In last month’s ‘Sex in Fraud’ article I mentioned that the two most common frauds worldwide were Billing Schemes and Corruption. It seems appropriate that we look a these two frauds in more detail. This month is billing schemes.
Billing schemes attack the payments system of a business. The ACFE Report to the Nations describes billing schemes as “Any scheme in which a person causes his employer to issue a payment by submitting invoices for fictitious goods or services, inflated invoices or invoices for personal purchases”.
All businesses have to pay suppliers, the payments have to be authorized and verified, and the cheques have to be drawn and signed. A billing fraud is designed to have the business make the fraudulent payment, but to record that payment as a legitimate expense.
A billing scheme has three major parts:
1. the creation of a false entity to receive the payments. The employee may open a bank account in the name of the false entity, or they may decide to cash the cheques or receive the payment in some other manner and not have an account that can be traced if the fraud is discovered.
2. the creation of the false invoice or the falsification of a legitimate invoices to be submitted for payment. This is usually the easiest part of the fraud. This can be done on a cheap computer and printer.
3. the manipulation of the payments system so that the false invoice is approved and the payment is made. How this is done will depend on what position the employee has in the business and what influence they can have over the payment process.
How does a billing scheme work?
A billing scheme is based on the creation of a false invoice, and the authorization and payment of that invoice. Most businesses have someone who has the authority to sign cheques. This is usually a senior manager or the business owner. In some businesses, the person that signs the cheque may not be the person that authorizes or verifies the invoices for payment. Cheques may be drawn and signed based on verification given by another employee.
This fraud is generally done by someone who can either authorize invoices or draw and sign cheques, or who can do both. But where the employee who authorizes invoices or signs cheques does not give them due attention (rubber stamps invoices that are placed in front of them) anyone will be able to submit a false invoice and commit the fraud. With reasonable looking documentation, the invoice may be authorized for payment with little scrutiny.
But the payment has to be made somewhere. The fraudster may create a business name and open a bank account in the name on their false invoice so the cheques do not have to be endorsed before banking. Alternatives are to produce a false invoice from a valid supplier and misdirect the payment before it gets to that supplier, or have a legitimate supplier as an accomplice. The point that the fraudster must consider is how to turn the cheque into cash or receive a deposit so that it does not raise suspicion.
How this is actually done will depend on the business system in place and the employees position and authority, and what level of risk the employee is willing to take.
Hiding the fraud
Once the false invoice is verified and a cheque is signed, and the payment is recorded as an expense or other payment, meaning that no action is needed to hide the payment. The fraud should then remain hidden, unless someone investigates that particular payment.
Some things to look for that may indicate a billing scheme
(i) Cash shortages or decreased profits when most costs are within budget. A billing scheme generally inflates one particular expense. That particular expense will be larger than budgeted or expected. Horizontal and vertical analysis of these costs may indicate that particular expense.
(ii) Abnormal levels of purchases from a particular supplier. The supplier’s name may be being used by the fraudster to submit false invoices. Checking the details on the invoices may show that some of the invoices are different from the others or suspicious in some manner. Verifying invoices with the real supplier will highlight false invoices.
(iii) Suspicious details on invoices, including
- Lack of detail. These may be details of the goods or services purchased, details of the supplier, missing incomplete or suspicious phone numbers or address.
- Irregular invoice numbers from valid suppliers. This may occur when the fraudster is using a name that is very similar to a valid supplier.
- Questionable amounts on invoices. Amounts that are always too regular should raise suspicion.
(iv) Missing documentation. The employee may destroy the documentation used to generate a payment once the payment has been made. It may later be assumed that the document has just been lost. The lack of documents will frustrate investigations into suspicious payments, but may indicate the false payments themselves.
(v) Purchases delivered to offsite locations may indicate that the fraudster has purchased an item in the name of the business and is having it delivered to himself offsite.
Next month we will look at Corruption in more detail.