Fraud Exam 3

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The main methods of check tampering are

(1) forged maker schemes, (2) forged endorsement schemes, (3) altered payee schemes, (4) concealed check schemes, and (5) authorized maker schemes.

Check tampering is a type of fraudulent disbursement scheme whereby an employee either

(1) prepares a company check for his own benefit, or (2) intercepts a check intended for a third party and converts the check to his own benefit.

For a ghost employee scheme to work, four things must happen in the following order:

(1) the ghost must be added to the payroll, (2) timekeeping and wage rate information must be collected, (3) a paycheck must be issued to the ghost, and (4) the check must be delivered to the perpetrator or an accomplice.

In forged endorsement schemes has does an employee (the fraduster) intercept a company check intended for a third party

- Employee's normal duties include delivery/mailing of signed checks, or - Poor internal controls enable the employee to steal one or more checks, or - Theft of returned checks, or - Rerouting the delivery of signed checks.

How to prevent and detect forged endorsement schemes

- Establish good internal controls over the handling of company checks - investigate vendor and customer complaints - Investigate any canceled checks endorsed by an employee - Paid vouchers / invoices should be stamped "Paid." - periodically generate a disbursement report, sorted by payee and amount to detect duplicate payments

B. Preventing and Detecting Tampering with Electronic Payments • Internal controls should be enforced, including:

- Separation of duties - Separation of bank accounts - separate accts for paper and electronic transactions - Daily account monitoring and reconciliation - Safeguard usernames and passwords - change passwords frequently - Authorized users should logoff immediately when finished using the system

forged maker must have:

- access to a blank check - a convincing forgery of an authorized signature - ability to conceal the crime

In a forged maker scheme once the employee has obtained a blank check, me makes the check payable to:

- himself - or a company (shell or legitimate) he owns - a nonemployee accomplice - and share the money or - "Cash" - a legitimate vendor

Do you notice anything suspicious on the face of the invoice from Syntech Systems? If so, what are your opinions about the company?

- invoices lacks detail: no phone # or fax # - mailing address is a po box - no tax charges on the invoice - very quick turnaround on invoices ^ these indicate shell company submitting fraudulent invoices

Preventing and Detecting the Alteration of Company Checks

- segregation of duties - among writing checks vs signing checks vs delivery vs remaining the bank stmt. • When preparing the bank reconciliation, payees' names and amounts on canceled checks should be compared with the payees' names and amounts recorded in the cash disbursements journal. • Use carbon copy checks.

A commission scheme may be committed by either:

1. Falsifying the amount of sales made a. fictitious sales b. overstate legitimate sales 2. Increasing the rate of commission - i.e. from 10% to 15%

to commit ghost employee scheme each of the following needs to occur:

1. add the ghost to the company's payroll 2. collect timekeeping information 3. issue the ghost's paycheck 4. deliver the paycheck

Key documents and records involved in the Purchases process:

1. purchase requisition (inventory control department) 2. purchase order (purchasing order) 3. Receiving report (warehouse) 4. Vendor's invoice (accounts payable) 5. Purchases transaction file (purchases journal) --> accounts payable master file (a/p subsidiary ledger) General ledgers department 6. Master (General ledger) Department

Preventing and Detecting Falsified Hours or Salary

Preventing and Detecting Ghost Employee Schemes

What are the differences between a forged maker and a forged endorsement scheme?

A forged maker scheme is one in which an employee misappropriates a check and fraudulently affixes the signature of a legitimate check signer to authorize disbursement of funds. In a forged endorsement scheme, the employee intercepts a signed company check intended for a third party and fraudulently endorses the check in order to obtain the funds that were intended for someone else.An important distinction is that the two schemes attack an organization's control structure at different points. A forged maker scheme typically involves the falsification of a blank check. The key to this kind of scheme, from the fraudster's perspective, is in obtaining a blank check, producing a signature that appears to be authentic, and in some cases, recording the check in such a way that the fraud will not be detected. In a forged endorsement scheme, by contrast, the perpetrator is working with a check that has already been prepared, so the issues are different. Instead of gaining access to blank check stock, the perpetrator must find a way to gain access to a check after it has been signed but before it has been delivered. Typically, this means the fraudster must steal the check before it is sent out in the mail, although in some cases the fraudster might alter the mailing address of a legitimate payee.From a concealment standpoint, forged endorsement schemes present different challenges than forged maker schemes. In a forged endorsement scheme, the stolen check was intended for a real payee, so the perpetrator must be concerned with the probability that the intended payee will complain about not receiving the check that has been stolen. In a forged maker scheme this is not generally a concern because the check is originally written for a fraudulent purpose; there is no legitimate payee.

According to this chapter, what are the three main categories of payroll fraud?

A payroll scheme is an occupational fraud in which a person who works for an organization causes that organization to issue a payment by a making false claim for compensation. There are three main categories of payroll fraud: ghost employee schemes, falsified hours and salary schemes, and commission schemes.

What are some methods of intercepting a check intended for a third party?

A perpetrator may be an employee authorized to mail or deliver a check but who diverts it for his own benefit. Checks that are signed but are left unattended instead of being immediately mailed can be stolen by a fraudster. Checks that are returned because they could not be delivered to the addressee could be intercepted or a perpetrator could change the address of a legitimate payee to his own address prior to mailing. After a check has been intercepted, the payee name can be altered by adding a second payee to the payee line, or the perpetrator can use erasable ink to prepare the check, then change the payee (and amount) on the check after it has been signed.

Opportunities to add a name to the payroll exist in both the personnel department (those with hiring or supervisory authority) and the payroll department. - creating a fictitious employee with a name very similar to that of a real employee - failing to remove the names of terminated employees

Add the ghost to the company's payroll

What is an authorized maker scheme, and why are these frauds especially difficult to prevent through normal internal controls?

An authorized maker scheme is a type of check tampering fraud in which an employee with signature authority on a company account writes fraudulent checks for his own benefit and signs his own name as the maker. The perpetrator in these schemes can write and sign fraudulent checks without assistance. He does not have to alter a pre-prepared instrument or forge the maker's signature.This may be the most difficult form of check tampering to defend against because in most cases check signers are owners, officers, or otherwise high-ranking employees, and thus have or can obtain access to all the blank checks they need. Even if a company's control structure ostensibly prohibits check signers from handling blank checks, the perpetrator typically has enough influence and authority to override this control.

Compare the articles of incorporation with the contract services information from Part 2. Do you notice anything that might lend credence to your theory that Syntech could be a shell company?

Articles signed and dated less than two weeks before the billings from Syntech began.

As shown in the video, which of the following schemes has the largest median loss? a. Check tampering schemes b. Billing schemes c. Cash register schemes d. Payroll schemes e. Expense reimbursement schemes

In one of the case studies in the textbook, Melissa Robinson, who worked as an executive secretary for a worldwide charitable organization and was active in her children's school, was also a thief. As one of two people allowed to sign checks on the organization's bank accounts, she learned early on that she could forge the second person's signature without anyone becoming suspicious. How was she finally caught? a. A co-worker contacted the organization's executive director when she found that a company check had been written to the children's school for Robinson's personal items. b. New officers were elected, and they took the accounting books from her. c. The auditors discovered her fraud during an annual audit of the books. d. Robinson's husband tipped off the audit committee after he became suspicious of some of Robinson's purchases.

Mavis Bosman works as an accounts receivable clerk at Brooks Publishing. She steals an incoming check from a customer and cashes it at a grocery store by forging the endorsement on the back of the check. This is an example of a check tampering scheme. a. True b. False

In one of the case studies in the textbook, Melissa Robinson, who worked as an executive secretary for a worldwide charitable organization and was active in her children's school, was also a thief. As one of two people allowed to sign checks on the organization's bank accounts, she learned early on that she could forge the second person's signature without anyone becoming suspicious. What red flags were present that indicated that something wasn't appropriate? a. Robinson would not take vacation leave. b. There were a lot of missing files that the auditors couldn't locate during their annual audit. c. Robinson would not release any financial information when requested and gave excuses for why it wasn't available. d. All of the above

In which of the following schemes does the fraudster intercept a company check made payable to a third party and then change the name of the person or company to whom the check is made payable in order to convert (i.e., cash or deposit) the check? a. Forged maker scheme b. Authorized maker scheme c. Altered payee scheme d. Concealed check scheme

The person who signs the front of a check is called the of the check. a. Author b. Endorser c. Maker d. Payee e. Payer

What type of fraud scheme does this indicate?

Check tampering: Altered payee scheme. The fact that the check is payable to Snowden's wife clearly makes him the prime suspect in this case.

Beta is one of 10 salespeople working for ABC Company. Over a given period, 15 percent of Beta's sales are uncollectable, as opposed to an average of 3 percent for the rest of the department. Explain how this fact could be related to a commission scheme by Beta.

Commissions are a form of compensation calculated as a percentage of the amount of sales a salesperson generates; therefore, one of the ways a salesperson could create fraudulent commission payments for himself is by overstating the amount of sales he generates. As was explained in this chapter, one way employees falsify the amount of sales they make is by creating fictitious sales to nonexistent customers. The employee collects the commission on the sales but no payment is ever made by the "customer." The receivables associated with these fake sales age and eventually are written off as uncollectible.

What measures can companies can take to prevent and detect fraudulent electronic payments?

Companies can best defend against fraudulent electronic payments through a combination of solid internal controls and bank security services. Separation of duties (e.g., segregating duties for creating, approving, and releasing wires) is one of the most important internal controls for preventing and detecting electronic payments fraud. Other essential internal controls include segregation of bank accounts (e.g., using separate accounts for paper and electronic transactions), daily account monitoring and reconciliation, and management and protection of user access and account information. Bank security services that can help business account holders mitigate electronic payment fraud include ACH blocks and filters, positive pay for ACH, multi-factor authentication tools, dual authorization, transaction limits, and software access restrictions

List at least three tests that could be performed to detect falsified hours and salary schemes.

Comparisons of overtime expenses by employee and by department Comparisons of payroll expenses to budget projections or prior year totals on a company-wide and departmental basis Exception reports showing any employee whose compensation has increased from the prior period by a disproportionately large percentage Verification of payroll taxes to federal tax forms Comparison of net payroll to payroll checks issued. In addition to the preceding, several proactive audit tests were recommended at the end of the chapter.

Methods used to manipulate electronic payments include which of the following? a. Abusing legitimate access to the employer's payment system b. Gaining access to the employer's payment system by stealing a password c. Exploiting weaknesses in the employer's internal control over its electronic payment system d. All of the above

Which of the following choices is not a category of check tampering? a. Concealed check schemes b. Forged maker schemes c. Authorized maker schemes d. Forged endorsement schemes e. Authorized endorsement schemes

In the Ernie Philips case, $109,000 was stolen through check tampering. How was this scheme accomplished and what could management have done differently to prevent the scheme from occurring?

Ernie wrote unauthorized checks, forged the authorized signers' names, and then manipulated the bank statements to hide the disbursements. He also obtained access to the signature stamp and included unauthorized checks with legitimate checks when submitting them for signing. Finally, he used his position of authority to deflect questioning about unidentified disbursements. Mr. Sell had implemented some good internal controls but Ernie did not respect them. For example, Ernie fraudulently obtained bank statements after being warned by Mr. Sell that he was not to receive or review them. This procedure should not have been tolerated in-house, and the bank should not have been permitted to send bank statements directly to Ernie in the first place (this kind of change should have required Sell's authorization). A stronger control over comparing checks presented for signing to supporting documentation and a stronger control over the signature stamp could have been implemented. If the organization had required Sell to spot-check his signature on canceled checks, it is possible some of Ernie's forgeries could have been detected.

How can a perpetrator conceal check tampering activity from others in the organization?

If the perpetrator is responsible for bank reconciliations he can remove fraudulent canceled checks, mark fraudulent checks as void on the reconciliation, force balance the reconciliation, or physically alter the bank statement to conceal the fraudulent checks. If a fraudster has committed an altered payee scheme, he might re-alter the canceled checks during the reconciliation (by inserting the name of the intended payee and the proper amount) so that they correspond to the disbursements journal. The fraudster can also falsify disbursement journals, hide the tampered disbursements in an account where they are unlikely to draw attention, or falsify supporting documents to make the bogus checks appear legitimate. In forged endorsement or altered payee schemes, which involve the theft of outgoing checks intended for a third party, the fraudster may reissue the intercepted checks to avoid having the intended payee complain to others in the organization.

Based on your results, what types of fraud schemes might be indicated from the maintenance accounts

It appears someone is issuing duplicate payments on some invoices. This could indicate a number of schemes. Perhaps an employee is running invoices through the payables system twice and stealing the second payment; i.e., "Pay and return scheme" (pay invoice twice, request and steal the refund), which is a non-accomplice vendor scheme (chapter 4). It is also possible that an employee is conspiring with one or both of the vendors in question, sending them extra payments in return for a kickback (Chapter 10 - Corruption). A check tampering scheme (chapter 5) is also possible, where fraudulent payments have been miscoded, with duplicate invoices acting as support for fraudulent checks.

In the case study of Melissa Robinson, she was able to steal over $60,000 from her employer. Why was she able to commit her fraud without detection?

Melissa Robinson was given check signing authority and sole control of the bookkeeping function. She was given large amounts of cash that were not verified by a second person. External audits that may have uncovered the fraud were never completed. In addition, she was not challenged when she failed to allow others access to the books and records and failed to provide financial information

First step to catch billing scheme

Once a billing scheme or a potential billing scheme has been discovered, the first step in identifying the culprit usually involves pulling the canceled checks. This might reveal the perpetrator's endorsement or bank account number. It might also reveal a payee or amount that is different from the check's posting. Another common investigative technique is to find out who approved the payments. However, in this case the fraudulent payments are obviously based on the re-processing of invoices that were probably legitimate. You could also try to identify who submitted the invoices for processing a second time. This individual would be a prime suspect in the fraud.

Assume there are two thefts of checks at ABC Company. In the first case, an employee steals an outgoing check that is drawn on ABC's account, and is payable to "D. Jones." The perpetrator forges the endorsement of "D. Jones" and cashes the check. In the second case, an employee steals an incoming check from "D. Jones" that is payable to ABC Company. The employee fraudulently endorses the check and cashes it. Which of these schemes would be classified as check tampering? Why?

Only the first scheme would be classified as check tampering, because check tampering is a form of fraudulent disbursement, and the first scheme involved a disbursement of the victim organization's funds, whereas the second scheme did not. Check tampering applies only to checks drawn on the victim organization's accounts. If an employee steals an incoming check that is payable to the victim organization, then this theft will be classified as either skimming or cash larceny, depending on whether the check was recorded by ABC Company before it was stolen or afterward.

2.Describe the red flags, if any, that you found in the contract services account.

Sort reveals: - consistently billed for even amounts in the range of $19,000 to $20000 - all of syntec's invoice are consecutively numbered, even though they were paid over a 12- month period - every payment to syntech was approved by the same person-snowden - wilson ground support

Do you notice anything unusual about these canceled checks? What does this indicate?

The bank stamp on the second check is different from the first. This indicates that the checks were deposited (or cashed) at different banks

In altered payee schemes, the perpetrator changes the name of the intended third party and negotiates the check himself. This can be done by adding a second payee or changing the original payee's name. What is the best method for detecting this type of fraud?

The best way to detect an altered payee scheme is to include as part of the bank reconciliation process a comparison of canceled checks to the check register to ensure both payees are identical. Implied in this statement is the understanding that the person who performs the reconciliation must be independent of the check-cutting process. Most altered payee schemes are successful only when the perpetrator is in charge of reconciling the bank statement.

Excursion's income statement indicates that net income decreased by approximately $73,000 (18 percent) in year 20X4. Was this caused by a decrease in revenues or an increase in expenses, or both?

The cause of the drop in net income appears to be an increase in operating expenses. REvenues have shown steady growth over the last four years, and they increased by approximately $380,00 in 20x4 from 20x3. Operating expenses on the other hand, rose by about $487,000 (13%) in 20x4.

There are five principal categories of check tampering frauds. What are they?

The five principal categories of check tampering are: (1) forged maker schemes, (2) forged endorsement schemes, (3) altered payee schemes, (4) concealed check schemes, and (5) authorized maker schemes.

Do you see anything in the articles of incorporation that looks suspicious?

The only thing that appears slightly unusual is that there is only one person's name anywhere in the Articles of Incorporation. Although any corporation can legally have a sole director and shareholder, it is not common. This is at least worth noting since shell companies typically have either one, or very few, shareholders or directors.

What red flags, if any, do you see?

The payee and endorsement on the bank's photocopy of the check are different than on Excursion's physical canceled check. The bank's photocopy of the check was payable to Debra Snowden, Brian Snowden's wife.

What is meant by the term "rubber stamp" supervisor and how are these individuals utilized in a payroll fraud scheme?

The term rubber stamp supervisor refers to a manager who approves timecards without reviewing their accuracy. This is a very serious breach in controls, because the ole of the manager in verifying hours worked and authorizing timecards is critical to preventing and detecting payroll fraud. Obviously, rubber stamp supervisors play a part in payroll fraud in the sense that they fail to detect crimes that are otherwise detectable. In addition, the fact that a manager is known to approve timecards without reviewing them may provide the perceived opportunity that convinces an employee to attempt a payroll fraud scheme.

3.Could these changes be the result of a fraud scheme? Explain.

These changes are not due to fraud, but they certainly could indicate a fraud scheme. The fact that operating expense significantly increased while cash dropped substantially should be investigated. Fraud examiners always consider possibility of fraud as they gather information. The cause of the changes needs to be determined.

pascarell and wilson, in overing seeing lunchroom operations at the two schools, told other cafeteria cashiers not to tally register totals at the end of their shifts, but to instead let them count and log the total funds collected from students for meals at the end of each school day. The lunch ladies would then help themselves to cash from the registers, underreport the total amount of daily sales and pocket the difference. Suspicions surrounding the fraud scheme arose after the administration at neighboring schools noticed financial inconsistencies with the cash-collection practices at two cafeterias where pascarelli and Wilson were employed. Investigators soon arrived and installed a point of sale software system in one of the schools that showed large discrepancies in the average daily deposits reported in the lunchroom where Pascarelli primarily worked. Saxe Middle School had average daily cafeteria deposits that ranged from $18 to 33$ per day from 2013 to 2016. But after the newly installed software began to register and document actual cash intake, daily deposits increased to an average of $93 in 2017. Interestingly, in 2018 the same year that Pascarelli resigned from her position due to the mounting investigation against her, average daily deposits at the cafeteria increased to $183 per day.

They stole $478,588

forged endorsement schemes and altered payee schemes both involve the theft of outgoing checks that are intended for third parties for some legitimate purpose (e.g., a check payable to a vendor for services rendered). In this respect, these schemes differ from other forms of check tampering, in which the check is usually drafted by the perpetrator for a fraudulent purpose. Discuss how this distinction affects the way in which forged endorsement and altered payee schemes must be concealed.

When an employee steals an outgoing check that was intended for a third party, this creates a concealment problem because the third party presumably expects the check and will in all likelihood complain if it is not received. Therefore, a fraudster who engages in a forged endorsement or altered payee scheme must often find a way to issue a check to the intended recipient to cover for the stolen payment. This is not a necessary step in other types of check tampering, such as a forged maker scheme, because in these cases the stolen check was originally written for a fraudulent purpose; it has no intended payee other than the fraudster. n addition, when a fraudster attempts to convert a stolen check that was payable to a third party, this may leave clues that will later have to be concealed. For example, in an altered payee scheme, the fraudster inserts his name (or that of an accomplice) onto the payee line of the check. This information will not match the check register and should be a red flag. Therefore, the perpetrator may have to re-alter the canceled check (by replacing the original information) when it is returned with the bank statement.If a fraudster uses a dual endorsement to convert a check as part of a forged endorsement scheme, the second endorsement (in the name of an employee) would be a clear red flag of fraud. The perpetrator may have to destroy the canceled check to prevent detection.

. In one of the case studies in the textbook, Ernie Phillips was a CPA who had fallen on hard times both financially and personally. He eventually got a job as a controller for a friend who had just been named as the receiver for a financial services company. Within a short period of time, Phillips began writing checks to himself that had nothing to do with payroll. Control weaknesses that facilitated the commission of this fraud include which of the following? a. The bank statements were sent directly to Phillips. b. Phillips had check signing authority. c. There was no separation of duties between accounts payable and the treasury department. d. All of the above

According to the ACFE Global Fraud Survey, which of the following fraudulent disbursements schemes has the highest median loss? a. Check tampering b. Expense reimbursement c. Billing d. Payroll e. Register disbursement

In one of the case studies in the textbook, Jerry Harkanell worked as an administrative assistant for a large San Antonio hospital, where his clerical duties included the submission of the payroll information for his unit. He found that he could add hours to the timesheets and receive extra pay. He continued to alter his timesheets until he was finally caught. How was his scheme detected? a. An exception report showed that Harkanell had claimed overtime hours for a period when there was no need to work overtime. b. The payroll department sent the timesheets for one pay period back to the supervisor for review when a suspicious number of hours had been indicated. c. An overtime audit was conducted revealing that Harkanell had worked an unusual number of hours compared to others in the department. d. The internal auditors received an anonymous tip.

In one of the case studies in the textbook, Katie Jordon was the "All-American Girl Next Door" working her first job out of college. As an on-site manager for an apartment complex in Dallas, she did such a good job that when her employer purchased a huge apartment complex in Houston, she was asked to run it. All was well until a member of the maintenance crew resigned. She continued to keep him on the payroll and pocketed his wages. She later added a non-existent assistant once she saw how easy it was to add an employee without being questioned. However, her scheme eventually came to light, and her days of bonus pay were over. What was her motivation for stealing? a. Her boyfriend, a professional motocross racer, was injured in a race. b. She was getting married and needed money for the wedding. c. She blew the engine in her car and didn't have the money to replace it. d. She wanted to pay off her college loan early so she could save for a house.

Which of the following best describes a check tampering scheme in which an employee intercepts a signed company check intended for a third party and converts (i.e., cashes or deposits) the check by signing the third party's name on the back? a. A forged endorsement scheme b. A forged maker scheme c. A counterfeit check scheme d. An altered payee scheme

schemes are the most common method of misappropriating payroll funds. a. Falsified hours or salary b. Understating vacation time taken c. Ghost employee d. Overstated commission rates

When the Vendor's Invoice is received from the vendor, the clerk in the ___________ matches the prices and quantities on the invoice with the related prices and quantities on the Purchase Requisition and Purchase Order and quantities on the Receiving Report.

accounts payable department

cash disbursements transaction file

accounts payable department

voucher package

accounts payable department

accounts payable master file (AP ledger)

fraud committed by a person authorized to sign the checks

authorized maker schemes

According to the ACFE Global Fraud Report, payroll frauds are the least costly type of fraudulent disbursement schemes. a. True b. False

According to the ACFE Global Fraud Report, payroll frauds are the most common type of fraudulent disbursement schemes. a. True b. False

For a ghost employee scheme to be successful, all of the following must happen, EXCEPT: a. A fictitious person or a real person who does not work for the victim must be added to the payroll. b. The ghost employee must be a fictitious person and not a real person. c. Timekeeping information must be collected for the ghost. d. A paycheck must be issued and delivered to the ghost.

If an employee generates a much higher percentage of uncollected sales than his coworkers, what type of scheme might he be committing? a. Sales skimming b. Commission scheme c. Multiple reimbursement scheme d. Shell company scheme

In one of the case studies in the textbook, Jerry Harkanell worked as an administrative assistant for a large San Antonio hospital, where his clerical duties included the submission of the payroll information for his unit. He found that he could add hours to the timesheets and receive extra pay. He continued to alter his timesheets until he was finally caught. What red flag was present that should have made someone suspicious? a. He used erasable ink to record the hours on the timesheets. b. He showed up for work on a day he had off so he could personally turn in the timesheets. c. No one else in the department had overtime hours but Harkanell. d. All of the above

In one of the case studies in the textbook, Katie Jordon was the "All-American Girl Next Door" working her first job out of college. As an on-site manager for an apartment complex in Dallas, she did such a good job that when her employer purchased a huge apartment complex in Houston, she was asked to run it. All was well until a member of the maintenance crew resigned. She continued to keep him on the payroll and pocketed his wages. She later added a non-existent assistant once she saw how easy it was to add an employee without being questioned. However, her scheme eventually came to light, and her days of bonus pay were over. How was her scheme discovered? a. An employee tipped off the main office when she saw the timesheets listing an employee that she had never heard of. b. When Jordon's boss made a routine visit to the office, he noticed that there was no sign of an assistant in the office. c. She was splitting the proceeds with her boyfriend, and he contacted the home office when she broke up with him. d. The auditors found it when they conducted a routine audit of all new acquisitions after being in business for one year

In one of the case studies in the textbook, Katie Jordon was the "All-American Girl Next Door" working her first job out of college. As an on-site manager for an apartment complex in Dallas, she did such a good job that when her employer purchased a huge apartment complex in Houston, she was asked to run it. All was well until a member of the maintenance crew resigned. She continued to keep him on the payroll and pocketed his wages. She later added a non-existent assistant once she saw how easy it was to add an employee without being questioned. However, her scheme eventually came to light, and her days of bonus pay were over. What happened to Jordon? a. The company terminated her employment but failed to press charges against her in order to keep things quiet. b. She was convicted but served no jail time. c. She skipped town and a warrant was issued for her arrest. d. She took out a loan for the amount stolen and paid the company back in lieu of the company pressing charges against her.

Jim Stevens is a payroll manager for a mid-sized insurance company in the southeast. Last year, his performance review was conducted late, so he received a retroactive pay increase. Because he was not authorized to access his own employee records, Stevens stole another employee's password and logged into the payroll system. He manipulated his records to keep the retroactive pay increase in effect in future periods, effectively doubling his intended pay raise. What type of fraud is this? a. Larceny of wages b. Falsified hours and salary scheme c. Commission scheme d. Ghost employee scheme

Marsha Wood added her one-year-old niece, Jackie, to the payroll at JNC Company and began issuing paychecks in Jackie's name, even though Jackie did not work for the organization. Marsha's niece is not considered a ghost employee because she is a real individual rather than a fictitious person. a. True b. False

Which of the following are the most likely suspects in a ghost employee scheme? a. Customers b. Managers and high-level employees c. Lower-level employees d. Vendors`

Which of the following is not a type of payroll scheme? a. Ghost employee scheme b. False deduction scheme c. Falsified hours and salary scheme d. Commission scheme

Which of the following would NOT help prevent payroll fraud? a. Personnel records are maintained independently of payroll and timekeeping functions. b. Those who prepare the paychecks also distribute the paychecks to the employees. c. A supervisor is present whenever timecards are punched. d. Timecards are returned periodically to supervisors (after paychecks are prepared) for the supervisors to review and compare with supervisors' copies.

two types of fraudulent disbursements

bill schemes check tampering payroll schemes

Frequency of frad disbursements

billing - 53.7% expense reimbursement - 31.2% check tampering - 25.6% payroll 20.0% register disbursement 7.8%

Able, an employee of ABC Company, was in charge of collecting the timecards of all the employees in his division (including his own) and delivering them to the division supervisor. After the supervisor reviewed and approved the timecards, Able delivered them to the payroll accounting department, where paychecks were issued. Able would fill out his timecard in erasable ink, wait until his supervisor had signed off on it, and then change the number of hours on the timecard before he took it to payroll accounting. This increased the size of his paychecks. This is an example of: a. Check tampering b. Forgery c. A falsified hours or salary scheme d. A ghost employee scheme

According to the ACFE Global Fraud Survey, which of the following fraudulent disbursements schemes is the most common? a. Check tampering b. Expense reimbursement c. Billing d. Payroll e. Register disbursement

In one of the case studies in the textbook, Melissa Robinson, who worked as an executive secretary for a worldwide charitable organization and was active in her children's school, was also a thief. As one of two people allowed to sign checks on the organization's bank accounts, she learned early on that she could forge the second person's signature without anyone becoming suspicious. How was Robinson punished? a. She was allowed to resign and agreed to pay the money back. b. She resigned, and a civil suit was filed to recover the loss. c. She was found guilty and ordered to make restitution to the organization and its insurance company. d. Charges were dismissed with prejudice when the evidence was thrown out on a technicality

Leonard McCoy, an employee of ABC Corporation, formed a company called Acme Consulting. He opened a bank account in Acme's name and used his home computer to create invoices from Acme for consulting services. In reality, Acme does not provide any services at all. It is a company in name only. McCoy submitted the invoices from Acme Consulting to his employer, ABC Corporation. When ABC made payment on the false invoices, McCoy collected and deposited them. McCoy has committed: a. A pay-and-return scheme b. A cash larceny scheme c. A shell company scheme d. A personal purchases scheme

Shell companies are most easily created by filing an assumed-name certificate or a DBA (Doing Business As) certificate at the level. Assumed-name certificates and DBAs are public records that can easily be obtained by investigators and might help identify the person behind a false billing scheme. a. Federal b. State c. County d. Municipal / City

What is the first step in a ghost employee scheme? a. Collecting timekeeping and wage rate information b. Issuing a paycheck to the ghost c. Adding the ghost to the payroll d. Delivering the paycheck to the ghost

Which of the following is not necessary for a ghost employee scheme to succeed? a. Timekeeping and wage rate information must be collected. b. The ghost must be added to the payroll. c. The perpetrator must have access to a bank account in the ghost employee's name. d. A paycheck must be issued to the ghost.

The A/P clerk sends the voucher package to what department

cash disbursements

check/vendor

cash disbursements department

is a form of fraudulent disbursement in which the perpetrator takes physical control of a check and cashes or deposits it in his/her account.

check tampering

median loss from fraudulent disbursements

check tampering $143,000 billing $100,000 payroll $48,000 expense reimbursement $26,000 register disbursement $25,000

a. supervisor is the fraudster b. non-supervisor is the fraudster - forge the supervisors signatrue

collect timekeeping information

the key to this stage of the fraud is obtaining approval of the timekeeping document. i.e. the timecard for hourly employees

collect timekeeping information

Pay is based on an employee's output e.g. sales per month rather than hours worked or a set salary

commission scheme

There are two ways that an employee working on commission can fraudulently increase his pay. What are they?

commissioned employee's wages are based on two factors, the amount of sales he generates and the percentage of those sales he is paid. In other words, there are two ways an employee on commission can fraudulently increase his pay: (1) falsify the amount of sales made (either by creating fictitious sales or by overstating the amount of legitimate sales), or (2) increase his rate of commission

In one of the case studies in the textbook, Ernie Phillips was a CPA who had fallen on hard times both financially and personally. He eventually got a job as a controller for a friend who had just been named as the receiver for a financial services company. Within a short period of time, Phillips began writing checks to himself that had nothing to do with payroll. How was the fraud discovered? a. The president received a bank statement containing canceled checks that had been written to Phillips. b. The receiver received a call from the bank asking him to verify a check. c. A vendor received a check in error and reported it to the operations manager. d. The operations manager found a check made payable to Phillips while searching Phillips' desk for some accounting records

In one of the case studies in the textbook, Ernie Phillips was a CPA who had fallen on hard times both financially and personally. He eventually got a job as a controller for a friend who had just been named as the receiver for a financial services company. Within a short period of time, Phillips began writing checks to himself that had nothing to do with payroll. What happened to Phillips? a. He quit his job and moved to another state. b. He pleaded guilty to fraud and grand theft and spent 24 months in prison. c. He paid the money back by mortgaging his home. d. He was charged criminally, and while out on bail, he fled with his family.

Which of the following is NOT an internal control that will help prevent check tampering schemes? a. After checks are signed, they should be immediately sent to the mailroom instead of returned to the employee who prepared them. b. Bank statements should be reconciled and reviewed by different people. c. Check writing (preparation) should not be done by a signatory on the account. d. Bank reconciliations should be done by one or more signatories on the account.

Which of the following is an example of a red flag for a billing scheme? a. The supplier is well-known in the marketplace. b. Invoices include sales tax. c. Purchases for merchandise are made in small increments. d. Vendors consistently bill at the end of the month.

a. hand delivered to employee at work b. mailed to employee's home address c. direct deposited to employee's bank account

deliver the paycheck

in regards to preventing/detecting forged endorsement schemes

different employees should be responsible for writing checks, signing the checks, delivering/mailing the check, reconciling the bank statement, and recording checks in the cash disbursements journal

1.Describe the red flags, if any, that you found in the maintenance information.

duplicate payments were issued on several occasions to two vendors - MFI and Mildware the 2nd invoice in each case had the same invoice # as the first, but with an "a" added at the end, in addition, the 2nd payment in each case was paid approximately, 3 weeks after the first

All of the following are warning signs ("red flags") of payroll fraud EXCEPT: a. Paychecks for more than one employee are direct deposited into the same bank account. b. An employee claims significantly more overtime hours than other employees with similar job functions. c. An employee claims more vacation time than he should be entitled to. d. An employee with no withholding taxes. e. An employee with significantly more withholding taxes than other employees with similar salaries.

To prevent check tampering schemes, which of the following duties should be segregated? a. Check signing vs. check delivery to payees b. Check signing vs. reconciliation of the bank statement c. Check preparation vs. check delivery to payees d. Check preparation vs. check signing e. All of the above

Which of the following is NOT designated as one of the five major categories of check tampering? a. Authorized maker schemes b. Forged maker schemes c. Forged endorsement schemes d. Altered payee schemes e. Counterfeit check schemes

For hourly employees, both the number of hours worked and rate of pay are susceptible to fraud. For salaried employees, fraudulent wages may be generated by increasing their rates of pay.

falsified hours or salary

ghost employee includes

fictitious person friend or relative accomplish

check tampering methods

forged maker forged endorsement altered payee concealed checks authorized maker

An employee misappropriates a check and forges the signature of the authorized maker.

forged maker scheme

In the forged maker scheme the employee has access to blank checks as part of his/her job duties, or - the employee does not normally have access, but the blank checks are poorly guarded, or - the employee produces counterfeit checks e.g. A/P clerks, office manager

forged maker scheme

master file (GL)

general ledger department

refers to someone on the payroll who does not actually work for the victim company

ghost employee

types of payroll schemes

ghost employee falsified wages commission schemes

Assume you are a new hire in the accounting department of an organization. One of your responsibilities is the reconciliation of the operating account. After the end of the month you are given a copy of the bank statement and the canceled checks and instructed to perform your reconciliation. You notice there are some faint markings on a portion of the bank statement that could be alterations. What steps would you take in performing the -reconciliation?

he first oddity that should be noticed is that you were given a copy of the bank statement, not the original. This is an indication that the bank statement may have been manipulated. This is further evidenced by the faint markings noted on the copy. These could be from tape, correction fluid, or some other method used to hide the true data on the original bank statement. You should add the individual items on the statement and reconcile the totals to the amounts reported on the bank statement (e.g., add deposits and compare the total to the "total deposit" amount on the bank statement). Each canceled check should be compared to the bank statement to ensure all canceled checks reported on the statement are included with the statement. A request should also be made to review the original bank statement and determine why you were given only a copy. A review of the age of reconciling items should be made and any old or unusual items investigated. A comparison should be made between each canceled check and the corresponding listing in the check register and the account to which it was posted. Finally, a review of endorsements may be prudent.

methods used in altered payee schemes

i. Employee (the fraudster) intercepts a company check intended for a third party (like in a forged endorsement scheme) ii. Employee alters the payee's name so the employee can cash/deposit the check. "tacking on" iii. Employee uses erasable ink when preparing the check (if the fraudster's job duties include check preparation). iv. To prevent complaints from the legitimate payee, the fraudster might then submit the vendor's invoice for payment a second time. v. To avoid detection when the canceled checks are reconciled with the bank statement, the fraudster might re-alter the fraudulent check when the bank statement arrives

Methods Used in Concealed Check Schemes

i. Employee's (the fraudster) normal duties include check preparation (but not check signing) ii. Employee prepares a fraudulent check (made payable to himself or an accomplice or to a vendor to pay for a personal purchase) and submits it along with several legitimate checks for signature iii. Unless the authorized signer takes the time to review each of the checks submitted for his/her signature, the fraudulent check will be signed. iv. In many cases, only the signature line is exposed when signing checks, and the payee's name is concealed.

. Preventing and Detecting Forged Maker Schemes

i. blank checks should be safeguarded ii. Maintain a strict set of procedures for the handling of checks that have been prepared but not yet signed. iii. Separate people should be responsible for preparing the check and signing the check. iv. Rotate authorized check signers and keep track of who is approved to sign checks during a given period. v. On a periodic basis, the company should have authorized check signers verify their signatures on returned checks. vi. If the company uses a signature stamp, access to the stamp should be strictly controlled.

forged endorsement schemes are also known as what?

intercepted check schemes

When inventory levels drop below the reorder point, the __________ prepares a Purchase Requisition, which is a request for the Purchasing Department to order more inventory.

inventory control department

cancel check means what?

it already went thru the system and was cashed

is the person who signs the front of the check

maker

Does this information indicate a potential suspect from the maintenance accounts information?

no clear suspect yet. The duplicate payments were authorized by both nately and orr. It is also possible this scheme was committed by someone involved in the cash disbursements process. It appears that the same invoice were run via the payables system twice. At this point, we do not have enough information yet to know who could have done that.

Electronic payments are an alternative to

paper checks

are a type of occupational fraud in which a person, who works for an organization, causes the organization to issue a payment by making a false claim for compensation.

payroll scheme

occur when an employee fraudulently generates overcompensation on his behalf.

payroll schemes

After the Purchasing Department receives a Purchase Requisition, the purchasing agent prepares a

purchase order

which indicates the quantity and condition of the inventory received.

receiving report

— When the inventory is received at the Warehouse receiving dock, the receiving clerk prepares a

receiving report

what are things you could do to determine the identity of the owner of Syntech systems?

refuse to pay the next invoice and see who follows up on the non-payment

3.Based on what you found, what type of fraud scheme is most likely to have occurred?

shell company scheme

Three methods of misappropriating cash are:

skimming, larceny, and fraudulent disbursements

4.Does this information indicate a potential suspect?

snowden; info far from conclusive

Do you see any red flags in snowden's personnel file? What if you compare it to Syntech Systems' articles of incorporation

street address for Syntech matches snowden's home address first name of director is Debra which is name of Snowden's wife.

There are four steps that must be completed in order for a ghost employee scheme to be successful. What are they?

the four steps to making a ghost employee scheme work are: (1) adding the ghost to the victim company's payroll records, (2) collecting and maintaining timekeeping and wage information, (3) issuing a company payroll check to the ghost, and (4) delivering the ghost's check to the perpetrator or his or her accomplice.

For hourly employees, the size of a paycheck is based on two factors:

the number of hours worked and the rate of pay

What is a ghost employee?

the term ghost employee refers to someone on the payroll who does not actually work for the victim company. The ghost employee may be a fictitious person or a real individual who simply does not work for the victim employer. When the ghost is a real person, he or she is often a friend or relative of the perpetrator. In some cases the ghost employee is an accomplice of the fraudster who cashes the fraudulent paychecks and splits the money with the perpetrator.

forged endorsement scheme example

theft of outgoing check

Electronic payments enable a payer

transmit funds electronically over the Internet or other medium. It includes ACH payments, online bill payments, and wire transfers.

A "voucher package" consists of the voucher and its related documents (i.e., purchase requisition, purchase order, receiving report, and vendor's invoice).

true

A person will probably have to present a bank with a certificate of incorporation or an assumed-name certificate (also known as a "Doing Business As" (DBA) certificate) to open a bank account for a shell company. These are documents that a company must obtain from, and file with, the county in which the business is located. The documents can be forged, but it is more likely that the perpetrator will file the requisite paperwork and obtain legitimate documents from their state or county. This can usually be accomplished for a small fee, the cost of which will be more than offset by a successful fraud scheme. If it is discovered that a vendor is falsely billing a company, investigators for the victim company might be able to identify the owner of the suspect company by reviewing its business registration filings, which are a matter of public record.

true

Accounts payable clerks usually prepare checks when a payment voucher comes due. These employees should be required to verify support for any payment before writing and posting the check. After checks are prepared (i.e., written), they are usually sent in batches to an authorized check signer. Support for the checks should also be forwarded to the check signer. It is imperative that the duties of check preparation and check signing be separated. This practice virtually eliminates the organization's exposure to authorized maker schemes. After checks are signed, they should be immediately routed to the mailroom. Many organizations make a key mistake in returning signed checks to the individual who prepared them, which creates the situation where most altered payee schemes succeed. By separating the duties of preparation and delivery, an organization can seriously limit its exposure to these schemes. Similarly, check signers should not be allowed to deliver checks, because they could intentionally misaddress those instruments. The person or persons who deliver signed checks should be wholly independent from other payables functions. Reconciling the bank statement is the fourth major function that should be separated. The majority of successful check tampering schemes are committed by individuals who are in charge of reconciling the bank statement and who have access to one or more of the other major check-writing functions, such as preparing the checks or signing the checks.

true

Checks—After receiving the Voucher Package from the Accounts Payable Department, the clerk in the Cash Disbursements Department reviews the voucher package for accuracy and then prepares a check

true

Companies can further enhance their protection against unauthorized access to an electronic payment system through the use of their banks' multifactor authentication tools, mechanisms that combine two or more methods to validate the identity of the person attempting to access the system.These tools—such as tokens (physical devices that authorized users provide in addition to their passwords to prove their identities electronically), digital certiﬁcates, smart cards, and voiceprint recognition software—can help businesses overcome the problem of compromised credentials, such as usernames and passwords.

true

Employees often use their home addresses to collect fraudulent disbursements because many businesses are wary of sending checks to vendors that have a PO Box for a mailing address. Other common collection sites for shell company schemes are the addresses of relatives, friends, or accomplices.

true

For an hourly employee to fraudulently increase the size of their paycheck, they must either falsify the number of hours worked or change the wage rate. Because salaried employees do not receive compensation based on their time at work, these employees usually generate fraudulent wages by increasing their rates of pay (salary).

true

In billing schemes, the false claim typically comes in the form of a fraudulent invoice. In payroll schemes, the false claim generally occurs when the fraudster falsifies payroll records, timekeeping records, or some otherdocument concerned with the payroll function.

true

In computerized accounting systems, purchases transactions are entered into the Purchases Transaction File, which is used to update data in the Accounts Payable Master File. In manual accounting systems, purchases transactions are recorded by the company's Accounts Payable Department in the Purchases Journal and are posted to the Accounts Payable Subsidiary Ledger. After recording the transaction, the A/P clerk then files the documents together (purchase requisition, purchase order, receiving report, and vendor's invoice), according to the payment due date, in the Open Accounts Payable File, awaiting payment.

true

John faulkner 18.5 years

true

Kay lemon stole 416,000 and got 4 to 8 years

true

Most large banks offer a number of security services that can help business account holders mitigate fraud through early detection and prevention of fraudulent electronic payments. For example, ACH blocks allow account holders to notify their banks that ACH debits—whether authorized or not should not be allowed on speciﬁc accounts. ACH ﬁlters enable account holders to provide their banks with a list of deﬁned criteria (such as the sending company ID, account number, and transaction code) against which banks can ﬁlter ACH debits and reject any unauthorized transactions.Positive pay for ACH is another security feature offered by banks to their account holders, in which banks match the details of ACH payments with those on a list of legitimate and expected payments provided by the account holder. Only authorized electronic transactions are allowed to be withdrawn from the account; exceptions are reported to the customer for review.

true

Most shell company schemes involve the purchase of services rather than goods because services are not tangible (i.e., it is more difficult to verify whether services were actually performed than whether goods were received). If an employee sets up a shell company to make fictitious sales of goods to their employer, those goods will obviously never arrive. By comparing its purchases to its inventory levels, the victim company might detect the fraud. It is much more difficult, on the other hand, for the victim company to verify that the services were never rendered. For this reason, many employees involved in shell company schemes bill their employers for things like consulting services.

true

Once a shell company has been formed, a mailing address has been established, and a bank account has been opened, the corrupt employee will begin billing their employer. Invoices can be manufactured by various means such as a professional printer or a personal computer. The quality of these documents varies widely depending on the sophistication of the scheme. The false invoices, once created, are then inserted into the employer's accounts payable system. In some cases, the perpetrator sets up a shell company with a name very similar to a common vendor of the victim organization. For example, if the perpetrator's company does a lot of business with ABC Vendor in Texas, the perpetrator might establish a company called ABC Vendor in Oklahoma and open bank accounts for the company in that state. The perpetrator then produces invoices that appear to be from the known vendor in the hope that their employer will pay these bills without questioning them. (The fraudulent invoices will have a different mailing address so that payments will not be delivered to the legitimate vendor.) Once checks have been issued, the perpetrator can deposit them in the shell company accounts

true

Once the receiving report is prepared, it should be sent, along with the goods, to a warehouse, stockroom, or other storage location. When the person in charge of the storage area gets the receiving report, they sign it to verify that the goods were delivered to the warehouse, and forward the receiving report to the accounts payable department. The warehouse employee can then place the goods into inventory. A second copy of the receiving report goes to the purchasing department, where it is filed with a copy of the purchase order. A third copy of the receiving report goes to the inventory control department, where the quantity is matched to the purchase order and posted to the inventory ledger. Shortly after the goods are delivered, an invoice will arrive from the vendor. The invoice should first be sent to the purchasing department, where it is compared with copies of the purchase order, the purchase requisition, and the receiving report. This process verifies that the correct items were delivered, in the proper quantity, and at the agreed-upon price. If the invoice is correct, it is signed or initialed, then sent to the accounts payable department. If an organization purchases services rather than goods, the invoice is sent to the department that utilized the service instead of the purchasing department. An authorized employee from that department, usually a manager, verifies the accuracy of the invoice before sending it to accounts payable. When the accounts payable department receives an invoice, the information on the invoice should be compared to the corresponding purchase requisition, purchase order, and receiving report that have been assembled. This is done to ensure that the purchase was duly authorized, that the items on the invoice were received in the appropriate quantity, and that the price matches the price set forth on the purchase order. It is critical that the individual who performs this task be independent of the purchasing and receiving functions, since that individual is verifying the information provided by those two departments. If a single employee has control over purchasing, receiving, and approving payment, an organization is very susceptible to billing frauds. Assuming the information on the invoice, purchase order, and receiving report matches, an accounts payable clerk initials the invoice or otherwise acknowledges that the invoice is approved for payment. A disbursement voucher is prepared based on the approved invoice. When the voucher comes due, the support should be reviewed once again before a check is prepared. If everything is correct, the voucher should be sent to the cash disbursements department, where the check will be prepared and later signed by an authorized individual. The cash disbursements department, like the accounts payable department, must be segregated from the purchasing and receiving functions.

true

Organizations can also set up their commercial banking software to restrict access to speciﬁc banking activities—such as viewing transactions, viewing bank statements, initiating electronic payments, or setting up ACH blocks or ﬁlters—to designated individuals. Companies should incorporate this feature into their internal control system to enhance separation of duties. For example, any individual authorized to make payments should not be permitted to set up ACH blocks or ﬁlters, or to submit positive pay information. In addition, businesses can customize their banking software to incorporate features such as dual authorization for certain transactions and daily or individual transaction limits.

true

Periodically, transactions are posted from the Purchases Transaction File (or Purchases Journal) to the Master File (or General Ledger).

true

Shell companies are business entities that typically have no physical presence (other than a mailing address), no employees, and generate little, if any, independent economic value. They may be nothing more than a fabricated name and a PO Box that an employee uses to collect disbursements from false billings. However, since the checks received will be made out in the name of the shell company, the perpetrator will normally also set up a bank account in his new company's name so he can deposit and cash the fraudulent checks. There are three major steps to establishing a shell company: creating the business entity, establishing a mailing address, and opening a bank account.

true

Snowden practically handled all the bookkeeping, cut all the checks, and made all the postings, and balanced all the accounts. He also handled the entire disbursements process except for signing checks. He was authorized to make purchases. He had the authority to approve purchases of up to $20,000. Cathcart usually just gave a cursory review to checks before signing them. Snowden dreamed up the company Syntech Systems and drafted some brief articles of incorporation. He put the corporation in his wife's maiden name so that, if anyone checked, they would not identify the company with him. Using the certificate of incorporation , Snowden set up a bank account in the name of Syntech Systems. As soon as the account was formed, he generated a fake invoice on his personal computer at home. He mailed the invoice to Excursion, knowing that all the incoming invoices were delivered to him as soon as the mail was opened. Then he approved the invoice and cut a check. He found an old invoice to MFI avionics that had been paid a few weeks earlier. The company usually did not mark their invoices "paid," so there was no way to tell that a check had already been cut for this invoice. Snowden took a blank check from the company's laser printer and made it payable to MFI using an erasable typewriter. He presented the check to Cathcart, along with the invoice, as support. cathcart barely even looked at the check before signing it. Snowden then took the check back and erased MFI's name, replacing it with his wife's. They endorsed the check in erasable ink. Snowden was in charge of reconciling the company's bank statement. When the canceled check to MFI showed up, Snowden erased his wife's name and replaced it with MFI as the payee. Then he erase the endorsement and stamped it with an MFI stamp that he had made. This made it appear that MFI had cashed the check.

true

The Cash Disbursements clerk cancels the voucher package (marks the documents "paid"), attaches a copy of the check to the package, and returns the package to the Accounts Payable Department for the cash disbursement to be recorded in the Cash Disbursements Journal.

true

The cash disbursement is then authorized when the check is signed by an authorized person(s), normally the Treasurer. The check is then mailed to the vendor.

true

The first step in a ghost employee scheme is entering the ghost on the payroll. Ghost employee schemes are generally perpetrated by employees who have hiring authority (i.e., managers and other high-level employees) or who have access to payroll records. These persons are in the best position to fraudulently add personnel to an organization's rolls.

true

The most common method of misappropriating funds from the payroll is the overpayment of wages.

true

The payment process begins with the preparation of a voucher by the Accounts Payable clerk.

true

The perpetrator of a check tampering scheme takes physical control of a check and places false information on that instrument. The fraudster might forge a signature, alter a payee, alter the amount of the check, or forge an endorsement. In this way, the fraudster is able to illegally obtain funds from his employer.

true

The purchase order must be approved by a supervisor, who verifies that the price, quantity, and other terms of the purchase are correct. The supervisor should also verify that prices are in line with market rates, thereby preventing overbilling schemes, particularly kickback schemes. It is crucial that purchases be approved by an individual other than the buyer or purchasing agent. Billing schemes often succeed because one person is in charge of initiating and approving purchases. By separating these duties, an organization can reduce its risk of loss due to billing fraud. Copies of the approved purchase order should be sent to the accounts payable department, inventory control department, and the receiving department. Each of these copies will independently verify that the purchase is legitimate. The merchandise that has been ordered should be delivered to a centralized receiving department. An employee in this department will match a blind copy of the purchase order to the packing slip that accompanies the goods, verifying that the product was actually ordered by the organization. The employee should also count the goods and inspect them to make sure they are not damaged or otherwise unacceptable. The employee will then prepare a receiving report, listing the quantity of goods received.

true

The purchase requisition should be approved by a supervisor in the inventory department to verify that the merchandise in question is actually needed. Once approved, the purchase requisition should be forwarded to the purchasing department.

true

The purchases process begins with a Purchase Requisition.

true

The purchasing process begins when an organization makes the determination that it needs goods or services. This might occur, for example, when inventory levels dip below a predetermined reorder level. At this point, a purchase requisition is prepared, stating the item and quantity that need to be purchased.

true

To avoid being detected through a records search, some perpetrators form their shell companies under another name. It is common, for instance, for employees to set up shell companies in the name of a spouse or other close relative. Male fraudsters often establish shell companies under their wives' maiden names. An employee might also form the company under a fictitious name.

true

To succeed at a ghost employee scheme, an employee falsifies personnel or payroll records, which causes paychecks to be generated to a ghost. The fraudster or an accomplice then converts (i.e., cashes or deposits) these paychecks.

true

With regards to check tampering: the check is drawn on the fraudster's employers' bank account, not a customers or vendor's check

true

for good internal controls keep all checks even if void

true

payroll schemes are similar to billing schemes, in that the perpetrator generally produces some false document or otherwise makes a false claim for a distribution of funds by his employer.

true

the fraudster does not need to take an active role in the issuance of the check.

true

Did any accounts on the income statement show significant changes in year 20X4? If so, which accounts? What about the balance sheet?

two operating expense accts on the inc stmt. showed usual increases in 20x4. Maintenance expense rose by 27% and contract services exp rose by 44%. These two inc increases in expenses led to a drop in operating income of 13% and appear to be the main cause for the 18% decline in net income. On the B.S cash dropped by 160,000 over (60%) from 20x3.

is a form used to initiate a cash disbursement.

voucher

What Documents and Records are Involved in Cash Disbursements (Payments)?

voucher check cash disbursements transaction file (Journal) accounts payable master file (AP ledger) master file (GL)

cutting a check means what?

writing a check

Methods Used in Authorized Maker Schemes

• An employee who is authorized to sign checks writes a check for his own benefit and signs his own name on the front of the check. • The employee (fraudster) records the check as "void" in the cash disbursements journal or not record it at all. • To try to conceal the fraud, the fraudster destroys the fraudulent check when returned by the bank and either alters the bank statement to make the balance agree with the books or simply reports that the bank statement reconciles with the books (even though it doesn't).

Suggestions for Identifying the Individual Who Owns a Suspected Vendor

• Articles of incorporation are maintained by the Secretary of State (or the state corporation bureau or corporate registry office) in every state. If the suspected vendor is registered, these documents should indicate who formed the company. DBA ("Doing Business As") information can usually be obtained at the county level. These public records can be obtained without a subpoena. • Online databases such as LexisNexis can be utilized to determine ownership. These services can be accessed over the Internet. • Dun & Bradstreet reports can provide verification information on vendors. • Fraudsters often set up shell companies in the names of relatives or accomplices. It is fairly common, for example, for a fraudster to form a shell company under his wife's maiden name. When checking public records, be alert for related names, as well as addresses, phone numbers, Social Security numbers, or other identifiers that match an employee's personnel information. • Review any canceled checks payable to the suspected vendor for bank account information or employee endorsements. • Generally, the person who creates a shell company also has a hand in selecting that company as a vendor. Examine purchase requisitions, purchase orders, and other support relating to the suspected vendor. Look for employees who consistently authorize or request purchases from the suspect vendor. Also look at the approved vendor list - if one is maintained - to determine who recommended the shell company as a vendor. • If a suspect or suspects have been identified, search their workstations and trash. Many shell company schemes are detected when a vendor's invoices or letterhead are discovered in an employee's work area. • Conduct surveillance of the mail drop (PO Box) to determine who collects checks on behalf of the shell company.

methods used in forged endorsement schemes

• Employee (the fraudster) intercepts a company check intended for a third party • Employee (fraudster) endorses the check by signing the third party's name on the back of the check • Submit the vendor's invoice for payment a second time. Concealment of the fraud can be difficult for the fraudster because the check was intended for a legitimate recipient who will complain if a payment isn't received, which could trigger an investigation and discovery of the fraud. The fraudster may attempt to conceal the theft of the check by resubmitting the vendor's invoice to the accounts payable department for payment

Methods Used to Manipulate Electronic Payments

• Employee misuses his legitimate access to employer's payment system e.g. authorized maker scheme • Steal an authorized user's password

The following procedures can help to detect invoices from shell companies:

• In most shell company schemes, the mailing address for payments is a PO Box or a residential address. Carefully scrutinize any invoice that calls for a payment to be delivered to one of these locations and verify the existence of the vendor before mailing a check. • Many fraudulent invoices can be detected by their lack of detail. For example, they might be missing phone numbers, fax numbers, invoice numbers, tax identification numbers, and other information that usually appears on legitimate invoices. Another common sign of fraud is an invoice that lacks detailed descriptions of the items for which the victim organization is being billed. • If a shell company repeatedly bills the victim organization, and if its invoices have invoice numbers, these numbers can give away the fraud. In many cases, invoices from shell companies will be consecutively numbered, even though they are received weeks or months apart. This can be detected by reviewing payables accounts and sorting bills by invoice number. • Look for invoices that have not been folded. An invoice mailed from a legitimate vendor will likely have been folded to fit into an envelope. A fraudulent invoice that was inserted into the payables system by an employee will not have been mailed and therefore might not have been folded. • Look for invoices from known vendors in which the mailing address is different than normal, or invoice numbers that do not correspond to other invoices from the same vendor. Also look for invoices from known vendors that have been paid twice. These flags might indicate that an employee has established a shell company in a name similar to an existing vendor and is running fraudulent invoices in that vendor's name. • If questions exist about a particular vendor, contact others in the industry. If no competitors are familiar with the vendor, this might indicate that the company does not actually exist. Another option is to look up the vendor in the phone book. The absence of a phone number for a vendor is an indication that the company is a shell. • Employees who commit shell company schemes frequently see to it that payment is issued on fraudulent invoices the same day they are received by the victim organization. Be wary of vendors whose invoices tend to have an unusually short turnaround time. • Periodically run comparison reports for vendor addresses and employee addresses. If a match occurs, the employee in question is probably engaging in a shell company scheme.

How should blank checks be safeguarded

• Maintained under lock and key • Access limited to those with check preparation duties • Boxes of blank checks should be sealed with security tape • Periodically check the security of unused checks • Voided check should be marked "void" and safeguarded • Checks should be printed on watermark paper with security threads and distinctly marked paper • Out-of-sequence canceled checks and duplicate check numbers should be investigated • Each day, the first check of the day should be reconciled to the last check written the previous day

Separation of duties is the most important control function for preventing and detecting check tampering schemes. Any serious attempt to control check tampering will include a system in which the following duties are segregated:

• Preparation (and posting) of checks • Check signing • Delivery of checks to payees • Bank statement reconciliation

By enforcing a rigid separation of duties in the purchasing process, an organization can significantly limit its exposure to billing schemes. Segregating the following functions can prevent most forms of billing fraud:

• Purchasing • Approval of purchases • Receipt of goods • Cash disbursements

In a forged maker scheme they:

• Record the check as "void" in the cash disbursements journal or not record it at all. • To try to conceal the fraud, if the fraudster's duties include reconciling the bank statement, he might remove and destroy the fraudulent check when returned by the bank and either alter the bank reconciliation to make the balance-per-bank agree with the books or simply report that the bank statement reconciles with the books (even though it doesn't).

Preventing and Detecting Authorized Maker Schemes

• Segregation of duties among (i.e., different employees should be responsible for) writing checks vs. signing the checks vs. delivering/mailing checks vs. reconciliation of the bank statement. • When preparing the bank reconciliation, watch for and investigate any checks made payable to employees or unknown vendors. •require dual signatures on checks

The following techniques are effective in preventing falsified hours and salary schemes:

• Segregation of duties: payroll preparation, distribution of paychecks, reconciliation of the payroll bank account, and the human resources department should be strictly segregated. • Require that all overtime be authorized by a supervisor. Make sure timecards are sent directly to payroll after having been authorized, and ensure that employees do not have access to their timecards after they have been approved. • Be alert to situations where only one employee works overtime in a given department, or where a particular individual works excessive overtime. • All wage rate changes should be verified by a designated official. • Sick leave and vacation time should not be granted without a supervisor's review. Sick leave and vacation time should be monitored for excesses by the human resources department. • If a time clock is used, timecards should be secured and a supervisor should be present whenever timecards are punched.

Suggestions for Preventing and Detecting Ghost Employee Schemes

• Separate the hiring function from other duties associated with payroll. If all hiring is done through a centralized human resources department, an organization can substantially limit its exposure to ghost employee schemes. Most ghost employee schemes succeed when the perpetrator has the authority to add employees to the payroll and approve the timecards of those employees. • Conduct background checks on all prospective employees prior to hiring. • Ensure that the person who distributes paychecks works independently of those who hire employees, authorize timecards, and issue (prepare) paychecks. • Require employees to provide identification to receive their paychecks. If pay is deposited directly into bank accounts, periodically check for duplicate account numbers. Follow up on any unclaimed paychecks. • Verify the existence of any employees whose checks are mailed. • Be alert to employees who lack Social Security numbers or to multiple employees with the same (or very similar) Social Security numbers. Also look for multiple employees with the same address. Ghost employees also frequently lack withholding taxes, insurance, or other deductions from their paychecks. • Periodically check the payroll against personnel records for terminated employees or fictitious employees. Pay specific attention to employees who were on the payroll for only a short time before being terminated.

1.What red flags should you look for?

• Vendors who consistently bill in even amounts or the same amount repeatedly. • Duplicate invoice numbers or duplicate payments to a vendor. • Vendors who submit consecutively numbered invoices. • Vendors whose payments are consistently approved by the same person. • Invoice numbers that are unusual (e.g., such as "0000" or a letter in the number (I instead of 1; O instead of 0, or any letter at the end). • Invoice numbers that do not match other invoices by that vendor. • Multiple payments to the same vendor on the same date.

Detecting Commission Schemes

• run reports to confirm a linear relationship between sales and commission expenses • use comparative analysis tests for commissions earned by each salesperson • track uncollected sales generated by each member of the sales department • use random sampling to confirm sales to customers

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