Workplace fraud refers to the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets. 

PwC’s Global Economic Crime and Fraud Survey reports, internal perpetrators represent nearly half of all reported frauds.

Frauds perpetrated by insiders are often far more damaging than externally perpetrated crime because they often result in civil or criminal actions against the company, incurring financial and reputational cost. 

Each type of fraud requires different methods of discovery and subsequent investigation procedures.

It is important to be able to recognize and understand the nature of each type of fraud in order to protect your business and your clients from such risk.

We have divided Workplace Fraud into the following categories: 

  • Asset Misappropriation
  • Corruption
  • Financial Statement Fraud
  • Data, Intellectual Property and Identity Theft

These categories were created based on the Fraud Tree developed by the Association of Certified Fraud Examiners (ACFE).

This is part 1 on the 4-part series of Types of Workplace Fraud.

This paper is designed to help you recognize various types of Asset Misappropriation schemes, and the best practices to minimize the risk of fraud on behalf of yourself and your clients.

Asset Misappropriation

Asset misappropriation, also known as insider fraud, is a broad term that describes a vast number of employee fraud schemes. 

Asset misappropriation schemes fall under the misappropriation of Cash or Inventory and All Other Assets.

Cash

Theft of Cash on Hand

Theft of cash on hand is any scheme in which the perpetrator misappropriates cash kept on hand at the victim organization’s premises (e.g., employee steals cash from a company vault).

 

Theft of Cash Receipts

Theft of cash receipts is any scheme in which the perpetrator misappropriates cash receipts. This can be separated into two types: Skimming and Cash Larceny. 

Skimming

This involves any scheme in which cash is stolen from an organization before it is recorded on the organization’s books and records. This is an “off-book scheme” because the receipt of the cash is never reported to the entity. 

The most common skimming schemes include:

1. Sales schemes 

  • Unrecorded sales 
  • Understated sales

2. Accounts receivable schemes

  • Write-off schemes
  • Lapping schemes
  • Unconvealed receivables

3. Refund and other schemes

Cash Larceny

This involves any scheme in which cash is stolen from an organization after it has been recorded on the organization’s books and records. In other words, cash larceny schemes are on-book frauds.

      Fraudulent Disbursements

      Fraudulent disbursements are the most common form of asset misappropriation, and they occur when an employee uses his position of employment to cause a payment for some inappropriate purpose.

      Fraudulent disbursements are on-book fraud schemes, meaning that cash (checks) leaves the entity fraudulently, but it is recorded on the books and thus an audit trail exists. 

      Fraudulent disbursement schemes are broken down into the following types:  

      • Billing schemes
      • Payroll schemes
      • Expense reimbursement schemes
      • Check tampering schemes
      • Register disbursements schemes

      1. Billing Schemes

      The most common and costly example of a fraudulent disbursement is the billing scheme. A billing scheme is a fraud in which an employee causes the victim organization to issue fraudulent payments by submitting invoices for fictitious goods or services, inflated invoices, or invoices for personal purchases.

      Billing schemes are usually classified into three categories, shell company schemes, non-accomplice vendor schemes, and personal purchase schemes.

      Shell Company Fraud Schemes

      Shell companies also known as dummy or sham companies, are fictitious entities created for the sole purpose of committing fraud.

      An employee or company officer may use a shell company to launder money, pay bribes, divert assets or evade taxes.

      Common red flags to this kind of fraud include a lack of detail on the fraudulent invoice, mis-numbered or consecutively numbered invoices, and the lack of a physical address on the invoice.

      Evidence of shell company schemes can be detected by sorting payments by vendor, amount, invoice number and address to identify red flags.

      Non-Accomplice Vendor

      This occurs when employees ​​use invoices in the name of existing vendors to generate fraudulent payments. The fraudster may study the victim organization’s vendor list and delivery patterns and fix invoices in the name of a particular vendor hence tapping money from the unknowing organization. 

      In order to detect this kind of fraud, efforts should focus on comparing mailing addresses or electronic payments info within the records of individual vendors. Additionally, search for duplicate payments because one invoice may be used as support for two payments.  Duplicate payments should be searched for by invoice amount, not just check amount, in order to uncover duplicate payments masked by individual checks being used to pay for multiple invoices.

      Personal Purchases

      A personal purchases scheme is one where an employee buys personal items with his/her company’s credit card or purchasing card. In cases of such frauds, the employee signatory of the company’s purchasing card benefits the most, he/she can easily buy any personal item with the card. 

      This can easily be detected by comparing card statements with employee expense vouchers for duplication, monitoring card expenses for an unexplained increase in purchasing levels and tracing back excess purchases to a particular cardholder.

       2. Payroll Schemes

      Payroll schemes are one of the most common types of workplace frauds. This can be broken down into the following types:

      • Ghost Employee
      • Falsified wages
      • Commissions schemes
      • Timesheet Falsification
      • Buddy Punching
      • Advance Fee schemes
      • Paycheck Diversion

      Ghost Employee

      This occurs when an employee creates a “phantom” employee in the payroll system for the purpose of obtaining their salaries or allowances. The “phantom” employee can be a  real person who knowingly or not is placed on the payroll, an ex-employee or a fictitious person.

      Falsified wages

      This occurs when employees alter their wages by:

      • Increasing their wage rate
      • Increasing their sales numbers
      • Tamper with the paycheck

      Commissions schemes

      This occurs when the amount of sales made or the rate of commission is fraudulently inflated.

      Timesheet Falsification

      This occurs when an employee reports working more hours than they actually did, inflating their paycheck in the process. Time theft most often takes the form of a worker clocking in for a shift early, clocking out late or clocking in for a co-worker who isn’t there.

      Buddy Punching

      This scheme involves an arrangement of employees who fraudulently clock-in for one another when one of them is not present. The missing person is receiving his/her wages without physically being present and performing his/her work duties.

      Advance Fee Schemes

      This occurs when an employee requests an advance on his pay and then never pays it back. A monthly procedure to review advances will eliminate this issue.

      Paycheck Diversion

      This occurs when employees write fictitious checks or take the paycheck of another employee who is absent, and then cash the check for themselves. This can be avoided by having the paymaster retain all unclaimed checks in a locked safe.

      3. Expense reimbursement Schemes

      Travel and expense budgets are a common target for occupational fraud. This type of scheme is most commonly perpetrated by sales personnel who overstate or create fictitious expenses in areas such as client entertainment and business travel. 

      Expense reimbursement schemes fall into four general categories:

      • Mischaracterized expenses
      • Overstated Expenses
      • Fictitious Expenses
      • Multiple Reimbursements

      Mischaracterized expenses

      This occurs when an employee uses a company expense account for personal expenses and submits them as business-related. They might, for example, charge your company for an expensive dinner with friends, claiming this as a “business dinner”,  or expense hotel costs for a business trip they later turn into leisure.

      Red flags for mischaracterized expenses include claims for:

      • Items that don’t seem to have a business connection
      • Meals and entertainment when employees aren’t working/travelling or on weekends or holidays
      • Items or meals for children, or from
      • Establishments in the employee’s neighborhood

      Overstated Expenses

      Overstated expenses are those items incurred as legitimate business expenses, but are over-claimed by the employee. In this case, an employee may change the amount on a receipt, or “lose” a receipt and submit a claim for a higher amount than was spent.

      For example, an employee may have stayed at a lower-price hotel or used lower-cost transportation and then created receipts showing higher-priced methods of transportation or accommodation. 

      Potential indicators of overstated expenses include:

      • Incomplete or inadequate expense report
      • Supporting documents such as receipts that are suspicious and/or show signs of fabrication (e.g. inconsistent font, color, visible correcting fluid/tape, pixelation, scratched out information)

      Detecting overstated expenses can be difficult. To uncover these schemes, take the following steps:

      • Scrutinize all receipts thoroughly.
      • Look for evidence of altered amounts, such as a different type of ink used for the service and the amount, or writing that looks different.
      • Compare receipts to receipts from other employees for the same product or service to see if the amounts seem reasonable.

      Fictitious Expenses

      This occurs when an employee creates a receipt for a product or service they didn’t receive and submit it for reimbursement. 

      For example, an employee may ask a taxi driver for a blank receipt and then fill in the information later. An employee might also create a fake receipt from scratch using an online template, or collude with a merchant to create a receipt for a non-existent purchase.

      Here are a couple signs to look out for:

      • Multiple expense reports submitted close together from the same company, from the same employee
      • Taxi, hotel, flight, or other travel-related receipts for dates and times the employee was known to NOT be on company business
      • Receipt amounts that are significantly higher than similar reports submitted by other employees
      • Expenses that were not pre-approved

      Multiple Reimbursements

      This occurs when an employee submits the same expenses on multiple reports. There are several methods used for this fraud.

      For example, an employee may submit a receipt with the expense on one report and then claim it again as a “lost receipt” expense. Or, an employee could submit a claim for a transportation cost, such as a plane or train ticket, then also claim for reimbursement of the mileage as if he or she drove to the location.

      This type of expense fraud is fairly easy to catch if you use software to record and process your expenses.

      In order to detect this type of fraud:

      • Compare dates, amounts, and payees claimed on one report to those on other reports from the same employee.
      • Look for evidence of the original version of a lost receipt connected to another expense report.
      • Be careful not to accuse the employee before you are sure it was done on purpose, as this type of scheme could occur due to employee error.

      4. Check Tampering

      This occurs when an employee alters the checks so that they can be deposited into a bank account under their control. This could involve forgery, altering payee information, or issuing inappropriate manual checks.

      This can be broken down into four major categories:

      • Forged Maker
      • Forged Endorsement
      • Altered Payee
      • Authorized Maker

      Forged Maker

      In a forged maker scheme, an employee misappropriates a check and fraudulently applies the signature of an authorized maker (person who signs the check). In order to forge a check, an employee must have access to a blank check and be able to produce a convincing forgery of an authorized signature. Blank checks and signature stamps should only be accessible to authorized personnel.

      Forged Endorsement

      This occurs when an employee intercepts a company check intended for a third party and converts the check by signing the third party’s name on the endorsement line of the check.

      For example, someone may write a cheque with a forged signature. Forging endorsements can be used to prevent the person or legal entity that the payment is made out to from being able to receive its value (such as cashing a cheque).

      Altered Payee

      This occurs when an employee changes the payee on the check so that he/she can deposit the check into his own account. 

      Authorized Maker

      This occurs when an employee with signature authority on a company account writes fraudulent checks for his own benefit.

      5. Register Disbursements

      When cash is stolen as part of a register disbursement scheme, the removal of the cash is recorded on the register tape. A false transaction is entered so it appears that the disbursement of money was legitimate. 

      Register disbursements schemes fall under these two categories:

      • False Voids
      • False Refunds

      False Voids

      A refund is processed at the register when a customer returns an item of merchandise that was purchased from the store. The transaction that is entered on the register indicates the merchandise is being replaced in the store’s inventory and the purchase price is being returned to the customer. In other words, a refund shows cash being disbursed from the register to the customer.

      False Refunds

      In a false refund scheme, an employee processes a transaction as if a customer were returning merchandise, even though there is no actual return.

      Inventory and All Other Assets

      Asset Misappropriation also involves the misuse of non-cash assets, such as inventory and all other assets. This might include taking office supplies home for personal use or stealing expensive company equipment.

      This can be broken down into the following categories:

      • Misuse
      • Larceny

      1. Misuse

      This occurs when an employee uses company inventory for personal use.

      For example, this may involve an employee taking office supplies home for personal use. Even if the assets are not stolen, they are exposed to additional wear and tear that decreases their value.

      2. Larceny

      This occurs when an employee takes inventory from the company premises without attempting to conceal the theft in the accounting records. 

      This can be broken down into the following sub-categories: 

      • Asset Requisitions and Transfers
      • False Sales and Shipping
      • Purchasing and Receiving
      • Unconcealed Larceny

      Asset Requisitions and Transfers

      This occurs when an employee steals the inventory during the process by which an employee requisitions inventory to be moved internally from one location to another.

      False Sales and Shipping

      False sales schemes occur when an accomplice of an employee “buys” merchandise, but the employee does not ring up the sale and the accomplice takes the merchandise without making any payment.

      False shipment schemes, which occur when an employee creates false sales documents and false shipping documents to make it appear that missing inventory was not actually stolen, but rather sold.

       Purchasing and Receiving

      Purchasing schemes occur when an employee with purchasing authority uses that authority to purchase and misappropriate merchandise.

      Receiving schemes occur when an employee misappropriates assets purchased by the company as they are received at the company.

      Unconcealed Larceny

      This occurs when an employee takes inventory from the company premises without attempting to conceal the theft in the accounting records.

      Moving Forward

      Early detection and thorough investigations are key.

      It is critical that you understand the key types of Workplace Fraud, different detection measures and subsequent investigation procedures. 

      Stay with us for our 4-part series of Types of Workplace Fraud to stay informed on behalf of yourself and clients.

      How Polonious can help

      As investigation experts ourselves, we know what it takes to help investigators to their jobs best.

      Polonious offers case management solutions designed to help with process management, productivity, automation, and analytics.

      Our investigation software is a trusted solution from investigation teams worldwide. 

       

       

      Misappropriation of Cash is a broad category of workplace fraud that can range from theft of cash on hand, theft of cash receipts, to fradulent disbursements involving check tampering, register disbursements, and billing/payroll/expense reimbursement schemes.

      Misappropriation of Cash is a broad category which can involve skimming, larceny, check tampering, register disbursements, as well as billing, payroll, and/or expense reimbursement schemes.

      Misappropriation of Cash is a broad category that can range from theft of cash on hand, theft of cash receipts, to fradulent disbursements involving check tampering, register disbursements, and billing/payroll/expense reimbursement schemes.

      Asset Misappropriation is not limited to misuse of cash. It also involves misuse of inventory and other assets.

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