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CHAPTER EIGHT. Billing Schemes

RILLING SCHEMES ARE PERPETRATED on the business through the accounts payable department. Businesses incur liabilities through the normal course of business that must be settled within a certain time period. Almost all expenditures made by the company are processed by accounts payable. The majority of the payments would be for trade payable and expense payable accounts. Trade payables are for the purchases of goods that are normally recorded as inventory and as part of the cost of goods sold. Expenses payable are those spent for purchases of goods or services that are normally expensed. Travel and entertainment expenses are also typically handled by accounts payable.

Payments flow through the system in the same manner, whether they are legitimate or fraudulent. Since so many transactions go through accounts payable and are the largest outlay for most organizations, you need to be vigilant to detect bogus payments. Not only is fraud of concern, but errors and inefficient payment processing are also issues, and all are costly to organizations just the same. Errors may be duplicate payments made or unnecessary charges paid for. Inefficient processing may include unnecessary payments for late payment interest or fees, discounts for earlier payment not taken, or individual payments of multiple invoices to the same provider during the same period.

There are a number of ways to run a billing scheme. The costliest to the organization are those where the corrupt employee forms a company for the purpose of receiving illegitimate payments. The company is formed so that the transaction flows are the same as a legitimate business, but the company has not provided goods or services invoiced to the targeted business. Normally the fraudulent invoices would be for services, as services eliminate involving the receiving department for goods. Where the billing of goods is involved, collusion from the receiving department or warehouse is needed to verify the receipt of fictitious shipments. However, there would be an inventory issue that needs to be covered by means of falsifying inventory counts or by setting up a method of writing the goods off. For goods, the intermediary scheme is simpler and less risky to implement. The corrupt purchasing employee, rather than purchasing directly from the vendor, would have his own intermediary company make the purchase and resell it to the employer at inflated prices.

A company is formed; a bank account is set up; and sometimes a post office box is used to receive the payments. When a false invoice is submitted to the organization, the corrupt employee, if in the right position, would authorize the payment of the invoice. If the employee cannot authorize the payment, then he or she may bring it to someone who is overly trusting to sign the authorization. Alternatively, the corrupt employee could just forge an authorization signature. Once the first payment goes through the accounts payable system, subsequent payments are simpler. The vendor by then is already added to the vendor master file as a supplier. Where there are strong controls over adding new vendors to the master file, the fraudster can form a company with the name similar to that of an existing vendor. An inactive vendor still on the vendor master file would be preferred so that only the address where the payment is to be sent needs to be changed.

Where there are strong controls over the automated flow of payments, there may be weak controls over manual payments. The corrupt employee will cause some deliberate error in the payment process so that the process is disrupted and manual intervention is necessary. This allows an opportunity for the employee to take control of the payment process to their benefit.

There are also overpayments, duplicate payments, and paying the wrong vendor schemes. These schemes involve making deliberate errors and paying legitimate vendors excess funds. The corrupt employee calls and asks those vendors to return the check or the excessive payment back directly to them for conversion to their own account.

Schemes that have the organization purchase goods benefiting the corrupt employee may be personal items paid for by the organization or supplies used for the corrupt employee's side business or for resale. These are not goods that the organization requires in their regular business operations so it is not classified as theft. The corrupt employee caused the organization to pay for items not needed so it is considered a billing scheme. If the employee cannot authorize the purchases, then the fraudster has to take additional steps, such as getting a supervisor to sign a purchase requisition so a purchase order can be sent to the vendor. Signatures can be forged and purchase orders can be inserted into the purchasing cycle depending on the corrupt employee's position in the organization.

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