Question

How do you detect billing scheme fraud

Answer 1

A billing scheme is a fraud aimed at the payments system of a business. Its main purpose is to manipulate that system and cause the business to make a fraudulent payment to the employee. Though it is a payment to an employee, the business still records it as a legitimate business expense in its records. The employee will normally have some sort of influence on a false bill being approved for payment. Since the payment is recorded as a legitimate business expense, it is effectively hidden in the business’s records.

Types of Billing Schemes
Shell company schemes – a fake entity is established by a dishonest employee to bill a company for goods or services it does not receive. The employee converts the payment to his or her own benefit.
Pass-through schemes – a shell company is established by an employee to purchase goods or services for the employer. The goods or services purchased by the employee’s shell company are then marked up and sold to the employer and the employee converts the mark-up to his or her own benefit.
Pay-and-return schemes – an employee purposely causes an overpayment to a vendor to occur, and when the vendor returns the overpayment to the company, the employee embezzles the refund.
Personal-purchase schemes – an employee orders personal merchandise and charges it to the company. The employee will then either keep the merchandise, or return it for a cash refund.

These types of billing schemes could be detected with some of the following techniques:

• Analyze disbursements, looking for many large round amounts, or amounts falling just below a threshold that requires additional approval for payment.
• Look for unusually large expenses, unexplained variances in expenses between years, or expenses that exceed budgeted amounts. Billing schemes may inflate expenses enough to cause one or all of these comparisons to yield questionable results.
• Examine the financial statements for variances in expenses that should track predictably with revenue. Cost of goods sold is a popular account in which to conceal theft via billing schemes because of the high level of activity in this account. If the account varies significantly from expected values when compared to revenue, however, this might indicate a billing scheme.
• Cross-check addresses of employees and vendors, looking for exact matches or close matches.
• Verify ownership of vendors that are suspected shell companies. While many fraudsters will use fictitious names to disguise the ownership of the shell companies, sometimes real names are used and can offer clues in cases of suspected fraud.
• Collusion between employees will make such schemes much more difficult to detect. Normal checks and balances that are carried out by multiple employees may be thwarted if those employees decide to team up to commit fraud.
• Abnormal levels of purchases from a particular supplier. The supplier’s name may be being used by the fraudster to submit false invoices. Checking the details on the invoices may show that some of the invoices are different from the others or suspicious in some manner. Verifying invoices with the real supplier will highlight false invoices.
• Missing documentation. The employee may destroy the documentation used to generate a payment once the payment has been made. It may later be assumed that the document has just been lost. The lack of documents will frustrate investigations into suspicious payments.

  SOME BASIC CONTROLS

• Purchases should be done with pre-numbered purchase orders. All suppliers should be given authorized orders and invoices should not be authorized for payment unless they match authorized orders.

• Random checks on invoices may locate fictitious entities being used for billing schemes.

• The use of electronic payments to pre-approved bank accounts will stop cheques being diverted to fraudulent entities.
• Audit purchases with pre-approved suppliers to look for payments to similarly named suppliers. An approved supplier’s name, or a very similar name, may be used by a fraudster without their knowledge.
• Randomly check the name and addresses of suppliers, particularly when the only address on the invoices is a postal address.