Billing schemes are a type of asset misappropriation employee fraud. According to the 2018 Report to the Nations published by the Association of Certified Fraud Examiners, billing schemes typically account for 20% of all employee fraud and cost employers $100,000 per incident. One type of billing scheme we have seen is the “Shell Company” or Fictitious Vendor” scheme.
In this scheme, an employee will set up a shell, or fictitious, company for the purposes of committing fraud. The employee will fabricate a name, often similar to the name of another vendor that the company uses. The employee will typically open a bank account in the shell company’s name, so he/she can deposit and cash the fraudulent checks. In order to open the bank account, the employee will often need to file the appropriate paperwork with the state’s corporation commission. These records are public, so employers can perform public record searches to find shell companies set up by their employees. In order to avoid detection, the employee may set the company up under a spouse’s or relative’s name. Maiden names or spouse’s maiden names are often used, as well.
The fictitious entity will also need an address. Often the employee will rent a post office box. However, some employees will list their home address instead. A comparison of employee addresses to vendor addresses in the accounts payable records might reveal shell companies. Also a careful review of all companies with post office box addresses should be performed regularly. In addition, the employee may use addresses of relatives or friends.
After the employee forms the fictitious company and opens a bank account, the employee may then prepare false invoices for services or products. Services are typically easier to bill than goods in a fraud scheme as companies’ often have more accounting controls and scrutiny over inventory and supply purchases. In order for the fraud scheme to work, the employee is usually the person who can authorize the fictitious purchase or the false invoice. The employee will approve payment of the invoice, the check will be sent to the employee’s address. Then the employee will deposit /cash the check via the bank account that was opened.
Proper segregation of duties and formalized procedures will assist in avoiding this type of scheme. For example, one employee submits an invoice with a payment voucher, and another employee approves the payment voucher. However, even in this scenario, a person may approve a fraudulent invoice if it appears reasonable. Sometimes, an employee will take advantage of having a “rubber stamp” supervisor, which is an individual who is either inattentive, overworked or too trusting, and will authorize transactions without proper review. In addition, the employee may actually forge the approval signature.
There are red flags or symptoms of this type of fraud scheme as well as detection techniques used by internal and external auditors and forensic accountants. Some of the most common red flags to look for are as follows:
- Higher than usual expenses
- Excess goods or services
- Unusual or unauthorized vendors added to vendor list
- Unusual vendor names or addresses
- Unusual endorsements on checks
- Vendors with alternate addresses
- Unusual, unexpected or unexplained fluctuations in payables, expenses or disbursements
- Unusual changes in behavior or lifestyle of employee
Have you checked your payables lately?