Identity Theft
Disaster Relief Fund Fraud
Skimming
Fictitious Vendors
Ghost Employees
Expense Reimbursements
Bid Rigging
Fraud schemes that have recently experienced a high degree of incidence are:
· Identity Theft
· Disaster Relief Fund Fraud
Some other common fraud schemes that have been around for quite a long time are the following:
· Skimming
· Fictitious Vendors
· Ghost Employees
· Expense Reimbursements
· Bid Rigging
Identity Theft
The theft of one’s identity can potentially be one of the most devastating events an individual may experience. There are a number of ways in which an individual can steal another’s identity. The most detrimental is when an individual can obtain a Social Security Number, bank account or credit card information, coerce responses to E-mails requesting personal information, or even gain access to discarded mail.
With a Social Security Number, a fraudster can apply for loans, credit cards, open new credit accounts, and in fact, create a whole new persona, without the knowledge of the victim. By securing bank account information the perpetrator is given free reign to carry out any transactions he or she wishes, and this could include unlawful transactions such as money laundering in addition to simply withdrawing funds from the account.
Access to credit card information, or even unsolicited "pre-approved" cards sent to you which are not destroyed before being discarded, will almost certainly be used to the maximum credit limit, and more if possible.
Protection of personal data is imperative. All documents that contain such information should be shredded or otherwise destroyed or rendered illegible. Those that are not can be retrieved from garbage by the simple process known as "dumpster diving," or can be easily removed from those recycling containers placed at the curb for pick up.
The consequences of NOT doing this can be catastrophic.
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Disaster Relief Fund Fraud
Unfortunately, the occurrence of natural disasters such as the Southeast Asian Tsunami, and Hurricane Katrina, spawn an abundance of attempts by unscrupulous predators who solicit donations to non-existent relief and aid funds. Using names for their organizations that closely resemble those of legitimate organizations involved in relief efforts, requests are made for contributions to assist those in need. In fact, these funds never get to them.
When contributing to such funds, individuals should investigate the legitimacy of the organization and its work prior to making any donation.
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Skimming
Skimming occurs when cash is removed prior to being recorded in the recordkeeping system in any fashion. Cash businesses, such as retail establishments, are most susceptible to this activity. A sale paid for in cash, but never rung up on the cash register leaves no trace of the transaction and directing the cash to one’s pocket instead constitutes skimming. No record of the sale or the receipt of the cash will exist.
An interesting aspect of skimming is that if it is done by a business owner, it can be referred to as "tax evasion" since the income would not be reported on a tax return. If it is performed by an employee, it is both "tax evasion" and "stealing." In any event, skimming is the primary reason that strict internal controls, or appropriate compensating controls are needed in organizations that deal with large amounts of cash.
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Fictitious Vendors
The addition of a fictitious vendor to a Vendor Master File in an Accounts Payable system is the first step towards committing a successful cash disbursement fraud. Unless a fraudster can ensure that the vendor exists in the system, it will not be possible to process bogus invoices for payment to the vendor. But once established, invoices can be entered for payment either directly by the perpetrator, or by another individual in collusion.
For this reason, it is imperative that controls require both the approval of all additions or changes to the master file, and the subsequent review of this activity in order to prevent fraudulent disbursements. Giving an individual the authority to do both is unacceptable, and it is difficult to stop the initial efforts of two or more persons with this authority who conspire to defraud in this manner. But periodic independent reviews of all additions, changes, and deletions form the file by an Internal Audit staff member for instance, can detect the existence of these vendors on a timely basis.
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Ghost Employees
In the payroll area "Ghost Employees" are the fictitious vendors of fraud. Ghosts can be actual employees who never show up for work, non-existent employees who have been added to the payroll file in the same manner as fictitious vendors, or an individual who has left the employ of the company but remains on the payroll. In any case individuals must have both the authority to approve additions to the master file, the ability to input these transactions, or both.
In order to facilitate the existence of ghosts, employment files are either created, altered, or otherwise maintained to validate employment, and records of work activity, e.g., time cards, electronic sign ins and outs, etc., must continually be prepared and processed. Payroll checks are usually intercepted by the perpetrator and diverted into his or her bank account. Direct deposits of payroll funds make detection of ghosts much more difficult, especially newer systems that provide pay stubs electronically instead of in hard copy for distribution.
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Expense Reimbursements
This is the manner in which more frauds are perpetrated against a company than any other, because it is the area where more people have access to the process than any other. More people travel or entertain than those that handle cash receipts, or post journal entries, or prepare payrolls. As such, there are also any number of ways to abuse this system than in other areas. Auditors and forensic accountants can spend hours relating the variety of methods they have uncovered to perpetrate this type of fraud.
Some of the more popular ways that individuals commit fraud in the reimbursement process are:
· submitting personal expenses as business expenses (that tank of gas for the company car was actually for the wife’s car)
· using tear-off receipts in support of expenses (that $15 lunch just became a $65 dinner, and the lunch was paid for too)
· misclassifying expenses (that $230 dinner I had with the bottle of Dom Perignon becomes a dinner with 2 or 3 clients)
· duplicate submission (that airline ticket submitted with the expense report is submitted again when the credit card statement arrives)
· non-expenditures (one of that stack of credit card charge forms from my friend Pete’s establishment is filled out and submitted periodically)
· falsely completed receipts (nice of that taxi driver or parking attendant to give me a blank receipt)
· altered receipts (amazing how easily a "1" becomes a "4"; thank God for white-out)
· check copies (I really did write that check for $750 to play in that outing, but I didn’t send it in)
Companies must be diligent in their review of documentation supporting reported expenses. In addition to all of the above, new technology in printers, copying machines, etc. make it possible to produce original receipts that are virtually undetectable. Close scrutiny of receipts, and relating them to the itinerary or whereabouts of the reporting individual are essential. Copies of receipts should never be permitted unless the reason for the copy is fully explained and approved prior to reimbursement.
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Bid Rigging
The competitive bidding process is conducted in order for the buyer to secure the best possible pricing for the work or product desired. However, bid rigging schemes actually result in the buyer paying more for the goods or services.
Most bidding procedures call for bids to be submitted in sealed envelopes to ensure the integrity of the bid process. While the bids may be sealed, collusive efforts can take place prior to their submission that negate the expected benefits of the bid process, and in fact, escalate costs to the buyer.
Bid rigging can take place in different forms. For instance, if expected bidders fail to submit a bid because it has already been determined among the potential bidders who the winner will be, there is no incentive for the winner to submit the lowest possible bid. Or conversely, the other bidders can purposely submit bids much higher than the winning bid, giving the appearance top the buyer that the best possible bid was obtained. In schemes such as these, the bidders will rotate themselves to be the winners, and in many cases, the non-winners will end up as sub-contractors at much higher prices than normal.
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