Systematic fraud

Staff or managers falsifying documents, issuing fictitious invoices or tampering with cheques.

Risk type: Practice

Risk driver: Internal

DESCRIPTION

Financial staff are responsible for handling cash, processing transfers, and documenting financial flows, which puts them in a vulnerable position when it comes to fraudulent acts. While they themselves may be actively pursuing private gain, they may equally be pressured by supervisors or managers to help embezzle funds or make illicit payments.

Utilities for example have considerable incentives to manipulate the accounting data through straightforward fraud or ‘creative’ accounting practices. For example, they could shift costs from unregulated to regulated activities or from non-productive to contracted activities in order to inflate costs and negotiate higher prices with the regulator or project owner. There is a great variety of fraud types, like insurance fraud, tax fraud, cheque fraud, and so on. A few of the most relevant types of systematic fraud in this context is presented here:

• The falsification of financial documents (profit & loss statements, balance sheets, etc.) and accounts is a common practice to cover up systematic fraud and more sophisticated forms of theft. Depending on how the organization is structured and whether the procurement or purchasing function is separated from the financial management, fraud schemes may involve various people across several departments of an organization.
• A fictitious invoice is any invoice that does not represent a legitimate purchase or lease, e.g. rent payments for a lot that is not being used by the company. Another fictitious invoice scheme is for an individual to arrange for invoices to be sent to and paid by a company but the invoicing business does not exist.¹
• Cheque tampering involves employees using company cheques to pay themselves. The simplest and most popular way this is done is by employees simply writing a cheque to themselves and depositing it in their account. Often this includes the employee forging the signature of the person authorized to write cheques. Another method is reissuing the company’s old outstanding cheques but replacing the payee’s name with their own. The company in this case has already recorded the cheque and deducted the cash accordingly, so when the cheque is deposited by the employee, there is no good indication that something has gone wrong.²

RED FLAGS

General red flags:

• Financial staff show a change of lifestyle – spending patterns do not match their income.
• Contractors and other business partners always want to deal with the same staff member and leave payment processes unfinished if the person is unavailable.
• There are lots of meetings between only financial staff and the same individuals, without a clear purpose.
• A lot of payments by the same staff are issued just below the threshold for higher authorization.
• Financial staff members or accountants are refusing to take holidays.

Red flags for fictitious invoices/cheque tampering:

• Photocopied invoices or invoices have been tampered (e.g., sections have been ‘whited out’ and typed over).
• Invoice numbers from the same vendor occur in an unbroken consecutive sequence.
• Invoices are from companies with a post office box address and/or no phone number.
• Invoices are from companies with the same address or phone number as an employee.
• The amount of each invoice from a particular vendor falls just below a threshold for review.
• Multiple companies have the same address and phone number.
• Vendor names appear to be ‘knock‑offs’ of well‑established businesses (i.e., names are spelled very similarly to well‑established businesses).

KEY GUIDING DOCUMENTS

Greene, C. L., 2013. Focus on Employee Fraud — Purchasing Frauds, http://www.mcgoverngreene.com/archives/archive_articles/Craig_Greene_Archives/Focus-Employee_Frauds-Purch.html, accessed 04.11.2015

Murphy, P., no year, Employee Theft, Business Practical Knowledge, http://businesspracticalknowledge.wordpress.com/legal-security/employee-theft/, accessed 15.10.2015

ICAC, 2011, Investigation into corrupt conduct of Sydney Water employees and others. ICAC Report March 2011, Independent Commission Against Corruption (ICAC)

GENERAL EXAMPLES

Over-billing at a national retail chain¹

Location: USA

Over-billing is a method where the individual submits an inflated or altered invoice for payment. The overpayment is then diverted, paid to the employee, or an accomplice. A 61-year-old employee of a national retail chain was indicted for defrauding his employer of more than $2 million. He was an employee for more than 15 years and was responsible for leasing building to house the company’s stores. On 22 leases, he altered the documents, including the forgery of letters to the company for fictitious legal and maintenance services. He also altered the company’s copy of the leases so that the billings for these services would match the leases.

TARGETED EXAMPLES

Fictitious invoices at Sydney Water³

Target group: Utilities, Public institutions

Location: Sydney, Australia

The invoices […], totalling $25,500, which Mr Makucha submitted to Mr Harvey for payment by Sydney Water, were a ruse concocted between Mr Makucha and Mr Harvey so that Mr Makucha could obtain money from Sydney Water for his personal use. To the knowledge of both Mr Harvey and Mr Makucha, the invoices falsely represented that they were for the sale of buildings to Sydney Water.

FULL REFERENCES

1. Greene, C. L., 2013. Focus on Employee Fraud — Purchasing Frauds, http://www.mcgoverngreene.com/archives/archive_articles/Craig_Greene_Archives/Focus-Employee_Frauds-Purch.html, accessed 04.11.2015
2. Murphy, P., no year, Employee Theft, Business Practical Knowledge, http://businesspracticalknowledge.wordpress.com/legal-security/employee-theft/, accessed 15.10.2015
3. ICAC, 2011, Investigation into corrupt conduct of Sydney Water employees and others. ICAC Report March 2011, Independent Commission Against Corruption (ICAC)