In 2013 the American Institute of Certified Public Accountants’ (AICPA) Forensic & Litigation Services Fraud Task Force released a reference guide that can help business owners and their advisors detect and prevent some of the most common forms of fraud.
Specifically, the guide focuses on the most common asset misappropriation schemes that are perpetrated within a company. Below, we list these schemes and provide a brief description of each.
Authorized Check Maker
This type of scheme involves an individual who is authorized to make and sign checks for the company. This perpetrator will make a company check payable to him or herself or use the check to pay for a personal expense. The perpetrator then typically changes the payee’s name in the company’s accounting records to make it seem as if the check was written to an authorized vendor.
Forged Maker
A person entrusted with access to their employer’s bank accounts embezzles funds by forging the signature of an individual authorized to sign checks. These forgeries are generally done by free-hand, stamp, computer signature generator, or photocopier. Subsequently, the perpetrator will craft a mechanism to conceal the payment.
Altered Check
An individual can commit an altered check scheme by intercepting a signed company check and altering the original payee name or the check amount using items such as correction fluid, “check washing” solution, or a pen eraser. The scheme is typically perpetrated by an employee who receives bank statements and performs bank reconciliations.
Billing
This scheme involves an employee who submits fraudulent invoices to the company and then issues payment. Most commonly, the perpetrator will create a shell company from which it sends fictitious invoices, or the perpetrator will either inflate or double-pay an invoice from a legitimate vendor.
Cash Larceny
A perpetrator of a cash larceny scheme takes possession of cash after it has been entered into the company’s financial records. This often occurs when cash is being transported to a bank for deposit. The perpetrator may steal cash prior to the deposit and replace the stolen amount with a check to offset the difference and avoid changing the total deposit. The perpetrator may also steal checks and deposit them into a personal account.
Non-Cash Misappropriation
Rather than stealing cash, some perpetrators take possession of a company’s inventory or other physical assets. If a perpetrator steals inventory, a physical inventory count would reveal lower levels than those reflected in the company’s perpetual inventory records, a concept often referred to as “shrinkage.”
Payroll
Companies will sometimes discover that an employee has submitted false documents or manipulated the payroll system to create unauthorized payroll disbursements. An employee can commit such a scheme by overstating hours worked, improperly increasing an employee’s hourly wage, altering data used to calculate performance-based incentives, generating paychecks to non-existent employees, or stealing checks payable to terminated employees.
Skimming
Skimming occurs when the perpetrator steals cash receipts before the transaction is recorded in a company’s financial records. Perpetrators of skimming schemes often commit their crimes by taking possession of cash receipts at a point of sale or by stealing and altering checks from customers on account.
Expense Reimbursement
Some employees get reimbursed for business expenses by their employers. Often, a dishonest employee will submit false receipts or purposely overstate expenses to receive extra reimbursements.
Cash Register Disbursement
Fraud often occurs at the point of sale when a dishonest employee processes a false return or voids a sale that was previously recorded and steals cash paid in the transaction. Alternatively, a salesperson may purposely skip entering a sale into the company’s point of sale system when a cash payment is made and instead pocket the proceeds.
Preventing Asset Misappropriation Schemes
Understanding the various asset misappropriation schemes is one of the first steps in eliminating fraud within an organization. In order to successfully prevent fraud, companies must have internal processes and controls in place to help them detect and deter such activity. Owners can start implementing such a framework by identifying weaknesses in their company’s infrastructure that make them susceptible to fraud. The AICPA and the Association of Certified Fraud Examiners both recommend that business owners perform self assessments using AICPA’s Fraud Risk Self-Assessment Tool.
This document is for informational use only and may be outdated and/or no longer applicable. Nothing in this publication is intended to constitute legal, tax, or investment advice. There is no guarantee that any claims made will come to pass. The information contained herein has been obtained from sources believed to be reliable, but Mariner Capital Advisors does not warrant the accuracy of the information. Consult a financial, tax or legal professional for specific information related to your own situation.
