Khadine Price

Invent a Fraud

David Delvecchio

9th July 2013

 The International Steel Company of Trinidad and Tobago (ISCOTT) is a medium sized

company whose mission statement aims at improving the process of manufacturing advanced

high strength steel while maintaining its quality. Our small to medium sized company is made up

of a total of 50 employees which comprises of an Administrative, Finance & HR and Production

departments; however 80 % of staff falls under the Production unit whilst the other 20% is solely

responsible for the administrative function of the organization.

Our Finance department is spearheaded by a Manager of Finance and is supported by an

Accountant whose sole responsibility is the preparation of financial statements and payroll of all

Administrative staff and our Payroll Accountant Ms. Jackie Theft who is responsible for the

purposes of managing and processing the payroll function of all Production Personnel.

Of recent the issue of fraud has become an important issue at the forefront of

Management’s mind. As a result management have decided on taking a proactive approach

which involves brainstorming and identifying any employee embezzlement schemes that can

occur within ISCOTT’s financial function most vulnerable area, payroll. The brainstorming

session has revealed the occurrence of the following employee embezzlement schemes that can

be carried out by our Payroll Accountant Ms. Jackie Theft which comprises of the following:

 Overtime Fraud Scheme: ISCOTT’s industry type has created the need for overtime in

order to meets it market demand, hence overtime is one of those benefits offered to both

Administrative and Production employees. To illustrate, if our Payroll Accountant Jackie

Theft is to embark upon an embezzlement scheme the manipulation of the overtime is

one area that is easily susceptible to fraud. However to successfully carry out this scheme

requires collusion with one of the production employees. The production employee will

be expected to manipulate his hours by falsifying the records for maintaining overtime
 i.e. he will have to pad up on the hours of time recorded which can be achieved one of

two ways signing in and out at incorrect times or by Jackie theft manipulating via forgery

the times already recorded. In any event the times recorded must be foolproof so that if

calculated by an independent auditor the period between the times recorded must tie back

to the number of hours within that time. Once accurately tampered with the false extra

hours will be recorded in the overtime records spreadsheet which will then be used by

Jackie Theft to process the final payroll for the production employees. In essence the

main act is the falsification of the overtime records.

 Vacation Allowance & Sick leave Bonus Scheme: an extension to the payroll fraud

scheme is the one-off embezzlement scheme that can be undertaken by the Payroll

Accountant in relation to company vacation leave and sick leave. Another incentive

offered at ISCOTT is the payment of sick leave bonus; this incentive was offered with the

intention of discouraging employee absenteeism. However in an attempt to understand

the embezzlement scheme one must understand the process involved. Once an employee

for example in the finance department has taken vacation or sick leave the employee is

required to fill out and sign a leave application form which is then approved by the

Finance Manager. The approved application forms are then collected by the Payroll

Accountant who is then responsible for remitting to the Human Resources for purposes

of updating there HR system. Once the system has been updated at the yearend each

employee’s number of sick days left is calculated and a spreadsheet is generated and

signed off by the Human Resource Manager who then forwards a signed copy to the

finance Department for processing in their respective payrolls.

 Having understood the procedure with respect to the processing of Sick leave bonuses the

embezzlement scheme can now be illustrated as Jackie theft having been charged with

the responsibility of monitoring Staff leaves for submission to HR can now manipulate

the process by destroying her personal approved sick leave application forms prior to

remitting to the Human Resource Department. Jackie Theft not manipulates the process

but in effect manipulates the dollar value of her sick leave remuneration bonus. As a

result this will allow Jackie to defraud ISCOTT since the destroyed sick leaves remains

unrecorded in the system. The effect is that the yearend sick leave bonus received by

Jackie will be more than what she should have received. In this situation, success of this

scheme will rely totally on the destruction of all Jackie’s personal signed leave

application records prior to issuance to the HR department.

Of course having understood the theft and concealment of both schemes the conversion

aspect must be considered. In the first instance involving the overtime scheme the agreement

between Jackie and her accomplice is one where the overtime will be divided according to an

agreed ratio. Therefore the initial payment will be paid to Jackie’s accomplice whether by check

or deposited into his personal salary account on each run of payroll. On depositing, her

accomplice will make arrangements for Jackie to receive her portion in cash. In relation to the

second scheme because these types of bonuses are paid one off at the end of the year it prevents

it from being a regular occurrence as opposed to the overtime scheme. In essence Jackie’s

embezzlement will be converted in to cash which she will receive as part of her normal paycheck

which now includes the overstated sick leave bonus. Both schemes method of conversion will be

mainly in the form of cash since if in any other form it signal a red flag.
 Another important aspect to examine is how Jackie would be able to perform these

payroll embezzlement schemes without alerting the auditors. In review Jackie Theft can fool the

auditors as a result of the following:

Overtime payroll Scheme

In the overtime payroll scheme in an attempt to go unnoticed it should be noted that the

overtime hours will be manipulated and not the rates; reason being that in the Production area

the employees base salaries will be within certain ranges and the hourly rates of employees in

the same range will be the same, hence manipulating the rate will not be wise as this can easily

show itself up as a red flag especially if the external auditors decide examine the hourly rates of

all employees in the same bracket and same base salary and upon testing a different rate appears.

Vacation & Sick Leave Bonus

In relation to the embezzlement of company funds via vacation & sick leave bonus an obvious

auditing procedure will be to vouch the sick leave and vacation day balances to the physical

records i.e. the leave application forms. Therefore the initial destruction of leave application

forms before issuance to the Human resource department will ensure that employee vacation or

sick leave balance will tie back to the hard copy documents and the summary listing of

employee’s balances. Even if the HR system is automated it still requires that the information be

inputted from a source, therefore if the sources is destroyed then the information cannot be

recorded as the signed off forms are the basis for all system entries.

Internal & External auditors Sampling Approach: Another reason to believe why the auditors

can be fooled in relation to these schemes is in the area of sampling, especially when it comes to

the manipulation of overtime hours, the auditors may use the approach and select a sample and

base their conclusions on the selected sample, in other words as according to Albrecht unlike a
forensic accountant who will look at the entire population and all documentation to look for

oddities, forgeries and tampering of documents the auditors will only review documents which

are in the purview of their sample which limits their findings.

Segregation of Duties: In the introduction ISCOTT is classed as a somewhat small to medium

sized company, it was also mentioned that in the area of payroll the internal control of

segregation of duties are implemented as illustrated by the separation of the payroll process i.e.

The payroll for administrative staff is prepared by the accountant and Jackie Theft is responsible

for the preparation of payroll for production staff which will be checked and signed off by the

Accountant and Manager respectively. The mere existence of these controls which allows for

Checks and balances is seen as a preventative fraud control measure in the minds of the auditor

as Jackie theft is not responsible for preparing a payroll for which she is the existing employee

in other word Jackie does not generate her own payroll.

Size of the organization: As discussed ISCOTT is also a small sized company and according to

Lower & Associates article entitled hiring and payroll fraud they stated that with small to

medium sized companies the initial assumption is that Finance is often part of the Human

resource department so the auditors may tend to think It is reasonable for cross functions in

department to take place given the size. Thus the fact that Jackie Theft is the Payroll accountant

who is also responsible for managing the Finance Department’s sick leave means she also has

payroll duties however this important factor may be overlooked because in the mind of auditors

the size and limited resources does not allow for such.

In conclusion despite the controls that may exist to prevent the embezzlement of funds

from ISCOTT it should be noted that at times factors such as size can in fact facilitate these

schemes in addition to the destruction, forging and manipulation of all relevant source
documents. In short, the less paper trail in addition to making a fraud appear normal such as the

amounts embezzled, the frequency and choice of an appropriate conversion method which

cannot be traced will result in success of these embezzlement schemes.

References

Albrecht, Albrecht& Albrecht- Fraud Examination 4e

Lowers & Associates- Hiring & Payroll Fraud retrieved from

http://www.lowersrisk.com/fileadmin/uploads/files/WPHiring-PayrollL&A.pdf