Fraudulent Disbursements - Billing Schemes
Fraudulent disbursements are the most common form of asset misappropriation. This type of fraud occurs when an employee uses his position of employment to cause a payment for some inappropriate purpose. Fraudulent disbursements are on-book fraud schemes. This means that the checks (cash) leave the entity, with it being recorded on the books, thus creating a trail. Billing schemes are just one type of fraudulent disbursement, although the most common and costly.
Billing schemes involve the purchasing function of an organization. They cause the organization to buy goods or services that are nonexistent, overpriced, or not needed by the organization.
The three main categories of billing schemes are:
- Shell company schemes -- When an employee submits invoices for payment from a fictitious company controlled by the employee.
- Pay-and-return schemes (Overbilling involving existing vendors ) -- When an employee arranges for overpayment of a vendor invoice and pockets the overpayment amount when it is returned to the company.
- Personal purchases with company funds -- When an employee submits an invoice for personal purchases to the company for payment, or when an employee uses a company credit card for personal purchases.
To deter and prevent a billing scheme:
- The organization should have a purchasing department that is separate from the payment function.
- The purchasing department should be independent of the accounting, receiving, and shipping departments.
- Management should approve all purchase requisitions.
- Purchase orders should specify a description of items, quantities, prices, and dates.
- Purchase order forms should be pre-numbered and accounted for.
- The company should maintain a master vendor file.
- Companies should require competitive bids for all purchases.
- The receiving department should prepare receiving reports for all items received.
- The receiving department should maintain a log of all items received.
- Copies of receiving reports should be furnished to the accounting and purchasing departments.
- Purchasing and receiving functions should be segregated from invoice processing, accounts payable, and general ledger functions.
- Companies should match vendor invoices, receiving reports, and purchase orders before recording the related liability.
- Purchase orders should be recorded in a purchase register or voucher register before being processed through cash disbursements.
- Companies should implement procedures adequate to ensure that merchandise purchased for direct delivery to the customer is promptly billed to the customer and recorded as both a receivable and a payable.
- Records of goods returned to vendors should be matched to vendor credit memos.
- The accounts payable ledger or voucher register should be reconciled monthly to the general ledger control accounts.
- Write-offs of accounts payable debit balances should require approval of a designated manager.
- The master vendor file should be reviewed periodically for unusual vendors and addresses.
- Vendor purchases should be analyzed for abnormal levels.
- Companies should implement control methods to check for duplicate invoices and purchase order numbers.
- Credit card statements should be reviewed monthly for irregularities.
- All vendors with post office box addresses should be verified.
- Voucher payments should be reviewed regularly for proper documentation.
- Access to the accounts payable subledger and the general ledger should be restricted and an audit trail should be created.
Billing schemes are the most common type of fraudulent disbursements. However, since there is a paper trail, this type of fraud can be detected or prevented with the proper procedures in place.
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