Last week, we embarked on a journey through the shadowy world of fraud, uncovering the many ways deceit can infiltrate a business. From fake vendors to ghost employees, we explored how fraudulent activities can damage the financial integrity and trust that every organization relies on. But the conversation doesn’t stop there.
In this follow-up, we’ll dive even deeper into the darker corners of business fraud. We’ll uncover additional schemes that can go unnoticed in the day-to-day operations of a company and explore advanced strategies for detecting and preventing these threats. With new real-life examples and expert insights, this blog will arm you with the tools needed to safeguard your business against ever-evolving fraudulent tactics.
Bogus Refunds
Fraud Example: Processing fake refunds and diverting the funds to personal accounts can be a way to steal money under the guise of customer service.
Case Study: In May 2023, an Amazon warehouse worker in Chattanooga, Tennessee, named Noah Page, was implicated in a refund fraud scheme where he falsely marked items as returned, earning $3,500. This incident was part of a larger operation by a group called Rekk, which targets retailers by exploiting lenient return policies. Amazon filed a lawsuit against Page and 47 others involved, accusing them of stealing millions. Refund fraud, which includes practices like "wardrobing" and returning stolen goods, cost retailers over $101 billion last year. Amazon also reported losing over $700,000 to another fraud ring, underscoring the widespread impact of such schemes. Read more here.
Internal Control: Require manager approval for all refunds and conduct regular audits of refund transactions to ensure legitimacy.
Skimming/Unrecorded Sales
Fraud Example: Stealing a portion of the cash received before it is recorded in QuickBooks, or failing to record cash sales and pocketing the money. Both will lead to revenue discrepancies.
Case Study: Studio 54, the iconic nightclub in New York City, was shut down in 1980 after its owners, Ian Schrager, and Steve Rubell, received prison sentences for tax evasion. The IRS was tipped off by a disgruntled employee who revealed the club's extensive skimming operation, where as much as 80% of revenue was siphoned off, amounting to $2.5 to $3 million. This excessive skimming was part of a broader trend at the time, as many nightclubs exploited the prevalence of cash transactions. Despite their legal troubles, Schrager and Rubell sold Studio 54 while in prison and later ventured into the hotel business after their release. Read more here.
*This case was interesting as it was the owners committing fraud and also looking to evade taxes.
Internal Control: Implement strict cash handling procedures, including daily reconciliations and surprise cash counts. Setting policies that invoices are issued for transactions first, no matter the payment type decided upon.
Check Tampering/Check Washing
Fraud Example: Altering checks after they've been signed or creating unauthorized checks can result in unauthorized disbursements.
Case Study: Lindsay Aleman experienced check fraud after mailing a check for $490 to the Delaware Division of Revenue. The check was intercepted and altered, resulting in $7,000 being stolen from her account. The check's details, including Aleman's personal information, were changed, and a fraudulent account number was added. Read more here.
Internal Control: Use positive pay services with banks to verify checks before they are cleared. Store checks securely and require multiple signatures for high-value disbursements.
Inventory Theft
Fraud Example: Stealing inventory and covering up the loss by adjusting inventory records in QuickBooks can lead to stock discrepancies.
Illustration: A warehouse manager, after 12 years of employment, began stealing inventory from his distribution center to support a lifestyle beyond his means. Using his access to keys and alarm codes, he removed pallets of products after hours. To conceal the theft, he manipulated inventory records by falsely reporting inbound shipment shortages and inflating damaged inventory figures. The scheme went undetected for over a year until an anonymous tip led to an undercover investigation. The investigator observed the manager entering false data and reporting false shortages. Surveillance caught him and an accomplice loading inventory into a rented truck. Confronted with evidence, the manager confessed to grand larceny, and the company was able to claim insurance reimbursement for the losses.
Internal Control: Conduct regular physical inventory counts and reconcile them with inventory records. Use surveillance and access controls in storage areas.
Fake Expenses
Fraud Example: Submitting false expense reports and getting reimbursed for nonexistent expenses can lead to financial losses.
Illustration: Some employees have been known to create false receipts for luxury dinners or travel expenses that never took place, using software or apps to generate these fake documents. Such fraudulent activities can go undetected for extended periods, especially in organizations with weak expense-tracking systems. To prevent this, companies are advised to implement strict expense verification processes, conduct regular audits, and utilize automated expense management systems to ensure all claims are legitimate and accurate
Internal Control: Implement a detailed expense reporting system that requires original receipts and explanations for all claimed expenses. The Level Copilot offers helpful notifications in you QuickBooks Online subscription such as: "Transactions Missing Vendor/Customer Information" and "Missing Bill Numbers" might catch some instances of this or "New Vendors Added" alert helps detect sudden appearances of new vendors.
Account Reconciliation Fraud
Fraud Example: Manipulating bank reconciliations to hide theft or discrepancies can lead to undetected financial losses.
Case Study: A real-life example of this type of fraud is detailed in an investigation where a company's CFO discovered that they had far more bank accounts than initially reported. During this investigation, it was revealed that fraudulent activities, such as check tampering, were taking place. Originally reporting on 13 bank accounts, after an investigation was done it was found that there were 51 total accounts. The unreported accounts hadn’t been reconciled in over 5 years. The employees responsible for reconciling the bank accounts were intercepting, forging, or altering checks to siphon funds. These fraudulent checks were not recorded in the company's books, allowing the perpetrators to manipulate the reconciliation process and conceal their actions. This type of fraud is particularly prevalent in environments with weak internal controls and a lack of oversight, where trust in employees' work goes unchecked. Read more here.
Internal Control: Require independent reconciliation of bank accounts by someone not involved in transaction processing. The Level Copilot also offers the "Transactions Posted to a Closed Bookkeeping Period" which might catch some attempts at this.
Loan Fraud
Fraud Example: Taking out loans in the company's name and diverting the funds for personal use can lead to significant financial liabilities.
Case Study: A former manager of Canadian Western Bank, Debra Anne Chapin, was sentenced to three years and nine months in prison for defrauding the bank of nearly $2 million. She used the embezzled funds to pay personal bills, buy trucks, gamble, and purchase cocaine. Judge Ken MacLeod also ordered her to pay $1,750,000 in restitution. The fraud, which involved about 72 transactions between June 2006 and June 2008, was facilitated by Chapin's trusted position at the bank .Initially, she set up one account in a woman’s name, without her knowledge or consent, and arranged for a line of credit which was secured by the woman’s $8 million GIC (guaranteed investment certificate). The line of credit began at $100,000 and increased six times until it reached $950,000 by Nov. 6, 2007. Read more here.
Internal Control: Require board approval for all loans and maintain strict documentation and monitoring of loan agreements.
Forged Signatures
Fraud Example: Forging signatures on checks or documents to authorize unauthorized transactions can lead to unauthorized disbursements, or in this case, house theft?!
Case Study: Ron Henne, an 83-year-old retired maintenance engineer, discovered that his childhood home in North Portland was fraudulently sold without his knowledge. A neighbor noticed suspicious activity when a locksmith and a strange man attempted to change the locks on Henne's house. Upon investigation, it was revealed that a man named Silvestre Garcia had forged documents to claim ownership of the property, registering a deed with the county for a fraction of the home's market value. This fraudulent act exposed vulnerabilities in the property recording system, as the forged signatures of both Henne and a notary public were used to facilitate the scam. Read more here
Internal Control: Use digital signatures and verification processes to ensure authenticity and require multiple approvals for significant transactions.
In conclusion…
Fraud is a pervasive threat that can impact businesses of all sizes, eroding trust, finances, and reputations. As we've explored in this blog, the variety of fraudulent schemes is vast, from fake vendors and ghost employees to unauthorized access and check tampering. Each case study highlights how seemingly small vulnerabilities can lead to significant financial losses.
The key takeaway is that vigilance and robust internal controls are your best defenses against fraud. By implementing strict verification processes, conducting regular audits, and fostering a culture of transparency and accountability, businesses can protect themselves from the bitter brew of deceit. Whether it's scrutinizing expense reports, verifying vendor legitimacy, or securing access to financial systems, proactive measures are essential.
Comments