Receivable Savvy hosted a webinar in February featuring Chris Doxey, CAPP, CCSA, CICA, CPC. The purpose of the webinar was to help participants gain understanding on how to detect and prevent Accounts Receivable fraud in their organizations. Following is the first in a series of excerpts from that webinar.
The primary types of Accounts Receivable Fraud
There are basically two types of fraud schemes. Unfortunately, any financial process, or any financial transaction process, is vulnerable to a fraud scheme. It’s an easy account, a big ledger or lots of sub-ledgers, and a lot of transactions. Fraudsters inside a company know how to bury some fraudulent activities within a lot of activity, and sometimes the insiders, or the employees, may think that this is an easy account to manipulate – particularly in a way of a cash transaction. So they look at whether we can bury a fictitious sales entry or whether we can bury a false profit at the end of the year – particularly if you don’t make some cutoff dates. The fraudster knows that the internal controls system is poor within a company. They know that controls aren’t being checked and we’ll give you some examples of what these controls actually look like.
So for accounts receivable fraud, the first type is a fraud committed by employees. These are the insiders that know where the skeletons are buried, that the transactions are numerous, where the weaknesses are in the internal control systems and they take advantage of that. So these are situations where they hide transactions and they take advantage of it. We have some examples of this and some case studies of these specific situations. The second type of fraud scheme involves companies that willingly cook the books. These are presented in our case studies as well.
Fraud by companies and employees go hand in hand, but if you look at some of the statistics by the Association of Certified Fraud Examiners, many fraud instances and fraudsters are actually perpetrated by insiders, and some of these fraud schemes can actually average a cost of about $145,000 and take place upwards of five to ten years. If you’re looking at your average fraudster, it’s going to be an insider. So these are the two types of AR fraud happening within companies today, company fraud as well as employee fraud.
Identifying the types of fraud committed by employees
Lapping is the most common type of fraud committed by employees who actually handle cash and record a cash or check receipt at the same time. They could enjoy good relationships with customers and are entrusted with receiving cash in the cash application process. This could occur within a small company, a medical office, and maybe where a customer is paying on installment.
What the employee is actually doing is diverting funds; fictitious refunds or early payment discounts can be created by an employee who handles the task of receiving cash and recording the payment. Lapping and diverting funds – the two go hand in hand.
Because of what can happen with lapping and diversion of funds, you really have to have segregation of duties. If you can’t have segregation of duties, particularly in smaller companies, the best thing to do is to have a really good compensating control. That’s making sure somebody’s watching checks coming in, and making sure that that the checks are properly accounted for.
Another type of fraud is skimming. This is when the funds are basically not recorded and are taken before they’re recorded in a retailer’s books. Larceny occurs when the employee actually steals the funds after they have already been received and recorded. There’s actually proof that the funds were received and the employee steals after the fact such as deposit theft.
Other examples of employee fraud include stealing statements – where the employee steals an incoming check that is meant to be applied to an open accounts receivable, and overstatement of prices – where there is a difference between the actual amounts collected and the amounts recorded.
You can listen to the entire webinar here.