Proper Documentation Segregation of Duties Independent Checks Physical Safeguards Red Flags of Inventory Theft Schemes IV. PREVENTING EMPLOYEE THEFT Selecting the Right Employee Past Employment Verification Criminal Conviction Checks Drug Screening Reference Checks Education and Certification Verification Get the Consent of the Candidate Policies and Procedures That Help Eliminate Employee Dishonesty Environmental Conditions Provide Incentives for Honest Employees Control Conditions Policies and Procedures That Help Deter Fraud Perception of Detection Proactive Programs Monitoring Systems Insuring Against Dishonesty PART 2: EXTERNAL FRAUD THREATS V. CHECK FRAUD Introduction Counterfeiting Checks Signs of Counterfeit and Forged Checks Check Fraud Vulnerabilities Check Theft Check Fraud Schemes Check Fraud Rings Check Fraud Detection Check Fraud Prevention iii

5 VI. CREDIT CARD SCHEMES Introduction Credit Card Schemes Unauthorized Use of a Lost or Stolen Card Organized Crime Rings Advance Payments Stolen Card Numbers Counterfeit Cards Telephone and Mail Order Fraud False Applications Credit Doctors True Name Fraud Non-Receipt Fraud Key-Enter Counterfeiting Creditmaster Skimming Pretext Calling Account Takeover Institutional Identity Theft and Spoof Sites Merchant Scams Company Credit Cards Smart Cards Hybrid Smart Cards The Law Concerning Credit Card Fraud Credit Card Fraud Detection Credit Card Fraud Prevention Education Programs Liaison with Law Enforcement Credit Card Company Security Initiatives Evolving Credit Card Security Features Technological Deterrents Photographs Holograms Signature Panel Activation of Cards Advanced Authorization Unusual Activity Monitoring Card Scrutiny at Point of Sale Internet and Telephone Orders Financial Institution Measures Protecting Credit Card Payment Data from Intrusion iv

6 VII. COMPUTER FRAUD Potential Impact of Computer Crime Securing Computers Electronic Security Internet Fraud Combating Internet Fraud Computer Hacking Methods Used to Gain Unauthorized Access VIII. SHOPLIFTING Introduction Types of Shoplifters Amateur Shoplifters Professional Shoplifters Shoplifting Methods Sleight-of-Hand Devices Distraction Employees as Shoplifters Training Methods of Shoplifters Shoplifting Detection Physical Characteristics Behavioral Characteristics Shoplifting Prevention Prevention Techniques What to Do with the Shoplifter Confronting and Detaining Shoplifters Investigation of a Suspect Criminal and Civil Actions IX. HOW VENDORS CAN CHEAT SMALL BUSINESSES Bribery: Kickbacks and Gratuities Methods of Making Illegal Payments Bribery Scheme Types Economic Extortion Illegal Gratuities Detection of Bribery Schemes Red Flags Associated with Employees Red Flags Associated with Vendors Red Flags Associated with the Corrupt Recipient Red Flags Associated with the Corrupt Payer Other Red Flags Keeping Suppliers Honest v

7 IX. HOW VENDORS CAN CHEAT SMALL BUSINESSES (CONT.) Conduct Background Checks Check References Check Billings and Invoices Question Suppliers Vendor On-Site Audit Vendor Questionnaire X. CON SCHEMES AND OTHER SCAMS Telemarketing Frauds Telemarketing Terminology Telemarketing Suppliers Telemarketing Scams Targeting Businesses Telemarketing Scams Enforcement and Prosecution Advance-Fee Swindles Types of Advance-Fee Swindles Advance-Fee Swindles Detection and Prevention Ponzi and Pyramid Schemes Accounts Receivable Schemes Ponzi Versus Pyramid Varieties of Pyramid Schemes Detecting and Preventing Pyramid and Ponzi Schemes Investment Swindles Methods of Investment Swindlers Types of Investment Swindles Prevention of Investment Swindles Identity Theft Business Identity Theft Profile of the Fraudster Common Ways of Obtaining Information Federal Identity Theft Statutes Identity Theft Guidance for Small Businesses Workers Compensation Fraud Red Flags of Workers Compensation Fraud Preventing Workers Compensation Fraud Tax Scams Employment Tax Evasion Tax Return Preparer Fraud Unreliable Third-Party Payers Improper Home-Based Business Other Common Scams Phony Invoices Cramming vi

8 X. CON SCHEMES AND OTHER SCAMS (CONT.) Phone Scams Slamming Nigerian 419 Fraud Schemes XI. WHAT TO DO IF YOU ARE A VICTIM OF FRAUD Dealing with Dishonest Employees Initiation: Detection and Identification Investigation and Development Documentation Detention Interview Disposition Avoiding Liability when Conducting Investigations Defamation Invasion of Privacy False Imprisonment Wrongful Termination Rights and Duties of Employees Employees Duty to Cooperate Employees Rights During the Investigation Workplace Searches Effect of Violation of Employee s Rights State Constitutions and Statutes Surveillance Polygraph Examinations Prosecuting Employees and Other Fraud Perpetrators Why Prosecute a Fraud Perpetrator? Aiding the Company s Civil Remedies and Litigation Malicious Prosecution Civil Actions Against Perpetrators Discovery Civil Trials Advantages and Disadvantages of Civil Litigation Will a Judgment Be Collectible? Ensuring Recovery of Property or Damages Enforcement of Money Judgments Discharging a Suspected Wrongdoer Just Cause Negligent Discharge Breach of Implied Contract vii

9 XI. WHAT TO DO IF YOU ARE A VICTIM OF FRAUD (CONT.) Breach of the Duty of Good Faith and Fair Dealing Discharge in Violation of Public Policy XII. REFERENCES viii