Question

In Casino Las Vegas, the accounts payable clerk Mr. Alexi Lalas discovered a flaw in the accounting system (accounting software used for general ledger), the accounts payable clerk discovered that he was able to change the names, address and phone numbers of the Casino’s vendors in the computer system to his name or to any other name, there were no evident access controls to the suppliers ( vendors) master file. He would create false invoices and then create a check for the same false invoice. The name on the check would be changed to the name of the employee or any other beneficiary not related to the transaction. After the check was printed, the name in the system could then be changed back to the appropriate vendor. The check register (listing that usually shows listing of checks by date, name and amount) is used by other employees in other departments for many reasons. The fraudulent employee had authorization to sign checks under $1,000. By writing small checks over a period of time, he was able to defraud the company for more than $100,000 over the years of his employment. This fraud was caught by accident. An employee of another department was looking through the vendor list and the check register on her computer after the fraudulent employee had changed the vendor name to his name. A few entries later, the vendor name changed again to the true name of the vendor. She wondered how this could occur and asked her supervisor for an explanation. Soon after, the company’s management hired an independent fraud investigator, after further investigation and inquiries, the fraudulent employee was caught and an admission was received to proceed with the next stage. Check Register Image Inspect the check register and list your notifications with your professional findings and analysis What kind of fraud being committed in this case?, explain how such scheme is possible How could this fraud have been prevented? What actions should be taken against the fraudster(s) and why?

Answer 1

Fake invoicing:False invoices have been used for many years by employees to misappropriate funds from their employers;

Employees use false invoices to defraud their employers by either:

• Creating an invoice for supposedly legitimate products or services that have never been delivered or carried out, then creating an invoice and submitting it for payment. The employee may work alone or they may work in collusion with a third party. Sometimes the latter occurs in what is known as a “pass-through” fraud - where an employee inserts their own intermediary company between a supplier of legitimate services and their employer. Payments are made for services but the employee’s intermediary company skims a percentage of the transactions.
• Re-submitting a legitimate vendor’s invoice for payment but using a bank account under the employee’s control. To carry out this fraud, the employee usually has to gain access to the employer’s accounting software whereby they are able to change the vendor’s bank account to one under the employee’s control to receive the payment. To avoid detection the employee will then change the bank account number back to the vendor’s once the payment has been made and then pay the legitimate invoice again to the real supplier’s bank account.

• Creating bogus suppliers, with payment being made to the fraudster’s bank account

• Creating bogus purchase orders of a bona fide supplier and substituting the supplier’s bank account details with fraudster’s bank account details.

  PREVENTION: The best method for an employer to protect themselves against an employee submitting a false invoice for their own financial benefit is to ensure that adequate controls are in place.

  Adequate controls, such as requiring a second person to authorise all changes to a vendor’s bank account, requiring adequate supporting documentation for all invoices, or reviewing invoices and making further enquiries if ‘red flags’ are present, will make it harder for the employee to submit false invoices or to alter the vendor’s bank account information. Having adequate controls in place will make it harder for an employee to commit false invoicing frauds against their employees. However, in the same way that you can only deter (and not completely stop) would-be burglars by having prevention mechanisms in place (such as an alarm system), an employee intent on committing fraud may will still find a way in despite having adequate controls in place.