Some fraudsters split payments to circumvent approval requirements. In this article, I show you how this type of theft works and what you can do to prevent it.
The maintenance supervisor, Billy, wants to make a fraudulent payment to ABC Hardware for $9,900. (ABC Hardware is owned by his cousin.) So, Billy wants to avoid his company’s review process. He knows that all checks over $5,000 require the physical signature of the finance director. All checks below $5,000 are signed by the computer. What’s a boy to do? Well, Billy can split the transaction–two checks for $4,950 each. That will work.
Billy asks his cousin for two ABC Hardware invoices of $4,950 rather than the one for $9,900. Afterwards, Billy approves each invoice, and the payments are made.
So, Billy tries the scheme again, and it works. Then, he does so repeatedly. His cousin rewards him with free trips to South Dakota, his favorite hunting destination.
No one is querying the check register for payments just below the threshold. Also, bids were not obtained.
Download the check register into Excel (or any database package). Then, sort the payments and look for repeated payments–just below the threshold of $5,000–to the same vendor.
Require bids for significant expenses, and retain the bids as support for the payments.
Learning tip: The hunting trip is referred to as a gratuity rather than a bribe. Why? Bribes are inducement payments made before the purchase decision. Gratuities–free trips in this example–are given after the vendor payments. The purpose of the gratuity is to reward the complicit person (Billy). Then, in the future, Billy knows the drill and expects more of the same.
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Charles Hall is a practicing CPA and Certified Fraud Examiner. For the last thirty years, he has primarily audited governments, nonprofits, and small businesses. He is the author of The Little Book of Local Government Fraud Prevention and Preparation of Financial Statements & Compilation Engagements. He frequently speaks at continuing education events. Charles is the quality control partner for McNair, McLemore, Middlebrooks & Co. where he provides daily audit and accounting assistance to over 65 CPAs. In addition, he consults with other CPA firms, assisting them with auditing and accounting issues.
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