Category Archives for "Fraud"

May 15

Fraudulent Payments Without Being on the Signature Card

By Charles Hall | Asset Misappropriation

Today I show you how bookkeepers can make fraudulent payments without being on the signature card.

Auditors often focus on authorized check signers when considering who can fraudulently disburse funds. But might it be possible to make payments without being on the bank’s signature card? The answer is yes. 

fraudulent payments without being on the signature card

Courtesy of a DollarPhoto.com

Fraudulent Payments without Being on the Signature Card

Here are a few ways to disburse funds without being on a signature card:

  1. Forgery
  2. Unsigned checks
  3. Wire transfer 
  4. Electronic bill pay 
  5. Signing checks with accounting software 
  6. Use of a signature stamp

1. Forgery

Since banks don’t usually inspect checks as they clear, a forged check will normally clear the bank.

2. Unsigned Checks

Again, since banks don’t normally inspect checks as they are processed, an unsigned check can clear the bank. (I saw one just last month.)

3. Wire Transfer

Many times–at the client’s direction–banks wire money with just one person’s approval. One nonprofit administrator stole $6.9 million in less than an hour because of this control weakness. 

I have also seen small-town business bookkeepers drop by a local bank and ask them to wire money. Banks, desiring to help their client, sometimes do.

Businesses should use the controls offered by banks. Otherwise, they might be on the hook for fraudulent wires.

4. Electronic Bill Pay

Anyone with the right passwords can make electronic bill payments to themselves or anyone else.

5. Signing Checks with Accounting Software

This one scares me the most.

Many businesses, in an effort to expedite the disbursement process, have authorized signatures embedded in the payables software, enabling the payables clerk to make a payment to anyone. If the payables clerk has access to check stock (and they usually do), watch out. Even if a second person is normally involved in processing checks with automatic signatures, how easy is it for the clerk to go by in the evenings and make fraudulent payments? This danger increases if the payables clerk also reconciles the bank account. Why? No second person is reviewing the cleared checks.

6. Use of a Signature Stamp

I cringe every time I see a signature stamp. Why not just ask the authorized signer to just sign plenty of blank checks? (Yes, I am being facetious.)

Just last year I worked on a case where the bookkeeper wrote manual checks to herself but entered payments in the general ledger to legitimate vendors for the same amounts. Why? To mask the payments.

Recipe for Disbursement Fraud

Give anyone (1) the ability to sign checks, (2) access to blank check stock, and (3) the ability to make the bookkeeping entry, and you have the recipe for theft–particularly if that same person reconciles the bank statement or if the person reconciling the bank statement does not examine the payee on cleared checks. If you can’t segregate duties (there are too few employees), here’s how to lessen segregation of duties problems in two easy steps

How to Audit Accounts Payable

Click here for detailed information about how to audit accounts payable and expenses.

corporate account takeover
May 02

Corporate Account Takeover (the Importance of Using Bank Security Procedures)

By Charles Hall | Accounting and Auditing , Fraud , Local Governments

Some thieves gain control of company bank accounts using a corporate account takeover scheme. And with that control, they steal money. Below you’ll see how this type of theft occurs.

On March 17, 2010, cyber thieves hacked into the computers of Choice Escrow and stole the login ID and password to their online banking account. With that information, the thieves were able to submit a $440,000 wire transfer from Choice Escrow’s bank account to an account in Cyprus.

Corporate account takeover

Courtesy of istockphoto.com

When Choice Escrow and the bank were unable to resolve their differences, Choice Escrow filed suit. The back-and-forth legal battle lasted until March 18, 2013, when a court ruled the loss was the responsibility of Choice Escrow. A major determining factor in the decision was Choice Escrow’s refusal of the dual control security mechanism offered by Bancorpsouth Bank. According to Article 4A of the Uniform Commercial Code, if an institution offers a reasonable security procedure to a commercial customer and that customer turns down that security procedure, then the customer is liable in the event of a loss.

Bancorpsouth Bank offered dual control to Choice Escrow twice. Not only did the bank offer this security feature to Choice Escrow, but Bancorpsouth also documented the customer’s refusal to use the security feature. The documentation of the customer’s refusal of the security features was a determining factor in this case. From a bank’s perspective, this case underscores the importance of a written agreement with commercial online banking customers and, more importantly, the importance of documenting the security procedures offered to those customers. From a user’s perspective, the case highlights the need to use the security procedures offered.

Corporate Account Takeover

Corporate account takeover is a term which has become more prevalent over recent years. Generally speaking, corporate account takeover occurs when an unauthorized person or entity gains access or control over another entity’s finances or bank accounts. This usually results in the theft of money in the form of fraudulent wire transfers or ACH transactions.

These fraud schemes first began to be noticed in 2005 but have since become much more widespread and frequent. Recent statistics have revealed that the fraudsters carrying out these schemes are actually becoming less successful in getting money out of a bank account. This reduction is due to both increased efforts on the part of the financial institutions, as well as better education of the customer to help them avoid becoming a target.

Usually, the financial institutions themselves are not the targets of the attack but rather the corporate customers of the institution. Using malware, social engineering, and various other methods, the fraudster obtains information about the customer’s online banking credentials. Once the online banking credentials have been obtained, a request for wire or ACH transfers is placed by the thief. Any business may be targeted for these types of attacks, but those at risk mostly are small businesses, governments, and nonprofits who have limited resources to protect against such threats.

receipt fraud test for auditors
Apr 03

Three Powerful Receipt-Fraud Tests (for Auditors)

By Charles Hall | Asset Misappropriation

Today I provide three receipt-fraud tests for auditors. 

The audit standards require that we introduce elements of unpredictability. Additionally, it’s wise to perform fraud tests. But I find that auditors struggle with brainstorming (required by AU-C 240, Consideration of Fraud in a Financial Statement Audit) and developing fraud tests. That’s why I wrote Five Disbursement Fraud TestsIt’s also why I am providing this post.

So, let’s jump in. Here are three receipt-fraud tests.

receipt-fraud tests for auditors

Three Receipt-Fraud Tests

1. Test adjustments made to receivables

Why test?

Receipt clerks sometimes steal collected monies and write off (or write down) the related receivable. Why does the clerk adjust the receivable? So the customer doesn’t receive a second bill for the funds stolen. 

How to test?

Obtain a download of receivable adjustments for a period (e.g., two weeks) and see if they were duly authorized. Review the activity with someone outside the receivables area (e.g., CFO) who is familiar with procedures but who has no access to cash collections.

If there are multiple persons with the ability to adjust receivable accounts (quite common in hospitals), compare weekly or monthly adjustments made by each employee.

Agree receipts with bank deposits.

2. Confirm rebate (or similar type) checks

Why test?

When rebate checks are not sent to a central location (e.g., receipting department), the risk of theft increases. Rebate checks are often not recorded as a receivable, so the company may not be aware of the amounts to be received. Stealing unaccrued receivable checks is easy.

How to test?

Determine which vendors provide rebate checks (or similar non-sales payments). Send confirmations to the vendors and compare the confirmed amounts with activity in the general ledger.

Theft of rebate checks is more common in larger organizations (e.g., hospitals) where checks are sometimes received by various executives. The executive receives a check in the mail and keeps it for a while (in his desk drawer – in case someone asks for it). Once he sees that no one is paying attention, he steals and converts the check to cash.

3. Search for off-the-book thefts of receipts

Why test?

The fraudster may bill for services through the company accounting system or an alternative set of accounting records and personally collect the payments.

How to test?

Compare revenues with prior years and investigate significant variances. Alternatively, start with source documents and walk a sample of transactions to revenue recognition, billing, and collection.

Here are a few examples of actual off-the-book thefts:

Police Chief Steals Cash

An auditor detected a decrease in police-fine revenue in a small city while performing audit planning analytics. Upon digging deeper, he discovered the police chief had two receipt books, one for checks that were appropriately deposited and a second for cash going into his pocket. Sometimes, even Andy Griffith steals.

Hospital CFO Steals Cash

hospital CFO, while performing reorganization procedures, set up a new bank account specifically for deposit of electronic Medicaid remittances. He established himself as the authorized bank account check-signer.

The CFO never set up the bank account in the general ledger. As the Medicaid money was electronically deposited, the CFO transferred the funds to himself.  What was the money used for? A beautiful home on Mobile Bay, new cars, and gambling trips.

Another Receipt Fraud to Consider

Sometimes it’s not the front-desk receipt clerk that steals. Surprisingly, your receipt supervisor can be on the take. So, consider that receipt theft takes place up-front and in the back-office.

governmental internal controls
Apr 02

Useful Governmental Internal Controls that You Need Know

By Charles Hall | Fraud , Local Governments

Below I provide useful governmental internal controls that you need to know.

Why am I providing this list of useful controls? Most small governments struggle with establishing sound internal controls. So, the list provides a foundation for preventing theft in your government. While not a comprehensive list, I thought I would share it.

Many of the internal controls listed below are also pertinent to nonprofits and small businesses as well. You will find this same checklist in The Little Book of Local Government Fraud Prevention (available on Amazon) which provides many more fraud prevention ideas.

I am providing general fraud prevention controls and then transaction-level controls for:

  • Cash receipts and billing
  • Cash payments and purchasing
  • Payroll

governmental internal controls

Useful Governmental Internal Controls

General Internal Controls

  1. Have bank statements mailed directly to someone outside of accounting; recipient should peruse bank statement activity before providing it to accounting
  2. Perform surprise audits (use outside CPA if possible)
  3. Elected officials and management should review the monthly budget to actual reports (and other pertinent financial reports)
  4. Map internal control processes by transaction cycle (preferably done by a seasoned CPA); once complete, provide the map to all employees involved in the cycle; when control weaknesses exist, institute additional controls (see 11. below)
  5. Use a whistleblower program (preferably use an outside whistleblower company)
  6. Reconcile bank statements monthly (have a second person review and initial the reconciliation)
  7. Purchase fidelity bond coverage (based on risk exposure)
  8. Periodically request from the government’s bank a list of all bank accounts in the name of the government or with the government’s federal tax I.D. number; compare the list to bank accounts set up in the general ledger
  9. Secure computer access physically (e.g., locked doors) and electronically (e.g., passwords)
  10. Do not allow the electronic transmission (e.g., email) of sensitive data (e.g., social security numbers) without the use of protected transmission technology (e.g. Sharefile); create policy and train staff
  11. Where possible, segregate who (1) authorizes transactions, (2) records transactions, (3) reconciles records, and (4) has custody of assets; when segregation of duties is not possible, require documented second-person review and/or surprise audits

Transaction Level Controls

Cash Receipts and Billing Controls

  1. Use a centralized receipting location (when possible)
  2. Assign each cash drawer to a separate person; require daily reconciliation to receipts; require second person review
  3. Deposit cash timely (preferably daily); require the composition of cash and checks to be listed on each deposit ticket (to help prevent check-for-cash substitution)
  4. Immediately issue a receipt for each payment received; a duplicate of the receipt or electronic record of the receipt is to be retained by the government
  5. A supervisor should review receipting-personnel adjustments made to accounts receivable
  6. Do not allow the cashing of personal checks (e.g., from cash drawers)

Cash Payments and Purchasing Controls

  1. Guard all check stock (as though it were cash)
  2. Do not allow hand-drawn checks; only issue checks through the computerized system; if hand-drawn checks are issued, have a second person create and post the related journal entry
  3. Do not allow the signing of blank checks
  4. Limit check signing authorization to as few people as possible
  5. Require two employees to effectuate each wire transfer
  6. Persons who authorize wire transfers should not make related accounting entries
  7. Require a documented bidding process for larger purchases (and sealed bids for significant purchases or contracts); specify procedures for evaluating and awarding contracts.
  8. Limit the number of credit cards and the chargeable maximum amount on each card
  9. Allow only one person to use an individual credit card; require receipts for all purchases
  10. Require a street address and social security or tax I.D. numbers for each vendor added to accounts payable vendor list (P.O. box numbers without a street address should not be accepted)
  11. Signed vendor checks should not be returned to those who authorized the payment; mail checks directly to vendors
  12. Compare payroll addresses with vendor addresses for potential fictitious vendors (usually done with electronic audit tools such as IDEA or ACL)

Payroll Controls

  1. Provide a departmental overtime budget/expense report to governing body or relevant committee
  2. Use direct deposit for payroll checks
  3. Payroll rates keyed into the payroll system must be supported by proper authorization in the employee personnel file
  4. Immediately remove terminated employees from the payroll system
  5. Use biometric time clocks to eliminate buddy-punching
  6. Check for duplicate direct-deposit bank account numbers
  7. A department head should provide written authorization for overtime prior to payment

Your Recommendations

What additional controls do you recommend? Share your thoughts below.

College aid theft
Feb 05

College Aid Official Funnels Student Funds of $4.1 Million to Herself

By Charles Hall | Asset Misappropriation

Theft from colleges happens more than we think. After all, aren’t these guardians tasked with looking after our children? Even in places where we expect unselfishness, sometimes there’s a bad apple. Today, we review a fraud involving a college aid official. 

The Theft

When I was a student at the University of Georgia, I needed every dollar I could find. I ate my share of cheap hamburgers and peanut butter sandwiches. In the summers, I scouted peanuts and cotton to make ends meet. So when I see a college aid official stealing student money, I wince.

theft from colleges

Picture is courtesy of AdobeStock.com

A New York college aid administrator used a simple scheme to steal $4.1 million of student aid funds. How? She made out financial aid checks to nonexistent students and then endorsed them over to the name of an alias. The administrator set up a bank account in the name of the alias and deposited the checks into the bank account, allowing her to convert the checks to cash.

How long did the theft go on? Over ten years. The fraudster stole most of the money in the last two years of the scheme. As is often the case, the thief became bolder over time. 

How many fraudulent checks did she issue? Over 1,000, each to a different student.

How was the fraudster caught? A change in the accounting system required cross-referencing of financial records.

The Weakness

No one was comparing the checks written to student admission files. Legitimate students have admission and other information that can be used to verify the students’ existence.

The Fix

A person other than the financial aid administrator should compare the student name on the check to student files to verify the existence of the student. If this control can’t be performed for each disbursement, it should be performed on a sample basis, and the persons creating and signing the checks should know their work is being monitored.

This test could be performed by someone in the financial aid office or by an external professional such as a CPA or a Certified Fraud Examiner.

The college can request from the bank the endorsement side of the cleared checks. If the back side of the checks are obtained, then the endorsements can be examined for appropriateness.

Banks Not Providing Cleared Checks

In an effort to save money, some banks don’t provide cleared checks to their clients. And very few banks (if any) provide the copies of the back side of checks. From a fraud prevention perspective, this is not good. Why? Because checks and endorsements can’t be inspected for potentially fraudulent activity. At least periodically, request some endorsements and test those on a sample basis. (The bank may require you to pay for these copies.) Additionally, as I said in another post, someone should be comparing cleared check payees to the general ledger–if not for every check, then at least on a sample basis.

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