: THE BASICS OF ASSET MISAPPROPRIATION (NO. 99-5402)
TABLE OF CONTENTS I. INTRODUCTION The Pervasive Threat of Employee Theft... 3 Asset Misappropriations... 5 ACFE s Occupational Fraud and Abuse Survey... 5 Measuring the Cost of Occupational Fraud... 5 Losses Reported in the 2010 International Fraud Survey... 6 How Occupational Fraud Is Committed... 7 Duration of Fraud Schemes... 13 Detection of Fraud Schemes... 14 Victims of Occupational Fraud... 15 The Perpetrators... 22 A Need for Better Efforts to Fight Fraud... 36 About this Workbook... 36 Review Questions... 38 II. CASH THEFT SCHEMES Overview... 39 Skimming... 41 Sales Skimming... 41 Skimming Receivables... 53 Skimming Revenues vs. Larceny of Revenues... 60 Unconcealed Larceny of Revenues... 60 Understated Sales... 66 Cash Larceny from the Deposit... 69 Converting Stolen Checks... 75 Preventing and Detecting Cash Theft... 77 Separation of Duties in the Receipt of Cash... 77 Red Flags Cash Theft Schemes... 79 General Control Objectives... 80 Maintaining Physical Security of Cash... 82 Analytical Review... 83 Shrinkage... 84 Detecting Lapping of Sales or Receivables... 84 Assignment Rotation and Mandatory Vacations... 84 Surprise Cash Counts and Procedure Supervision... 85 Receipt or Sales Level Detection... 85 Check Conversion Detection... 85 Review Questions... 86 III. BILLING SCHEMES Overview... 91 Shell Company Schemes... 91 What is a Shell Company?... 91 Shell Company Bank Accounts... 94 i
III. BILLING SCHEMES (CONT.) How Payments are Collected... 96 Billing on Behalf of the Shell Company... 97 Pass-Through Schemes... 103 Overbilling Schemes Involving Existing Vendors... 104 Kickback Schemes... 104 Pay-and-Return Schemes... 109 False Invoicing from Non-Accomplice Vendors... 111 Personal Purchases with Company Funds... 112 Personal Purchases through False Invoicing... 112 Personal Purchases on Credit Cards or Other Company Accounts... 117 Charge Accounts... 119 Returning Merchandise for Cash... 120 Preventing and Detecting Billing Schemes... 120 Separation of Duties in the Purchasing Process... 120 Red Flags Billing Schemes... 122 Control Objectives Billing Schemes... 124 Deterring Billing Schemes... 125 Review Questions... 127 IV. PAYROLL SCHEMES Overview... 131 Ghost Employees... 131 Placing the Ghost on the Payroll... 131 Collecting Timekeeping Information... 134 Issuing the Ghost s Paycheck... 135 Delivery of the Paycheck... 135 Suggestions for Preventing and Detecting Ghost Employee Schemes... 137 Falsified Hours and Salary... 138 Manually Prepared Timecards... 139 Understating Leave and Vacation... 143 Time Clocks and Other Automated Timekeeping Systems... 144 Rates of Pay... 144 Suggestions for Preventing and Detecting Falsified Hours and Salary Schemes... 145 Commission Schemes... 146 Fictitious Sales... 146 Altered Sales... 147 Altering the Rate of Commission... 147 Suggestions for Preventing and Detecting Commission Schemes... 147 Prevention and Detection of Payroll Schemes... 149 Separation of Duties in the Payroll Process... 149 Red Flags Payroll Schemes... 151 Independent Payroll Distribution... 152 Analysis of Payee Address or Accounts... 152 Overtime Authorization... 152 Commissions... 152 Analysis of Deductions from Payroll Checks... 152 Prevention of Payroll Schemes... 153 ii
IV. PAYROLL SCHEMES (CONT.) Review Questions... 155 V. EXPENSE REIMBURSEMENT SCHEMES Overview... 158 Mischaracterized Expense Reimbursements... 158 Suggestions for Preventing and Detecting Mischaracterized Expense Schemes... 161 Overstated Expense Reimbursements... 162 Altered Support... 162 Overpurchasing... 162 Overstating Another Employee s Expenses... 163 Orders to Overstate Expenses... 165 Suggestions for Preventing and Detecting Overstated Expense Reimbursements... 165 Fictitious Expense Reimbursements... 166 Producing Fictitious Receipts... 166 Obtaining Blank Receipts from Vendors... 168 Claiming Expenses Paid by Others... 168 Suggestions for Preventing and Detecting Fictitious Expense Reimbursements Schemes... 168 Multiple Reimbursements... 169 Suggestions for Preventing and Detecting Multiple Reimbursement Schemes... 170 Prevention and Detection of Expense Reimbursement Schemes... 170 Reviewing Expense Reimbursement Requests... 170 Review and Analysis of Expense Accounts... 171 Red Flags Expense Reimbursement Schemes... 172 Review Questions... 253 VI. CHECK TAMPERING SCHEMES Overview... 177 Forged Maker Schemes... 177 Obtaining Blank Checks... 179 Producing Counterfeit Checks... 180 Suggestions for Detecting and Preventing the Theft of an Organization s Check Stock... 181 To Whom is the Check Made Payable?... 181 Forging the Signature... 183 Forged Endorsement Schemes... 186 Intercepting Checks Before Delivery... 188 Theft of Returned Checks... 189 Poor Control of Signed Checks... 189 Altered Payee Schemes... 191 Altering Checks Prepared by Others: Inserting a New Payee... 192 Altering Checks Prepared by Others: Tacking On... 194 Altering Checks Prepared by the Fraudster: Erasable Ink... 194 Altering Checks Prepared by the Fraudster: Blank Checks... 195 Concealed Check Schemes... 195 Suggestions for Preventing and Detecting Schemes Whereby an Employee Alters the Payee and/or Amount on an Organization Check... 196 Authorized Maker Schemes... 196 Overriding Controls through Intimidation... 197 iii
VI. CHECK TAMPERING SCHEMES (CONT.) Poor Controls... 197 Suggestions for Preventing and Detecting Check Tampering By Authorized Check Signers... 199 Concealing Check Tampering... 200 The Fraudster Reconciling the Bank Statement... 200 Re-Altering Fraudulent Checks... 202 Falsifying the Disbursements Journal... 202 Coding the Fraudulent Checks... 203 Re-Issuing Intercepted Checks... 204 Bogus Supporting Documents... 204 Suggestions for Preventing and Detecting Check Tampering Schemes That Are Concealed By the Techniques Discussed Above... 205 Preventing and Detecting Check Tampering Schemes... 205 Separation of Duties... 205 Red Flags Check Tampering... 207 Account Analysis through Cut-off Statements... 208 Bank Confirmation... 209 General Control Objectives Check Tampering... 209 Bank-Assisted Controls... 210 Physical Tampering Prevention... 210 Review Questions... 212 VII. REGISTER DISBURSEMENT SCHEMES Overview... 216 Common Register Disbursement Schemes... 216 Failure to Require Approval on Register Disbursements... 218 Rubber Stamp Managers... 220 Forged Approval... 220 Collusion with a Manager... 221 Refunds and Voids Below the Minimum Approval Amount... 221 Credit Card Refunds... 222 Destroying Records of the Transaction... 222 Suggestions for Preventing and Detecting Fraudulent Refunds and Voids... 223 Preventing and Detecting Register Schemes... 223 Fictitious Refunds or Voided Sales... 223 Red Flags Register Disbursement Schemes... 224 Prevention of Register Disbursement Schemes... 224 Review Questions... 226 VIII. INVENTORY, SUPPLIES, AND FIXED ASSETS Overview... 229 Misuse of Fixed Assets... 229 The Costs of Inventory Misuse... 230 Suggestions for Preventing and Detecting Misuse of Fixed Assets... 230 Theft of Inventory, Supplies, and Fixed Assets... 231 Unconcealed Larceny... 231 Fraudulent Requisitions and Transfers... 237 Falsified Receiving Reports... 238 iv
VIII. INVENTORY, SUPPLIES, AND FIXED ASSETS (CONT.) Fraudulent Shipments of Merchandise... 238 Concealing Inventory Shrinkage... 243 Altered Inventory Records... 244 Fictitious Sales and Accounts Receivable... 244 Write Off Missing Non-Cash Assets... 245 Physical Padding... 245 Preventing and Detecting Theft or Misuse of Inventory, Supplies, and Fixed Assets... 245 Acquiring, Storing, and Shipping Inventory... 245 Red Flags Inventory Theft Schemes... 248 Statistical Sampling... 248 Perpetual Inventory Records... 249 Shipping Documents... 249 Physical Inventory Counts... 249 Analytical Review... 249 Control Objectives Inventory Schemes... 251 Preventing Inventory Fraud... 252 Review Questions... 253 IX. CONCLUSION Bob Daniel Case Study... 256 Summing Up... 260 X. PRACTICAL PROBLEMS... 261 XI. SOLUTIONS TO REVIEW QUESTIONS... 298 XII. SOLUTIONS TO PRACTICAL PROBLEMS... 335 FINAL EXAMINATION... E-1 v