COMMON FRAUDS

Auditors must know what can go wrong if they are to recognize or detect occurrences
of fraud. The following are representative examples of occurrences of fraud.

ACCOUNTS PAYABLE

1. Establish new fictitious vendors on the vendor Masterfile, then unauthorized

invoices could be paid, either self-prepared or obtained through collusion with
suppliers.

2. An inactive vendor could be used, by changing the address, then paying

unauthorized invoices.

3. An Accounts Payable supervisor is advised by a vendor that they have been

overpaid. The supervisor requests the repayment be directed to his/her attention
so that proper credit can be made. The supervisor converts the payments to
his/her own use and begins making duplicate payments intentionally and requests
repayments, which he/she keeps.

4. Blank checks could be stolen and used for unauthorized transactions.

5. Blank Wire Transfer Request Forms could be stolen to make cash transfers into
unauthorized bank accounts.

6. Properly prepared checks could be stolen before they are distributed for payment
to vendors.

7. Make payment to oneself using the copy of an original authorized invoice as

supporting documentation, and divert the disbursement through an account in own
name.

8. Travel/Entertainment Expense Reports could be submitted twice by using originals

and copies as support for expenses.

9. Delete amounts on the invoice file to be paid or the vendor master to understate
the Company’s Accounts Payable Liability.

10. Print listings of vendors, account balances, or payment history for sale
to competing vendors.

11. Alter Accounts Payable Program Code to calculate vendor balances or

amounts due incorrectly.
12.Bidding is not competitive or fair. The supplier who gets the bid is always the last
bidder—an example of an information leak.

13. Write off accounts payable “credit” balances to profits.

14. Collude with accounts payable personnel/supervisor, and re-direct

payments, or make duplicate payments to own bank accounts.

15. Alter vendor invoices and photocopy to conceal alteration, and make
payment to benefit third party.

16. Forge check signature or endorsement.

17. Overstate the cash disbursements journal, record the overstated amount, and
misappropriate the difference .

18. Collude with contractor to pay him/her more and misappropriate the excess
amount paid.

PURCHASING

1. Increase amounts of suppliers' invoices through collusion and divert additional

payment to vendors for personal use.

2. Charge personal purchases to the Company through misuse of purchase orders.

3. Permit special prices or privileges to customers or grant business to favored

suppliers for "kickbacks."

4. Purchase goods through unauthorized related-party suppliers at noncompetitive

prices.

5. Collude with a supplier to accept lower quality paper stock, or other goods, at first
quality prices.

6. Purchase discounts are taken, but not recorded and the amount of discount is
misappropriated.

7. Purchase unauthorized goods though expense reports to avoid the purchase order
and authorization process
8. An employee gives business to a favored vendor in exchange for incentives such as
a commission, free vacations, free tickets to events, etc.

9. A vendor compromises a purchasing agent by sending gifts to the purchasing

agent’s home. The purchasing agent then must side with the vendor when he/she
charges excessive prices or delivers shoddy merchandise.

10.Vendors get together to rig bids. When one of them gets the work at a higher
price, the others become subcontractors to the winner.

11.A manager with authority to select vendors solicits business from a particular
vendor in exchange for stock in the vendor. The rationale was to reduce the
charge from “kickbacks” to “conflict of interest.”

12.A purchasing agent makes sure a favored vendor or partner gets the bid by:
 Disclosing the competitor’s bids
 Throwing away any lower bids
 Making up reasons not to accept low bids by others
 Not providing the other bidders all pertinent information
 Sending out requests for bids too late for responses
 Structuring specifications so only the favored vendor can win

PURCHASING FRAUD SCENARIOS

1. A regional manager for a retail convenience store and gas station chain became
disenchanted with the company. In anticipation of leaving, he went into business
for himself, and built his own new store in a prime location. All of the
construction costs, store fixtures and initial inventory was purchased by the
company which was also building new stores in the area.

2. A materials coordinator uses surplus casing head pipe to build a barbecue grill for
the district office.

3. A car dealer provides the company fleet manager and his family cars each year to
“try out.”

4. A defense contractor substituted materials he claimed were “just as good,” as

those specified in the contract. To avoid detection, he manufactured labels to
appear the same as those specified.

5. A project manager responsible for building offices arranges for the contractor to
do work on his own house. The cost of the improvements is billed to the
company.
24.Company executives responsible for negotiating leases for retail and office space
acquired property just prior to leasing it to the company. Rental rates were
excessive and the duration of the leases were longer than normal.

PAYROLL / BENEFITS

1. Carry fictitious employees on the payroll, or pay one employee through more than
one paycheck, and increase amount paid to employee.

2. Increase rates/hours or manipulate deductions so employee receives more pay

than they should.

3. Keep employees on payroll beyond their actual severance date.

4. Withhold unclaimed wages.

5. Falsify employee timecards/timesheets, vacation and sick records.

6. Misuse workers compensation and medical benefits through staging an employee

injury.

7. Use access to confidential employee records and information to commit fraud,

e.g., obtaining unauthorized credit cards by using the employees social security
number, birth date, etc.

8. Improperly reconcile the "Employee Unclaimed Wages Account” and direct the
funds of located employees to oneself.

9. Use employee funds, such as profit-sharing or 401 (K) moneys, for personal use.

10.Inefficiency in daily working routine such as leaving early or arriving late.

11.“Budget Padding," giving yourself extra time/expenditure to complete a project.

WORKERS' COMPENSATION

1. Claim for Workers' Compensation when the injury did not occur during work hours.

2. Increase the amount of a worker’s compensation claim by having non-related

medical treatment and adding it to an existing claim.
3. Pay more benefits than required by State Law to an employee while on workers'
compensation leave of absence.

4. Increase amounts of Workers' Compensation invoices through collusion.

5. Permit special privileges or grant business to favored workers' compensation

vendors for “kickbacks.”

6. Fail to follow-up and investigate potentially fraudulent Workers' Compensation

Claims.

7. Make workers' compensation out-of-court settlements for fraudulent claims by

collusion for kickbacks.

HEALTH BENEFITS

1. Claim for health benefits when the individual is not covered for insurance or when
that type of treatment is not covered by the plan.

2. Carry participants' coverage beyond their actual cancellation date or allow

coverage to begin before the employee is eligible for the Plan Document.

3. Misuse medical benefits and the ability to gain medical treatment through staging
an employee injury.

4. Use access to confidential employee records and information to commit fraud, i.e.
by using personal medical information, address, name, social security number gain
medical treatment for own benefit.

5. Make Medical Claims for others who are not covered by the insurance, using an
employee's Medical Health Card to gain improper treatment.

6. Pay Medical Claims to fictitious employees, or for inflated amounts.

7. Allow individuals who have not paid for coverage to continue their medical
benefits, whether by collusion, or otherwise.

8. Misappropriation and/or lapping of checks received for medical insurance coverage

from individuals paying by check.

9. Improperly reconcile Benefits Bank Accounts, or Benefits Claims Records to actual

documentation, and direct the funds to oneself.
10. Fail to follow-up (or do not follow-up timely) with vendors for noncompliance
with Performance Guarantee Agreement when refunds are available.

11.Permit special privileges or grant business to favored health providers, for

kickbacks.

12. Fail to follow-up and investigate potentially fraudulent Benefits Claims.

ACCOUNTS RECEIVABLE

1. Lappings collections on customers' accounts by misappropriating cash receipts and

concealing shortages by delaying postings of cash receipts.

2. Kiting bank transfers by depositing a bank transfer and recording an appropriate

entry to conceal a previous shortage, but no disbursement entry is made for the
transfer.

3. Deposit checks, but do not record them, and write checks to employees for the
same amount, but do not record this entry also.

4. Create a fictitious customer account in own name and deposit Customer Sections
into it.

5. Coil an account, misappropriate the money, and write it off as "bad debt."

6. Collect on a charge-off account and not record it.

7. Issue credit for false customer claims and returns.

8. Fail to make bank deposits daily or deposit only part of the money.

9. Allow poorly vetted customers to make orders that at a later date become bad
debts.

10. Non-repayment of amounts owed to customers, caused by them overpaying

their account, and the credits account balances can be written off to profits.

11. Use inactive customer accounts to deposit checks received for own use.

12. Age accounts receivable entries incorrectly and not recognize potentially
uncollectible amounts as part of a lapping procedure.
BILLING

1. Unrecorded sales or income.

2. Bill the customer incorrectly for an order. An over-billing would be fraud on the
customer, under-billing would be fraud on the company.

3. Make a sale to a customer at an unauthorized discount rate.

4. Improperly delete orders from the Order File preventing the Company from billing
the orders.

5. Under bill or no-charge check orders for personal gain.

6. Make a sale to a customer at full price, record the entry at a discounted price and
collude with accounts receivable personnel to deposit the difference into a
customer account in own name.

7. Order free checks for non-authorized persons.

8. Under-report or do not report unshipped orders to keep unfilled orders at a

minimum.

9. Issue fictitious credit memo's to customers or misuse the ability to generate credit
memo's for returned goods to conceal theft of inventory.

10. Manipulate shipping and invoice dates so they are in different accounting periods
to give customer longer to pay or to conceal poor credit collections practices.

11. Record billing in wrong period to achieve desired earnings trends, commission,
bonus, or profit sharing goals.

12. Understate revenues to reduce taxes or royalties.

MISCELLANEOUS EMPLOYEE THEFT

1. Forgery

2. Collusion

3. Theft

4. Unrecorded transactions
5. Embezzlement

6. Theft of company products (e.g., customer checks, software, forms, machines)

7. Theft of company computers, supplies, tools, other items of equipment,

stationery and company promotional items for sale.

8. Items sold for cash when the sale is not recorded and cash is misappropriated.

9. Misuse of a postage meter.

10. Steal company purchased software or copy it onto home computer.

11. Petty Cash abuses in the form of stealing small sums.

12. Overload or padding Expense Reports.

14. Sell scrap materials and misappropriate the proceeds.

15. Increase amounts of petty cash vouchers while accounting for disbursements.

16. Use personal expenditure receipts to support false paid-out items.

17. “Sell” door keys or combination.

18. Misuse or sell to an outside party proprietary Harland knowledge, such as

software code.

19. Take sick days when not ill.

20. Use the telephone or other company equipment for personal use.

21. Act upon insider company information (i.e., insider dealing).

22. Sell company information to an outside parties such as customers or

competitors.

BANK ACCOUNTS

1. Open secret, unauthorized bank accounts in the company’s name and using the
funds for personal expenses.
2. Open bank accounts in own name, and divert Harland funds through it for personal
use.

3. Not keep authorized signers on bank accounts up-to-date so that terminated

employees remain shown as authorized signers.

4. Improper segregation of duties - If the person who wrote checks also did the bank
reconciliation they could forge checks and then alter the reconciliation so that the
theft is not detected.

5. Raise canceled bank checks to agree with fictitious entries.

6. Diverting savings account interest to personal bank account.

7. Sell items such as inventory, fixed assets, or equipment for cash, do not record the
sale, and misappropriate the cash.

INVENTORY

1. Steal new or obsolete stock and falsify inventories to cover thefts.

2. Bill stolen merchandise to fictitious customer accounts.

3. Make unauthorized purchases, either on a separate purchase order, or by

increasing the quantity on an existing order, for personal use and charging the
Inventory General Ledger Account.

4. Falsify physical inventory counts and results so that inventory variances are
favorable, the value of inventory in the Balance Sheet is increased, or to improve
performance figures.

5. Have extra cartons, roll stock, or other valuable items loaded onto trucks at the
web.

6. Re-direct returned goods to home location for personal use and make erroneous
entries in Returns Records to conceal the thefts.

7. Make errors in detailed inventory records, resulting in over-stocking and

obsolescence.

8. Delete obsolete stock from inventory records, sell the obsolete stock to a customer
for cash, and misappropriate the receipts.
9. Misappropriate items being transferred from Raw Materials to W-I-P to Finished
Goods, and falsify inventory records to conceal the theft.

FIXED ASSETS

1. Steal fixed assets by ordering quantities surplus to requirement and taking the
extra items for personal use or by taking old assets not easily detected by other
personnel.

2. Sell a fixed asset, deposit the funds into personal bank account, and do not report
the proceeds.

3. Delete Asset Records from the Fixed Asset System through improper means, such
as retirement, a new piece of equipment, then sell it for personal gain.

4. Overstate the value of property, plant, equipment or understate the value of

depreciation on the Financial Statements in order to improve the Balance Sheet.

5. Improperly modify depreciation calculations programs to report less depreciation

expense and overstate net income.

6. Modify asset status on the Fixed Asset System so that assets are not properly
depreciated.

7. Improperly change the location field on the Fixed Asset System so that the system
is so disorganized it is unauditable and theft can remain undetected.

8. Misappropriate assets upon plant disclosure or transfer them from one location to
another.

9. Acquire surplus to requirements, resulting in unused or idle assets, which are

easily open to theft.

10. Take company property home for personal use. Once missing, these items are
less likely to be returned to the company.

11. Do not return company property upon leaving the company.

12. Record cash proceeds of assets to sales and do not remove the asset from the
Faxed Asset Register, thus increasing profits and increasing the value in the
Balance Sheet.

13.Do not write down or write off the value of assets known to be worthless.
ACCOUNTING & FINANCE

1. Manipulate reports and financial statements to receive a larger incentive bonus or

to exceed the performance displayed during the last years.

2. Create credit balances on the general ledger and convert it to cash.

3. Increase or create fictitious credit/reserve balances and manipulate high profits in

one year to successive years where profits are low.

4. Accounting cutoff's - or inventory and sales information arm manipulated to

maximize financial report performance and bonuses.

5. Use confidential "insider" information regarding purchases/acquisitions sales to

profit in the stock market.

6. Profit-sharing - Divert profit-sharing funds to one’s own fund to increase one’s own
balance.

7. Divert company funds on personal expenditure by authorizing a Check Request for

a fictitious expenditure, or by authorizing a personal invoice/bill to be paid
through bank account.

8. Exceed authority limits in borrowing funds or purchasing assets/stock.

CASH RECEIPTS FRAUD SCENARIOS

1. A salesman collects from a customer and never turns in the cash or the order.

2. A retail clerk receives payments, fails to record the sale, and pockets the
proceeds. retail clerk records less than the proceeds of a transaction and pockets
the difference.

3. Payments on account are stolen by the accounts receivable clerk. The clerk
covers it up by lapping payments from other accounts.

4. Payments on account are stolen by the accounts receivable clerk. The clerk
covers it up by adjusting the customers account for the amount of the payment.

5. Payments on account are stolen by the accounts receivable clerk. The loss is
covered up by making a fictitious deposit in transit.
6. Payments on account are stolen by the accounts receivable clerk. The loss is
covered up by debiting an expense account or any account not frequently
scrutinized, such as suspense accounts, inter-company accounts, or past due
receivables.

7. Money is removed from the bank deposit after it is prepared. It is short when
received at the bank.

8. An outside agent with access to a company bank account changed banking

instructions and withdrew over $1 million for his own use.

9. A retail clerk receives payments, fails to record the sale or under records the sale,
and pockets the proceeds or difference.

DELIVERY OF GOODS FRAUD SCENARIOS

1. A delivery driver shorts unwary customers and sells his stolen merchandise to
other customers at a discount.

2. The driver, in collusion with the receiver, shorts the delivery, records the delivery
as complete, and splits the proceeds of the sale of the stolen goods.

3. The driver steals goods from the receiving dock.

4. The vendor shorts the customer, relying on the driver to be able to fool the
customer’s receiving personnel.

5. The driver unloads most of the crude in the tank and replaces it with water.

6. The vendor substitutes lower quality; mixing rock, paper, and stumps in with coal;
adding kerosene to gasoline.

7. The driver falsifies the quality of the crude pumped, pays the owner a lower price
and sells the crude himself at the true quality value.

8. The vendor delivers the goods to a location other than the company location, for
example to an executive’s home or farm.

SALES FRAUD SCENARIOS

1. Salesmen compensated on salary plus commission had to validate their draws. A
salesman could turn in orders before the cutoff for the period, and then cancel
the order, claiming the customers had changed their minds.

2. Salesmen on salary went into business for themselves, selling a competitor’s

product for commissions while still getting a salary from the original employer.

3. The salesman used his commissions to pay a kickback of about 5% of the total
sale.

4. An insurance salesman set up a bank account in the name of a group customer and
overcharged the customer for group insurance. He deposited checks payable to
the insurance carrier in the account, paid the carrier at the correct rate for fewer
group members than were really covered, and verified coverage for claim
purposes.

5. A salesman misrepresented the terms of investments, inducing individuals to

invest because they believed the payments to be tax deductible. When the
customers complained and were made whole, the salesman had collected his
commissions and was gone.

6. Sales cutoff was manipulated by the plant manager and the marketing manager to
maximize quarterly bonuses. Mobile homes were shipped to a holding lot, with
sales being recorded at the time of such shipment.

TRANSPORTATION FRAUD SCENARIOS

1. The garage owner, in collusion with a company employee, arranged for the
company to be billed for charges for work on vehicles not belonging to the
company.

2. The fleet manager arranged for an accomplice to buy used trucks for about 60% of
their real market value. The accomplice could then quickly dispose of the trucks
for about 80% of the value, splitting the profit with the fleet manager.

3. Employees filled up company cars at the plant gas tanks maintained for company
vehicles. The also stopped by on weekends and filled up family cars, campers,
recreational vehicles, boats on trailers, and 55 gallon drums.

PAYROLL AND PERSONNEL FRAUD SCENARIOS

1. A store manager forges an unclaimed payroll check and cashes it in the store till.
He later leaves employees on the payroll for a few extra days to generate extra
pay to take.

2. A plant foreman approves overtime never worked in exchange for 40% of the
overtime pay.

3. A payroll clerk puts herself down for overtime never worked.

4. An employee submitted a matching gifts request to the Company Foundation to

support a charitable organization. The charity returned the employee’s gift to
him, plus additional money.

5. Co-workers take turns punching each other’s time cards giving themselves “free”
time off.

6. A personnel manager paid his own firm placement fees for new hires who came
directly to the company without really going through an employment agency.

7. Time sheets were “corrected” by bosses to charge labor costs to defense contract
jobs which did not have budget problems.

STORES FRAUD SCENARIOS

1. An employee in a convenience store steals merchandise by putting it in a trash

container and retrieving it later.

2. Counts were overstated, prices were high and mathematical errors were used to
intentionally overstate inventory to maximize bonuses and to avoid criticism for
excessive inventory losses.

3. A manager covers up unacceptable shrinkage by manipulating inventory counts

and prices.

4. Plant managers used reclassification from good to obsolete inventory or vice versa
to get earnings in the time period when bonuses would be maximized.

5. An employee arranges to stage a robbery of the store. He and his accomplices

later divide up the proceeds.

6. An employee takes personal advantage of a robbery by putting 10 cases of beer

and wine in his van and blaming it on the robbers.
LOAN FRAUD SCENARIOS

1. Company policy required that loans to officers be repaid by year end. A fictitious
deposit in transit was made up to reflect repayment.

2. “We believe the loans are fully secured,” is the refrain that echoes through the
banks, savings and loans, and insurance companies. The threat of statutory
insolvency may cause even the most conscientious financial managers to hesitate
to reserve doubtful loans. In some cases they have gone so far as to obtain
inflated appraisals and record entries to appear as payments.

PURCHSAING FRAUD SCENARIOS

1. A regional manager for a retail convenience store and gas station chain became
disenchanted with the company. In anticipation of leaving, he went into business
for himself, and built his own new store in a prime location. All of the
construction costs, store fixtures and initial inventory was purchased by the
company which was also building new stores in the area.

2. A materials coordinator uses surplus casing head pipe to build a barbecue grill
for the district office.

3. A car dealer provides the company fleet manager and his family cars each year
to try out.

4. A defense contractor substituted materials he claimed were just as good as

those specified in the contract. To avoid detection, he manufactured labels to
appear the same as those specified.

5. A project manager responsible for building offices arranges for the contractor to
do work on his own house. The cost of the improvements is billed to the
company.

6. Company executives responsible for negotiating leases for retail and office
space acquire property for themselves and subsequently lease it to their company.
Rental rates were excessive and the duration of the leases were longer than
normal.