Know what to look for to prevent disbursement fraud
Estimated reading time: 3 minutes
Fraudulent disbursements are the most common form of asset misappropriation. This type of disbursement occurs when an employee uses their position to make payment for an inappropriate purpose. They are on-book fraud schemes, which means that money in the form of checks leaves the entity fraudulently, but is recorded on the books and leaves an audit trail. In this way, entities can become victims of fraud, even when no cash is involved.Accounts payable disbursement fraud involves an employer issuing a payment based on invoices for fake goods or services, inflated invoices or personal purchases. Examples include an employee creating a shell company and billing the employer for services not actually rendered, or an employee purchasing personal items on the employer's credit card or submitting a fraudulent invoice to the employer for payment.
Examples of disbursement misappropriation reported on by our Office include:
- A District secretary used credit cards to misappropriate $118,871 over six years.
- A City clerk misappropriated $65,895 through unallowable purchases made by general disbursement and credit cards over a year and a half.
- A County public works employee misappropriated $1,786,232 over 10 years through payments made to two fake vendors.
Strong controls are the key to preventing or reducing the risk of fraud. In addition, it helps to watch out for these red flags:
- Higher-than-usual costs
- Excess goods and services
- Copies of documents rather than originals
- Missing documents
- Unusual vendors
- Unusual changes in the behavior or lifestyle of employees
- Unusual endorsements on the checks
While fraudulent disbursement is one of the most common methods used to exploit employer resources, the related paper trail allows this type of fraud to be detected or prevented with proper procedures. As such, consider these monitoring controls:
- Implement adequate segregation of duties or other compensating controls. For example, the person paying the bills should not be responsible for approving invoices or accepting shipments of goods.
- Review vendor listings for unusual vendors or excessive payments to vendors.
- Monitor voided transactions to ensure they are truly voids.
- Review for transactions that seem unusual considering your operations.
- Only pay original invoices, and ensure they are reasonable and make sense.
- Ensure payments made outside normal process are approved, supported and for a public purpose. Examples of these types of payments include petty cash, credit cards, revolving accounts and advanced travel accounts.
- Anytime something seems unusual, ask questions and confirm what was purchased with a third party, if necessary.
In addition, consider performing these disbursement fraud tests:
- Test for duplicate payments. Theft may occur if the same check is generated twice, and the second one is stolen and converted to cash. To test, sort the full check register by dollar amount and vendor name. Same dollar payments with same vendor names above a certain threshold should be investigated.
- Review the accounts payable vendor file for similar names. Fake vendor names may mimic real vendor names, and home addresses or P.O. boxes may be used. Obtain a download of all vendor names, and sort the list by name to visually compare any vendors with similar names, and investigate any near matches.
- Check for fake vendors. A fake vendor may be added with a home address or P.O. Box. Pay close attention to vendors that provide services rather than physical products, because the latter leave audit trails, but the former are less likely to do so. Obtain a download of new vendors' names and addresses for a period of time and look up the businesses to check for validity. If necessary, call the vendor.
- Compare vendor and payroll addresses. Those with vendor setup ability can create fake vendors associated with their own home address. If you compare all addresses in the vendor file with addresses in the payroll file, you may find a match. Sometimes the match is legitimate, such as travel checks being processed through accounts payable. However, any suspicious matches should be investigated. To test, obtain a download of vendor names and addresses and payroll names and addresses. Merge the two files and sort the addresses to visually inspect for matches.
- Scan checks for proper signatures and payees. Fraudsters will forge signatures or complete checks with improper payees, such as themselves. Pick a period of time and obtain the related bank statements, then scan the checks for appropriate signatures and payees. Also consider scanning endorsements if available.
All organizations are susceptible to fraud; however, an entity can help deter and reduce the opportunity for fraud. Management should set an ethical tone and establish solid internal controls. These two actions form the basis on which all other policies and procedures rest.