William C. Smitheman Jr. CPA, CFE, Baratz & Associates, P.A.
| September 12, 2022
It is inevitable that businesses will experience some sort of employee theft or fraud. Employee fraud is very costly, and according to the Association of Certified Fraud Examiners’ (ACFE) Occupational Fraud 2022 report, businesses lose an estimated 5 percent of revenue due to employee-related fraud. The most common type of fraud is asset misappropriation, which was a staggering 86 percent of fraud cases. The report also found that 42 percent of those who committed fraud were living beyond their means, and 26 percent were having financial difficulties.
The fraud triangle is an important concept to understand. Fraud generally happens when these three things are present: pressure, opportunity and rationalization. Situations where employees are living beyond their means create pressure, inadequate internal control creates opportunity and employees believing they are owed compensation creates rationalization.
Here are five common types of employee schemes and what accountants can initiate or tell their clients to be aware of to uncover the fraud:
- Expense reimbursement. Some of the most common types of fraudulent expenses are reimbursement for fuel purchases, airfares and meals and entertainment.
- Review the date and time of the expense on the receipt. Was the expense made on a holiday, late at night or on a weekend that does not correlate with the employee’s duties? Look at the location of the purchase and confirm whether the location correlates with a company activity.
- Payroll. There are typically two ways that an employee can perpetuate payroll fraud:
- Setting up ghost employees. These employees do not exist but are paid like regular employees with their payroll being diverted to the perpetrator’s account.
- To detect a ghost employee, look for duplicate mailing addresses or bank accounts. Review W4 forms and benefit election forms. The absence of withholding elections or benefit elections is an indication a ghost employee may exist.
- Falsified wages, increased salary or excessive overtime.
- Compare employee overtime and look for outliers. Are there any employees who are working many more overtime hours than their peers? Review employees’ pay rates versus their peers: Are there any outliers?
- Billing. There are typically two methods of perpetrating billing fraud:
- The fraudster creates a purchase order and payment is diverted for personal use.
- Examine the quality of the invoice, the invoice numbers and pricing. Many times, fraudulent invoices are created using online templates. Invoices may be unnumbered or invoice numbers will be sequential, similar or close together.
- The fraudster creates a false vendor account and pays fraudulent invoices from this fictitious vendor. This type of fraud is more difficult to detect since to commit this type of fraud, the fraudster has a higher level of authority.
- Test a few new vendors each year and scrutinize those at a higher level. Review the addresses of the vendors and compare that to the file of employee addresses; look for duplicate mailing addresses or bank accounts.
- Skimming sales. Skimming of sales typically occurs at point-of-sale businesses where an employee checks out a customer and pockets the cash received.
- Test the register logs for a high volume of no-sale or voided transactions and compare the time they are occurring to the employee shifts for evidence they are happening more often by one or a few employees.
- Receivables skimming. Accounts receivables skimming is typically conducted by an employee who has access to the payments received and the recording function. In this scheme, the fraudster will steal the payment received and attempt to conceal this by either lapping or journal entry. Lapping will cover up the theft of customer A’s payment by using customer B’s payment, then customer C covers customer B, and so on.
- Match the payments received with the customer the payment is credited to and the date the payment is posted. Match the customer check with the customer on the invoice. A discrepancy between the invoiced customer and the paying customer, or significant discrepancies between deposit date and posting date, could indicate a lapping concealment of a receivable fraud.
No auditing procedure can guarantee success in uncovering fraud but having preventative measures in place can provide the right environment for detecting these common forms of employee fraud.