During one of our past May training events, our speaker, shared a fascinating, real life example from her own practice of how detailed analytic analysis could be especially helpful in addressing false billing frauds. In addition, she explained at length just how this type of fraud works.
In a false billing scheme, an employee or outside party creates false vouchers or submits false invoices to a target organizational payer. These documents cause the payer to issue payments for goods or services that are either completely fictitious or overstated in price. The perpetrator then collects the fraudulent payments/checks and converts them for personal use. Another common billing fraud involves buying personal goods or services with company money.
A false billing fraud affects the purchasing cycle, causing the company to pay for nonexistent or non-essential goods or services. Most false billing frauds involve a service, since it is easier to conceal a service that is never performed than to conceal goods never received. As our speaker’s example demonstrated, the most common billing scheme, is setting up one or more bogus vendors. There are several ways to do this. The most common is to create a fictitious vendor (often called a shell company), open a bank account in the shell company’s name, and bill the victimized company. The perpetrator then creates an invoice and sends it to his/her employer. Invoices can be professionally produced via computer and desktop publishing software, typewritten, or even prepared manually. Often, the most difficult aspect of a fraudulent billing scheme is getting the false invoice approved and paid. In many instances of billing fraud, the person perpetrating the fraud is also the person in the company who is authorized to approve invoices for payment. Another popular means of getting invoice approval is to submit invoices to an inattentive, trusting, or “rubber-stamp” manager. Furthermore, perpetrators often create false supporting documents to facilitate approvals and payments, e.g., voucher packages.
A perpetrator can also use a shell company to perpetrate a pass-through billing scheme: the perpetrator places orders for goods with his shell company, has his shell company order the goods from a legitimate supplier at market prices, and then sells those goods to his employer at inflated prices. The fraud lies in the fact that the victimized company is buying the goods it needs from an unauthorized vendor at inflated prices. The perpetrator “profits” from the inflated prices gained while acting as an unauthorized middle-man in a necessary company transaction.
Rather than utilizing shell companies to overbill, some employees generate false disbursements through invoices of non-accomplice vendors. In what is called a pay and return scheme, the perpetrator makes an error in a vendor payment to facilitate the theft. One way to do that is to overpay or double-up on payments, request a check from the vendor for the excess, and steal the check when it arrives. Another scenario is to pay the wrong vendor by placing vendor checks in the wrong envelopes, then calling the vendors to explain the mistake and requesting the return of the checks. When the checks return, they are stolen. The support documents are sent through the accounts payable system a second time; and these checks are sent to the proper vendors.
Another scheme involves purchasing personal items with company money. One popular way to do this is to make a personal purchase, then run the unauthorized invoice through the accounts payable system. If the perpetrator is not in a position to approve the purchase, s/he may have to create a false purchase order to make the transaction appear legitimate or alter an existing purchase order and have an accomplice in receiving remove the excess merchandise.
Another way to purchase personal items with company money is to have the company order merchandise, then intercept the goods when they are delivered. To avoid having the merchandise delivered to the company, the perpetrator often will have it diverted to their home or some other address, such as a spouse’s business address. A third way to purchase personal items with company money is to make personal purchases on company credit cards. No matter which of the approaches is used, the perpetrator will either keep the purchases for personal use or turn the purchase into cash (or a credit card refund) by returning the merchandise.
Our event speaker pointed out that, in some ways, it’s easier to conceal a billing fraud than other frauds, but in other ways, it’s harder. It’s easier in that the perpetrator does not have to remove cash or inventory from company premises; instead, the company mails her a check. It’s more difficult in that, when the perpetrator creates a bogus vendor or shell company, s/he has to come up with a name, mailing address (often the fraudster’s home address or a postal box), and phone number (often a home phone number); open a bank account in the shell company’s name (usually requiring him or her to file or forge articles of incorporation) or in his own name; deposit and withdraw money; and create and send vendor invoices. Any of these can lead back to the perpetrator, making it easier to find him once the fraud is detected and the shell company identified.
Depending on the scheme and organizational controls in place, the perpetrator may have to falsify or alter a purchase requisition, purchase order, receiving report, or vendor invoice, or fool or force the authorizing person to approve or forge an authorization. Perpetrators involved in a pay and return fraud usually have to intercept any checks that are returned.
Our speaker additionally presented a number of red flags usually present when a false billing fraud is taking place, including:
• An unexplained increase in services performed (services that were paid for, but never performed);
• Payments to unapproved vendors;
• Invoices approved without supporting documents;
• Falsified or altered voucher documents; for example, altering a purchase order after its approval;
• Inflated prices on purchases or orders of unnecessary goods and services;
• Payments to an entity controlled by an employee;
• Multiple payments on the same invoice or over payments on an invoice;
• Personal purchases with company credit cards or charge accounts;
• Excessive returns to vendors, or full payment not received for items returned;
• A vendor with a post office box address (many post office box addresses are legitimate, but a smart.
On May 15-16th, 2019 our Chapter will be hosting a two-day ACFE lead seminar entitled, ‘How to Testify’. Our speaker, Hugo Holland, wants to make a courtroom pro out of you! Learn how to testify effectively on direct and cross examination, basic courtroom procedures, and most important, tricks for surviving on the witness stand. Improve your techniques on how to offer testimony about damages and restitution while learning to know when to draw the line between aggressive testimony and improper advocacy. Walk away with more effective report writing skills and explore the different types of evidence and legal remedies in this 2-day, ACFE instructor-led course. To review the event content and to register to attend, click here. Hope you can join us!