ACCT 410610Fraud Examination

1
ACCT 410/610Fraud Examination

• An NDSU course developed taught by
• Thomas A. Buckhoff, Ph.D., CFE, CPA
• Topic 9 March 25, 2003

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Agenda for Today

• Concealment investigative methods
• Common vendor schemes
• Criminal of the day
• Exercise 10

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Concealment Methods

• Most fraud are concealed by manipulating source
  documents. Thus, obtaining and evaluating
  documentary evidence is critical to fraud
  examination.

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Common Billing Schemes

• Fictitious vendor
• Pass-through schemes
• Ghost employee
• Overbilling
• Kickbacks

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Fictitious Vendor Schemes

• Red Flags
• Unprofessional-looking invoices
• Vendors with only P.O. box addresses and/or no
  phone number
• Vendors and employees with matching addresses
• Multiple vendors with same address
• Invoices not being folded
• Vendors with no or invalid taxpayer ID number

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Pass-through Schemes

• Usually perpetrated by someone in the purchasing
  department.
• Fraudster inserts himself (via a shell
  company) as an unnecessary intermediary between a
  legitimate vendor and the employer.
• Fraudster makes an unauthorized profit on the
  transaction.

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Pass-through Scheme Example

• Ron, the fraudster, manages 5 large apartment
  complexes.
• Instructed a vendor to send all invoices for
  services rendered to him rather than the
  apartment complexes he managed.
• Using the vendors original invoice and his
  computer, Ron creates a new invoice with the
  amounts being marked up.
• Ron submits the inflated invoice to the complex
  which he approves and pays.

8
Ghost Employee Schemes

• Suspicious items
• Employees who do not have taxes
  withheld.
• Employees who do not enroll in health
  insurance programs.
• Employees with matching SSN.
• Employees with no job applications on file

9
Overbilling Schemes

• Suspicious items
• Invoice notation of extra or
  special charges.
• Discrepancies between the purchase
  order/invoice amount and the amount of the
  payment.
• Unusually large amounts on bill or bills which
  break a pattern.

10
Fraudulent Telemarketing Schemes

• Edward Tunick was convicted of 9 counts of mail
  fraud
• Estimated losses suffered by victims 170-200
  million

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Kickback Schemes

• May involve
• Fraudulent invoice
• Inflated invoice
• Inferior quality materials/services
• Fraudster receives
• Payment
• Gratuities
• Other benefits

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Kickback Schemes Red Flags

• Increased use of certain vendor(s).
• Bidding policy not being followed.
• Cost of materials or services not competitive.
• Extravagant lifestyle of fraudster

13
Data Analysis Software

• The computer can be used as a tool to identify
  red flags such as those associated with vendor
  fraud schemes
• ACL and Benfords Law

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Reviewing Suspect Payments

• Review canceled checks
• Trace canceled checks to supporting documentation
  and investigate
• Discrepancies
• Unnumbered or sequentially unusual invoices
• Altered or photocopied documents

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Exercise 10 Example of a Fictitious Vendor
Scheme

• Complete the Double Trouble Case Study on p. 7.3
  of the Student Workbook

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Instructions Part 1

• Read the newspaper article on p.
  7.3.
• How do you think this fraud was discovered?

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Part 1 Answer

• Investigative procedure
• Matched payments for invoices to receiving
  documents.
• Finding
• No receiving documents existed for numerous
  invoices approved for payment by Lisa Chaffey.

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Instructions Part 2

• Review pages 7.4, 7.5, and 7.6.
• Identify items that support the fraud theory that
  Fairmont Co. is a fictitious vendor.
• The case began with the money order.
• The other documents were among hundreds of items
  seized from the Chaffeys residence.

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Part 2 Answer

• A legitimate vendor would issue a company check
  rather than use a money order.
• Fictitious vendors generally list only a P.O. Box
  address.
• Paid for an answering service with another money
  order. Legitimate vendors rarely, if ever, use
  an answering service.

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Fraudwise

• Specializing in fraud detection, investigation,
  and prevention consulting services
• Senior Forensic Consultant
• Thomas Buckhoff, Ph.D., CFE, CPA
• 2974 Southgate Drive
• Fargo, ND 58103-3524
• 701-231-8512
• www.fraud-wise.com