Killing billing fraud schemes

Killing billing fraud schemes
Employee billing fraud can take a big bite out of a company’s profits.  Motivated by the potential for big rewards, thieves have come up with a variety of billing fraud schemes. But businesses and their legal advisors can help prevent large losses and possibly enhance their chances of a successful prosecution if they know the signs of this type of fraud. Here’s how fraud experts uncover them.
Pass-through schemes
With pass-through schemes, employees, such as purchasing agents or other individuals authorized to approve invoices, form a shell company to purchase goods for the employer. They then mark up the price on the goods and re-sell them to the employer.
This type of fraud can be uncovered by comparing purchase expenses from previous periods with the current period. Significant price increases without a reasonable explanation (such as market shortages) could suggest billing fraud and, thus, merit further investigation.
Shell companies
Here, employees create a fake entity to bill the employer for goods and services the employer doesn’t actually receive. Typically, perpetrators obtain a fictitious name certificate from a local government or invent a name similar to that of a pre-existing vendor and then open a business account at a bank in that name. Next, thieves submit phony invoices from their shell company to their employer. As with pass-through schemes, this type usually requires the involvement of an employee who can approve invoices and add accounts to the company’s master list of approved vendors.
Fortunately, shell company fraud leaves a paper trail, though locating the phony documents may require some digging. Fraud experts generally begin by scrutinizing line-item costs over a multiyear period for unusual trends or items. In particular, they pay close attention to billings for expenses that are difficult to quantify (and, therefore, validate), such as consulting, contracted employees and advertising.
Personal purchases
Employees may improperly charge merchandise to their employers and either put the goods to personal use or return them for a cash refund. They could, for example:

  • Use their position to approve invoices for personal purchases,
  • Forge approval on purchase requisitions,
  • Alter purchase orders to increase the amounts delivered and then siphon the extras, or
  • Abuse company credit cards.

In the last case, a billing scammer might make purchases online using company credit cards and request that the goods be delivered to a different address.
Experts gather evidence of this type of scheme by comparing shipping reports with amounts recorded as received. They also review invoices for anything unusual (such as an invoice to a manufacturing company from a seller of electronic goods) and delivery addresses other than the employer’s.
Pay-and-return schemes
Dishonest employees might cause an overpayment to an actual vendor and, when the vendor returns the overpayment, pocket the refund. For example, an accounting department employee could process a legitimate invoice twice by making a copy of the original. He or she processes and approves the original and repeats the actions days later for the copy. The employer pays both invoices and, when the vendor sends a refund check, the employee nabs the check and forges the employer’s endorsement.
In another version of this scheme, a fraudster might use a shell company with a name similar to that of the employer and replace the employer’s Form 8109 coupon with the shell company’s taxpayer identification number. Payroll tax refunds, therefore, are sent directly to the employee.
A fraud expert will look for duplicate invoices that may not be apparent to untrained eyes. Experts can also help companies establish internal controls that will catch multiple invoices before they’re paid. Anonymous tiplines could prove worthwhile, as well, because co-workers often are the first to witness or suspect billing fraud.
Billing scheme red flags
Even before they call in financial experts, owners need to be on the lookout for warning signs. Items that should raise suspicion, if not actual alarm, include:

  • Invoices for vague consulting or similar services, or a significant increase in consulting expenses,
  • Vendors with names that include initials, which may be a fraud perpetrator’s,
  • Unknown vendors,
  • Vendors that bill more often than once a month,
  • Vendor addresses that correspond with employee addresses, and
  • Vendors that use a post office box for invoice payments.

Invoice amounts that consistently come in just below a threshold that would normally trigger the owner’s review or an additional manager’s approval further merit attention.
Stop the cash drain
As soon as reasonable suspicions arise, you and your client should consult a fraud expert. The earlier you enlist the help of a forensic accountant, the more likely this expert will be able to uncover evidence, identify the perpetrator and prevent further, possibly significant, losses.