Study Unit 3 - Types of Fraud in the Workplace PDF

STUDY UNIT 3 TYPES OF FRAUD IN THE WORKPLACE WHAT WILL BE COVERED IN THE STUDY UNIT? Asset Misappropriation (p. 102 & p345) Employee Fraud (Payroll fraud schemes) (p.103) Financial Statements Fraud (p.103) Contracts and Procurement Fraud (p.102, p.109 - p.111)  ASSET MISAPPROPRIATION...

STUDY UNIT 3 TYPES OF FRAUD IN THE WORKPLACE WHAT WILL BE COVERED IN THE STUDY UNIT? Asset Misappropriation (p. 102 & p345) Employee Fraud (Payroll fraud schemes) (p.103) Financial Statements Fraud (p.103) Contracts and Procurement Fraud (p.102, p.109 - p.111)  ASSET MISAPPROPRIATION There are 3 forms of Asset Misappropriation: Asset Misappropriation – Cash Receipts (Incoming cash) Asset Misappropriation – Fraudulent Disbursements (Payments/outgoing cash) Asset Misappropriation – Inventory and other assets ASSET MISAPPROPRIATION – CASH RECEIPTS There are 2 categories of cash receipts schemes 1. Cash Skimming (off-book fraud) 2. Cash larceny (on-book fraud) What differentiate these categories is the timing: when the cash is stolen. 1. Cash Skimming – theft of cash that has not yet been recorded in the accounting system (p.186) 2. Cash Larceny – theft of cash that has already appeared/recorded on the victim’s books (accounting system).  ASSET MISAPPROPRIATION – CASH RECEIPTS - SKIMMING Removal (stealing) of cash happens prior to entry in accounting system. Leave no direct audit trail as stolen funds are never recorded. It can happen or occur at any point where & when cash enters the business Anyone who handles cash might be able to skim that money. (i,e. sales people, tellers, cashiers, waiters and whoever receive cash directly from customers. Note: The victim organisation might not be aware that cash was ever received. In most cases, victim organisations can find it difficult to detect that cash was stolen. DIFFERENT WAYS/ METHODS OF SKIMMING Sales skimming (Unrecorded sales) – occur when employee sell goods or services to clients and receive payment but make no record of the sales. (This is purely off-book sales). Understated sales – sale transaction is recorded in the books but for a lower amount than what fraudster has actually received. (p.102 & p.378) Skimming receivables – fraudster receive payment and find a way to manipulate the system in order to keep money received for themselves. ( It is generally difficult to conceal as victim organisation is expecting payment from receivable. (p.102 & p.378) Lapping customer payments – it is done by crediting one client account through the abstraction of money from another account. (p.378) DETECTION MECHANISM FOR SKIMMING SCHEMES Analysis of sales accounts Ratio analysis Inventory control procedure to detect inventory shrinkage due to unrecorded sales. Review and analysing all journal entries: False credit will reveal unrecorded or understated sales Write offs (of both stock {lost, stolen or waste} and account receivable) Confirm accounts payment dates with clients (by phoning) and verify the posting date ASSET MISAPPROPRIATION – CASH RECEIPTS – CASH LARCENY Intentional taking of employer money without consent and against the will of employer. Has audit trail as the stealing of money after recording of such cash received has happened in books. (Making it easier to detect when compared with skimming) Anyone who has access to cash might be able to commit cash larceny scheme. (i,e. sales people, tellers, cashiers, waiters and whoever receive cash directly from customers) DIFFERENT WAYS/ METHODS OF CASH LARCENY Incoming cash - stealing cash from cash register (cash drawer/ till). Employee sneak cash out of the cash drawer into their pockets It can be committed while the sale is being conducted Cash larceny from deposit – cash is stolen from the amount to be deposited prior the actual deposit. DETECTION MECHANISM FOR CASH LARCENY SCHEMES Cash recording - Analysis of cash receipts and recording process. Control objectives – analyse cash receipt process Authenticate deposit slips Bank deposit should be made by someone other than cashier or account receivable clerk. Analytical review of relationship among sales, cost of sales, returns and allowances. Cash account analysis - Review and analysing all journal entries made to cash accounts Perform random reconciliation of cash in register to cash on system by an employee other than cashier or cash register worker. ASSET MISAPPROPRIATION – FRAUDULENT DISBURSEMENTS (PAYMENTS/OUTGOING CASH) (P.362) Employee make distribution of organisation’s funds for dishonest purpose. Cash register/Till disbursement scheme - Removal of cash from register is recorded There are basically 2 cash register/till disbursement schemes: False refunds False voids ASSET MISAPPROPRIATION – FRAUDULENT DISBURSEMENTS – CASH REGISTER DISBURSEMENT – FALSE REFUNDS Fictitious refunds - employee process transaction as if client was returning items purchased, even though there is no actual return. (p.378) Overstated refunds – employee overstate amount of legitimate refund and steal the excess money. Card payment refunds - employee process a refund on card payment while there is no actual return of items, then credit their own card rather than the customers’ ASSET MISAPPROPRIATION – FRAUDULENT DISBURSEMENTS – CASH REGISTER DISBURSEMENT – FALSE VOIDS Cancel totality of the transaction. To process false voids, employee will need: Customer’s receipts/sales invoice (withhold after actual sale) Ring a void sale Keep the money for themselves as if it was paid to customer. DETECTION MECHANISM FOR CASH REGISTER DISBURSEMENT Fictitious refunds or voided sales Evaluate refunds or discounts given by each cashier or sales person. Verify if customers signed in the register for refunds. Random service calls to customers who have returned items. Review and analysis of decrease in gross sales or increase in returns and allowances ASSET MISAPPROPRIATION – FRAUDULENT DISBURSEMENTS - BILLING SCHEMES This is one of the schemes that allows the fraudster to misappropriate company assets without ever handling cash at work. There are 3 types of billing schemes: False invoicing through shell company Mostly purchase services rather than good Often referred to as Pass-through schemes False invoicing through non-accomplice vendors Pay and return scheme Personal purchases made with company funds DETECTION MECHANISM FOR BILLINNG SCHEMES Perform analytic review Data analytics Site visits for observation Statistical sampling EMPLOYEE FRAUD (PAYROLL FRAUD SCHEMES) (P.103 & P.378) This schemes is similar to billing schemes – in payroll fraudsters produce false documents or fictitious claims for the company to make payments. In payroll fraud, payments are made to employees; unlike in billing schemes where payments are made to external parties. There are 3 categories of payroll fraud schemes: Ghost employees/ Fictitious employees schemes Falsified hours and salary schemes (p.202 & p.210 case studies) Commission schemes (p.196 case study) DETECTION MECHANISM FOR EMPLOYEE FRAUD (PAYROLL FRAUD SCHEMES) Independent payroll (payslips) distribution Analysis of payee address or accounts Check for duplicate identification numbers Verify that overtimes are authorised by line manager / supervisor Analyse deduction – ghost employees payslips usual do not have deductions such tax, medical, uif ect EXPENSE REIMBURSEMENT SCHEMES There are four common types of expense reimbursement schemes: Mischaracterized expenses – incur expense in private capacity and claim as business activity Overstated expenses – Increase the claim amount fraudulently Fictitious expenses - claim from employer a non-existing claim Multiple reimbursement - use company credit card, and still claim as if the amount was paid from employee’s pocket. DETECTION MECHANISM FOR EXPENSE REIMBURSEMENT SCHEMES Review and analyse expense accounts Detail review of expense report FINANCIAL STATEMENT FRAUD (P.103 & P.377) Definition - “the deliberate misrepresentation of the financial condition of an enterprise accomplished through the intentional misstatement or omission of amounts or disclosures in the financial statements to deceive financial statement users.” WHAT IS THE RATIONALE BEHIND COMMITTING FINANCIAL STATEMENT FRAUD To encourage investment through the sale of stock To demonstrate increased earnings per share or partnership profits interest, thus allowing increased dividend/distribution payouts To cover inability to generate cash flow To avoid negative market perceptions To obtain financing, or to obtain more favorable terms on existing financing To receive higher purchase prices for acquisitions WHAT IS THE RATIONALE BEHIND COMMITTING FINANCIAL STATEMENT FRAUD - CONT… To demonstrate compliance with financing covenants To meet company goals and objectives To receive performance-related bonuses FINANCIAL STATEMENT FRAUD SCHEMES The Approach: Overstated assets or revenue Understated liabilities and expenses OR Assets and revenues are understated Liabilities and expenses are overstated FINANCIAL STATEMENT SCHEMES 5 CLASSIFICATIONS 1. Fictitious revenues 2. Timing differences (including improper revenue recognition) 3. Improper asset valuations 4. Concealed liabilities and expenses 5. Improper disclosures 2. TIMING DIFFERENCES (INCLUDING IMPROPER REVENUE RECOGNITION) Premature revenue recognition Sales with condition Long-terms contracts Multiple deliverables Recording expenses in the wrong period 3. IMPROPER ASSET VALUATIONS Inventory valuation Account receivables Fictitious account receivables Failure to account for irrecoverable debts 4.CONCEALED LIABILITIES AND EXPENSES Liability or expense omissions Improperly capitalizing cost Expensing capital expenditures Capitalising expenses 5. IMPROPER DISCLOSURES Contingent liabilities Subsequent events Management Fraud Related party transactions Changes in Accounting principles changes, estimates and reporting