Pay-and-Return Schemes

Instead of using shell companies in their overbilling schemes, some employees generate fraudulent disbursements by using the invoices of legitimate third-party vendors who are not a part of the fraud scheme. In a pay-and-return scheme, an employee intentionally mishandles payments that are owed to legitimate vendors. (See the “Pay and Return Schemes” flowchart that follows.) One way to do this is to purposely double-pay an invoice. For instance, a clerk might intentionally pay an invoice twice and then call the vendor and request that one of the cheques be returned. The clerk then intercepts the returned cheque.

Another way to accomplish a pay-and-return scheme is to intentionally pay the wrong vendor. In this type of scheme an employee sends Vendor A’s cheque to Vendor B. After the cheques are mailed, the employee calls the vendors to explain the “mistake” and requests that they return the cheques to his attention. When the cheques arrive, the employee converts them and keeps the money. The employee usually runs the vouchers through the accounts payable system a second time so that the vendors eventually get their money.

pay and return schemes

An employee might also pay the proper vendor but intentionally overpay him. Once again, the employee contacts the vendor, this time to request that the excess payment be returned. Finally, an employee might intentionally purchase excess merchandise, return the excess, and pocket the refund.

Overbilling with a Nonaccomplice Vendor’s Invoices

In most instances where an employee creates fraudulent invoices to overbill his employer, he uses a shell company. It is not as common for an employee to submit an existing vendor’s invoice. Nevertheless, in some instances an employee will undertake such a scheme by altering an existing vendor’s invoice or by creating a counterfeit copy of a vendor’s invoice form.

Personal Purchases with Company Funds

Instead of undertaking billing schemes to generate cash, many fraudsters simply purchase personal items with their company’s money. Company accounts are used to buy items for employees, their businesses, their families, and so on. This type of scheme is classified as a fraudulent billing scheme rather than theft of inventory. The heart of the scheme is not the theft of the items but rather the purchase of them. The perpetrator causes the victim company to purchase something it did not actually need, so the damage to the company is the money lost in purchasing the item.

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Personal Purchases Through False Invoicing

Employees who undertake purchases schemes might do so by running unsanctioned invoices through the accounts payable system. The perpetrator in this type of scheme buys an item and submits the bill to his employer as if it represented a legitimate company expense. The victim company ends up unknowingly buying goods or services for a dishonest employee. (See the “Invoice Purchasing Schemes” flowchart that follows.)

THE FRAUDSTER AS AUTHORISER OF INVOICES

The person who engages in a personal purchases scheme is often the very person in the company whose duties include authorising purchases. Obviously, proper controls should preclude anyone from approving his own purchases. Such poorly separated functions leave little other than his conscience to dissuade an employee from fraud. Fraud arises in part because of a perceived opportunity. An employee who sees that no one is reviewing his actions is more likely to turn to fraud than one who knows his company works diligently to detect employee theft.

EXAMPLE

A manager of a remote location of a large, publicly traded company was authorised to order supplies and approve vendor invoices for payment. For over a year, the manager routinely added personal items and supplies for his own business to orders made on behalf of his employer. The orders often included a strange mix of items. For instance, technical supplies and home furnishings might be purchased in the same order. Because the manager was in a position to approve his own purchases, he could get away with such blatantly obvious frauds. In addition to ordering personal items, the perpetrator changed the delivery address for certain supplies so that they would be delivered directly to his home or side business. This scheme cost the victim company approximately $300,000 in unnecessary purchases.

In some situations, the perpetrator is authorised to approve purchases, but controls prevent him from also initiating purchase requests. This procedure is supposed to prevent an employee from purchasing personal items with company funds. Unfortunately, those with authority to approve purchases often have a good deal of control over their subordinates. These individuals can use their influence to force subordinates to assist in purchasing schemes. In other cases, the manager might simply initiate the purchase order himself by forging the subordinate’s signature.

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EXAMPLE

Purchases for under $1,000 at a certain utility company could be made with limited value purchase orders (LPOs), which required the signatures of two people: the originator of a purchase request and the approver of the request. An LPO attached to an invoice for less than $1,000 would be paid by the accounts payable department. In this case, a manager bought goods and services on company accounts and prepared LPOs for the purchases. (In some cases, the LPO would falsely describe the item to conceal the nature of the purchase.) Once the LPO was prepared, the manager forced a clerk in his department to sign the document as the originator of the transaction. The clerk, intimidated by her boss, did not question the authenticity of the LPOs. With two signatures affixed, the LPO appeared to be legitimate and the bills were paid. The scheme cost the victim company at least $25,000.

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FALSE PURCHASE REQUISITIONS

If an employee does not have purchasing authority, he might get approval for a fraudulent purchase by misrepresenting the nature of the acquisition. In many companies, those with the power to authorise purchases are not always attentive to their duties. If a trusted subordinate says that the company needs to buy a certain item or items, busy supervisors often give rubber stamp approval to the purchase requisition. Additionally, employees sometimes misrepresent the nature of the items they are purchasing in order to pass a cursory review by their superiors.

EXAMPLE

An engineer bought over $30,000 worth of personal items. The engineer dealt directly with vendors and was also in charge of overseeing the receipt of the materials he purchased. He was therefore able to misrepresent the nature of the merchandise he bought, listing it as “maintenance items.” Vendor invoices were altered to agree to this description.

If the perpetrator falsifies his purchase requisition in this manner, the fraud should be detected when delivery occurs. For example, if the purchase requisition says “maintenance items,” but the vendor delivers home furnishings, it will be obvious that the perpetrator has committed fraud. The problem of delivery can be avoided if the perpetrator is in charge of receiving incoming shipments. He can verify that delivery of “maintenance items” was received. This is a breach of separation of duties, but unfortunately it is fairly common for purchasing agents to verify delivery of their own orders. Even if the victim organisation enforces a centralised delivery point, the perpetrator might enlist the aid of an accomplice in the receiving department to falsify the organisation’s receiving reports.

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Another way to avoid detection at the delivery stage is to change the delivery address for purchases. Instead of being shipped to the victim organisation, the items that the employee buys are sent directly to his home or business. The perpetrator might also order the goods to be shipped to a remote location.

Invoicing Via Nonaccomplice Vendors: Pay-and-Return Schemes

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