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Chapter 7: Billing Schemes. What Are Billing Schemes?. Schemes attacking purchasing function Cause organization to buy goods/services that are nonexistent, overpriced, or not needed Perp submits bogus invoice or other support Victim organization issues a check Perp collects payment .

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Chapter 7: Billing Schemes

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what are billing schemes
What Are Billing Schemes?
  • Schemes attacking purchasing function
  • Cause organization to buy goods/services that are nonexistent, overpriced, or not needed
  • Perp submits bogus invoice or other support
  • Victim organization issues a check
  • Perp collects payment
billing schemes
Billing Schemes
  • 244 billing schemes were reported, with a median loss of $250,000.
  • Billing schemes are the most common and most costly form of fraudulent disbursement.
common billing schemes
Common Billing Schemes
  • Shell company schemes
  • Non-accomplice vendor schemes
  • Personal purchases with company funds
billing schemes breakdown of cases
Billing Schemes – Breakdown of Cases
  • Of 244 billing schemes reported, over 90% were either personal purchases or shell company schemes.
  • Billing schemes are the most common form of fraudulent disbursement.
shell company schemes
Shell Company Schemes

What is a shell company?

  • Fictitious entity
  • Created for purpose of committing fraud
  • Only exist on paper
  • Usually consist of bank account and mail drop
  • Generally registered with state or county (perp needs registration to open bank account)
shell company schemes1
Shell Company Schemes
  • Usually invoice for services, not goods
    • Services not tangible, harder to verify
  • How shell company invoices get paid:
    • Perp has authority to approve payment
    • Supervisor “rubber stamps” purchases
    • Perp prepares bogus support documents
    • Collusion among several employees
shell company schemes2
Shell Company Schemes

Pass-through schemes:

  • Variation of standard shell company scheme
  • Perp assigned to purchase goods/services for company
  • Uses shell company to buy the items on credit
  • Shell company sells items to employer at inflated price
  • Pays off shell’s credit, excess is profit
shell company schemes countermeasures
Shell Company Schemes – Countermeasures
  • Question invoices that have residential address or mail drop for mailing address
  • Look for invoices with lack of detail
    • Missing phone #, fax #, invoice #, tax id, etc.
  • Investigate invoices with no sales tax
  • Sort payments by vendor, look for:
    • Consecutive invoice numbers
    • Consistent payment amounts, round numbers
shell company schemes countermeasures1
Shell Company Schemes –Countermeasures
  • If suspicions about vendor arise:
    • Look up vendor in phone book
    • Contact others in industry
    • Visit address to verify existence
    • Independently verify delivery before paying
  • Periodically run comparison reports between vendor/employee addresses
  • Maintain up-to-date vendor list
identifying the perpetrator of a shell company scheme
Identifying the Perpetrator of a Shell Company Scheme
  • Check articles of incorporation, dba
  • Conduct surveillance on mail drop
  • Review support: who requests, authorizes purchases?
  • Review cancelled checks for bank acct info
  • Don’t pay invoice, see who follows up
  • Search workstation of suspect for evidence
billing via non accomplice vendors
Billing via Non-accomplice Vendors
  • Perp overbills company on behalf of existing vendor
  • Vendor not involved in the scheme
  • Two common techniques:
    • Pay-and-return
    • Counterfeit invoices
billing via non accomplice vendors1
Billing via Non-accomplice Vendors

Pay-and-return scheme:

  • Controls over returned checks may be more lax than outgoing checks
  • Perp double-pays invoice, sends check to wrong address, etc.
  • Tells recipient a mistake was made
  • Asks for check back
  • Steals the returned payment
billing via non accomplice vendors2
Billing via Non-accomplice Vendors

Counterfeit invoices:

  • Perp generates bogus invoices, similar to existing vendor’s
  • Easy to do with desktop publishing
  • Company cuts check
  • Perp steals check or has it delivered to mail drop
non accomplice vendors countermeasures
Non-Accomplice Vendors – Countermeasures
  • Sort invoices by vendor, look for unusual invoice numbers, change in address or style
  • Mail checks immediately after signing
  • Restrict access to accounts payable records and addresses
  • Investigate excessive purchases from particular vendor
non accomplice vendors countermeasure s
Non-Accomplice Vendors – Countermeasures
  • Independently spot-check purchases with vendors
  • Install system to prevent duplicate payments
  • Require all incoming mail to be opened by mailroom; all incoming checks logged (to prevent pay-and-return)
  • Instruct bank not to cash checks payable to organization
personal purchases with company funds
Personal Purchases with Company Funds
  • Perp uses company checks to buy personal items. Common examples:
    • Home supplies/construction
    • Side business
    • Pay medical, utility, credit card bills, etc.
  • Merchandise may be returned for cash
personal purchases with company funds1
Personal Purchases with Company Funds

Methods of payment:

  • Perp has approval authority for invoices
  • Altered or bogus support documentation
  • Initiate fraudulent purchase requisitions
  • Buy on running accounts/purchase orders
  • Use company credit card
personal purchases countermeasures
Personal Purchases – Countermeasures
  • Require all purchases to be delivered to centralized receiving department
  • Separate purchasing and receiving functions
  • Investigate any purchases that are ordered drop-shipped to unusual location
  • Question purchases that do not appear to have a business purpose
  • Review any purchases made without management approval
general billing scheme red flags
General Billing Scheme Red Flags
  • Invoices cannot be traced to shipments
  • Multiple payments to single vendor on same date
  • Pattern of purchases just below review level
  • Unusually quick turnaround on invoices
  • Departments/employees consistently over budget
  • Payments to multiple vendors for same product
general billing scheme red flags1
General Billing Scheme Red Flags
  • Extreme inventory shortages
  • Expenses increase dramatically
  • Unexplained rise in cost of goods sold
  • Unexplained decrease in gross/net profits
  • Excessive materials orders
  • Goods not purchased at optimal point
  • High level approval of a low level transaction
billing schemes controls
Billing Schemes Controls
  • Invoices, purchase orders and receiving reports must be matched before payment issued
  • Purchasing department should be independent of:
    • Receiving
    • Shipping
    • Accounting
billing schemes controls1
Billing Schemes Controls
  • Purchases must have management approval
  • Maintain a current approved vendor list
  • Use competitive bids for major purchases
  • Vendor purchases should be reviewed for abnormal levels
  • Control methods should be implemented for duplicate invoices/purchase orders