Transcript Document 7868775

Chapter 7
Expense Reimbursement Schemes
1
Learning Objectives
• Explain what constitutes expense reimbursement fraud.
• Discuss the data on expense reimbursement fraud from the
2004 National Fraud Survey.
• Understand how mischaracterized expense reimbursement
schemes are committed.
• Be familiar with the controls identified in this chapter for
preventing and detecting mischaracterized expense
schemes.
• Identify the methods employees use to overstate otherwise
legitimate expenses on their expense reports.
• Understand controls that can be used to prevent and detect
overstated expense schemes.
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Learning Objectives
• Explain what a fictitious expense reimbursement scheme is
and differentiate it from other forms of expense
reimbursement fraud.
• Identify red flags that are commonly associated with
fictitious expense schemes.
• Discuss what a multiple reimbursement scheme is and how
this kind of fraud is committed.
• Discuss the controls identified in this chapter for
preventing and detecting multiple reimbursement schemes.
• Be familiar with proactive audit tests that can be used to
detect various forms of expense reimbursement fraud.
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Expense
Reimbursement
Schemes
Mischaracterized
Expenses
Overstated
Expenses
Fictitious
Expenses
Multiple
Reimbursements
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Frequency of Fraudulent
Disbursements
52.1%
Billing
45.5%
31.3%
Check tampering
30.2%
Expense
Expense
Reimbursement
reimburse.
22.1%
22.1%
19.6%
Payroll
17.7%
4.3%
Register disburse.
0.0%
3.0%
10.0%
20.0%
2002
30.0%
2004
40.0%
50.0%
60.0%
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Median Loss
Fraudulent Disbursements
$140,000
$160,000
Billing
$155,000
$140,000
Check Tamp
Expense
Expense Reimb.
Reimbursement
$92,000
$60,000
$90,000
Payroll
Register Disb
$0
$140,000
$18,000
$18,000
$50,000
2002
$100,000
2004
$150,000
$200,000
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Dollar Loss Distribution
Expense Reimbursement Schemes
1-999
1,000 - 9,999
1.4%
1.4%
4.2%
12.3%
29.6%
10,000 - 49,999
22.8%
15.5%
12.9%
50,000 - 99,999
26.8%
100,000 - 499,999
5.6%
6.8%
500,000 - 999,999
1,000,000 and up
0%
29.2%
16.9%
14.6%
5%
10%
All Cases
15%
20%
25%
30%
Exp. Reimb.
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Detection of Schemes
Expense Reimbursement Schemes
32.8%
Internal Audit
23.8%
Tip from Employee
23.6%
17.2%
By Accident
14.1%
Internal Control
21.3%
18.4%
14.1%
10.9%
External Audit
3.1%
7.8%
4.7%
6.2%
Tip from Customer
Tip from Vendor
1.6%
Anonymous Tip
Law Enforcement
34.4%
0.0%
0.9%
0%
5%
5.1%
10%
All Cases
15%
Exp. Reimb.
20%
25%
30%
35%
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Perpetrators –
Expense Reimbursement Schemes
49.3%
Employee
67.8%
50.7%
Manager
Owner
0%
34.0%
23.9%
12.4%
20%
All Cases
40%
60%
80%
Exp. Reimb.
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Median Loss by Perpetrator
Employee
Manager
$68,500
$62,000
$88,500
$140,000
$700,000
Owner
$0
$900,000
$200,000
$400,000
All Cases
$600,000
$800,000
$1,000,000
Exp. Reimb.
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Size of Victim
Expense Reimbursement Schemes
59.4%
45.8%
1-99
13.0%
100-999
21.1%
10.1%
1,000-9,999
19.8%
17.4%
13.3%
10,000 +
0.0%
10.0%
20.0%
All Cases
30.0%
40.0%
50.0%
60.0%
Expense Reimbursment
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Median Loss by Number of Employees
Expense Reimbursement Schemes
$92,000
$98,000
1-99
$200,000
100-999
$78,500
$100,000
$87,500
1,000-9,999
$68,500
10,000 +
$-
$105,500
$50,000
All Cases
$100,000
$150,000
Expense Reimbursment
$200,000
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Expense Reimbursement Schemes
• Employees are reimbursed for expenses
paid on behalf of the employer
• Airfare, hotel bills, business meals,
mileage,ground transportation and so on
• Business purpose explained and receipts
attached per the organization’s guidelines
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Mischaracterized Expense
Reimbursements
• Purpose of reimbursement request is misstated
• Reimbursement for personal expenses not allowed
– Personal trips listed as a business trips
– Non-allowable meals with friends and family
• Most are by high-level employees, owners, or
officers (in the study)
– Common element – lack of detailed expense reports
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Preventing and Detecting
Mischaracterized Expenses
• Establish and adhere to a system of controls
• Require detailed expense reports with original
support documentation
• Require direct supervisory review of all travel and
entertainment expenses
• Establish a policy that clearly states what will and
will not be reimbursed
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Preventing and Detecting
Mischaracterized Expenses
• Scrutinize any expense report that is approved
outside the requestor’s department
• Compare dates of claimed expenses to work
schedules
• Compare prior year expenses to current year
expenses and to budgeted expenses
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Overstated Expense Reimbursements
•
•
•
•
Altered receipts
Overpurchasing
Overstating another employee’s expenses
Orders to overstate expenses
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Preventing and Detecting
Overstated Expense Reimbursements
• Require original receipts for all expense
reimbursements
• If photocopied receipts are submitted,
independently verify the expense
• Require original ticket stubs for airline and rail
travel
• Compare employee’s expense reports with coworkers to identify inconsistencies
• Spot check expense reports with customers
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Fictitious Expenses
• Producing fictitious receipts
– Personal computers
– Calculators
– Cut and paste
• Obtaining blank receipts from vendors
• Claiming the expenses of others
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Preventing and Detecting Fictitious
Expense Reimbursements
• High dollar items that were paid in cash
• Expenses that consistently rounded off, ending with “0” or
“5”
• Expenses that are consistently for the same amount
• Reimbursement requests that consistently fall at or just
below the reimbursement limit
• Receipts that are submitted over an extended time that are
consecutively numbered
• Receipts that do not look professional or lack information
about the vendor
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Multiple Reimbursement Schemes
• A single expense item is submitted several times
to receive multiple reimbursements
– Example: Airline ticket stub and travel agency’s
invoice
• Submit the credit card receipt for items charged to
the company’s credit card account
• Submitting the same expenses to different budgets
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Preventing and Detecting Multiple
Reimbursement Schemes
• Enforce a policy against accepting photocopies
• If photocopies are accepted, the accounting system should
have an edit for duplicates
• Establish clearly what types of support documentation are
acceptable
• Scrutinize expense reports that are approved by
supervisors outside the requestor’s department
• Require expense reimbursements be approved by the
employee’s direct supervisor
• Establish a policy that expenses must be submitted by a
certain time limit
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Mid-term Exam practice
questions
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1. Purchasing personal items using an
organization’s money is what type of
scheme?
a.
b.
c.
d.
Inventory theft scheme
Billing scheme
Pay-and-return scheme
Off-book scheme
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1. Purchasing personal items using an
organization’s money is what type of
scheme?
a.
b.
c.
d.
Inventory theft scheme
Billing scheme
Pay-and-return scheme
Off-book scheme
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2. Mel Turner, the runner for a small bookstore, had a bad
habit of helping himself to cash from the deposit on the
way to the bank. He covered his tracks by substituting
a check from the next day’s deposit for the amount he
stole from the previous day. This is an example of what
type of concealment?
a.
b.
c.
d.
Deposit in transit
Deposit lapping
Force balance depositing
None of the above are correct
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2. Mel Turner, the runner for a small bookstore, had a bad
habit of helping himself to cash from the deposit on the
way to the bank. He covered his tracks by substituting
a check from the next day’s deposit for the amount he
stole from the previous day. This is an example of what
type of concealment?
a.
b.
c.
d.
Deposit in transit
Deposit lapping
Force balance depositing
None of the above are correct
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3. Which of the following is not considered
to be a red flag for fictitious expenses?
a. Expenses are consistently rounded off
b. Reimbursement request consistently falls at or
just below the reimbursement limit
c. Receipts that do not look professional
d. Payment in cash for expenses
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3. Which of the following is not considered
to be a red flag for fictitious expenses?
a. Expenses are consistently rounded off
b. Reimbursement request consistently falls at or
just below the reimbursement limit
c. Receipts that do not look professional
d. Payment in cash for expenses
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4. In order to prove fraud, four elements must
be proved. Which of the following is not a
general element of fraud?
a.
b.
c.
d.
A material false statement
Knowledge that the statement was false
Reliance on the false statement by the victim
Material damages resulting from the victim’s
reliance on the statement
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4. In order to prove fraud, four elements must
be proved. Which of the following is not a
general element of fraud?
a.
b.
c.
d.
A material false statement
Knowledge that the statement was false
Reliance on the false statement by the victim
Material damages resulting from the victim’s
reliance on the statement
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5. The most basic way that an employee
executes an authorized maker scheme is to
override controls designed to prevent fraud
in the first place.
a. True
b. False
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5. The most basic way that an employee
executes an authorized maker scheme is to
override controls designed to prevent fraud
in the first place.
a. True
b. False
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6. The following methods can be used to detect
sales skimming with the exception of:
a. Comparing register tapes to the cash drawer and
investigating discrepancies
b. Summarizing the net sales by employee extracting
the top employees with low sales
c. Installing video cameras at cash entry points
d. Offering discounts to customers who do not get
receipts for their purchases
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6. The following methods can be used to detect
sales skimming with the exception of:
a. Comparing register tapes to the cash drawer and
investigating discrepancies
b. Summarizing the net sales by employee extracting
the top employees with low sales
c. Installing video cameras at cash entry points
d. Offering discounts to customers who do not get
receipts for their purchases
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7. In the 2004 Report to the Nation on
Occupational Fraud and Abuse, fraudulent
financial statements were the most costly in
terms of median loss as opposed to asset
misappropriations and corruption.
a. True
b. False
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7. In the 2004 Report to the Nation on
Occupational Fraud and Abuse, fraudulent
financial statements were the most costly in
terms of median loss as opposed to asset
misappropriations and corruption.
a. True
b. False
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8. In one of the case studies in the text book, Albert Miano,
the facilities supervisor for a popular magazine,
submitted the phony invoices and checks were made
payable to a contractor. When Miano received the
checks for the phony invoices, he forged the contractor’s
signature. He then endorsed the check in his own name.
How was the fraud caught?
a. The auditors found a discrepancy in the invoices that were submitted
b. It was found by accident by the new chief of internal audit
c. The vendor received a check by mistake and called the accounts
payable department
d. The external audit found it in an audit sample of canceled checks
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8. In one of the case studies in the text book, Albert Miano,
the facilities supervisor for a popular magazine,
submitted the phony invoices and checks were made
payable to a contractor. When Miano received the
checks for the phony invoices, he forged the contractor’s
signature. He then endorsed the check in his own name.
How was the fraud caught?
a. The auditors found a discrepancy in the invoices that were submitted
b. It was found by accident by the new chief of internal audit
c. The vendor received a check by mistake and called the accounts
payable department
d. The external audit found it in an audit sample of canceled checks
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9. Which of the following choices is not
a payroll scheme?
a.
b.
c.
d.
Ghost employee schemes
False deduction schemes
Falsified hours and salary schemes
All of the above are correct
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9. Which of the following choices is not
a payroll scheme?
a.
b.
c.
d.
Ghost employee schemes
False deduction schemes
Falsified hours and salary schemes
All of the above are correct
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10. Mary Duncan is an internal auditor for the Western Realty
Group. Recently, she ran a program that extracted
checks that were out of the normal sequence. She found
that four or five checks were written every month that fit
this category. Based on the information given, which one
of the following check tampering scheme(s) is likely?
a.
b.
c.
d.
Forged maker
Concealed checks
Authorized maker
All of the above
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10. Mary Duncan is an internal auditor for the Western Realty
Group. Recently, she ran a program that extracted
checks that were out of the normal sequence. She found
that four or five checks were written every month that fit
this category. Based on the information given, which one
of the following check tampering scheme(s) is likely?
a.
b.
c.
d.
Forged maker
Concealed checks
Authorized maker
All of the above
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