1 expense reimbursement schemes chapter 7. 2 explain what constitutes expense reimbursement fraud....

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Expense Reimbursement Schemes

Chapter 7

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• 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.

Learning Objectives

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• 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.

Learning Objectives

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ExpenseReimbursement

Schemes

ExpenseReimbursement

Schemes

MischaracterizedExpenses

MischaracterizedExpenses

OverstatedExpenses

OverstatedExpenses

FictitiousExpensesFictitiousExpenses

MultipleReimbursements

MultipleReimbursements

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3.0%

4.3%

17.7%

19.6%

22.1%22.1%

30.2%

31.3%

45.5%

52.1%

0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0%

Register disburse.

Payroll

Expensereimburse.

Check tampering

Billing

2002 2004

Frequency of Fraudulent Disbursements

Expense Reimbursement

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$18,000$18,000

$140,000

$90,000$60,000

$92,000

$140,000$155,000

$160,000

$140,000

$0 $50,000 $100,000 $150,000 $200,000

Register Disb

Payroll

Expense Reimb.

Check Tamp

Billing

2002 2004

Median LossFraudulent Disbursements

Expense Reimbursement

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Dollar Loss DistributionExpense Reimbursement Schemes

14.6%16.9%

6.8%5.6% 29.2%

26.8%12.9%

15.5%22.8%

29.6%

12.3%4.2%

1.4%1.4%

0% 5% 10% 15% 20% 25% 30%

1,000,000 and up

500,000 - 999,999

100,000 - 499,999

50,000 - 99,999

10,000 - 49,999

1,000 - 9,999

1-999

All Cases Exp. Reimb.

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0.9%0.0%

5.1%1.6%

6.2%4.7%

7.8%3.1%

10.9%14.1%

18.4%14.1%

21.3%17.2%

23.6%34.4%

23.8%32.8%

0% 5% 10% 15% 20% 25% 30% 35%

Law Enforcement

Anonymous Tip

Tip from Vendor

Tip from Customer

External Audit

Internal Control

By Accident

Tip from Employee

Internal Audit

All Cases Exp. Reimb.

Detection of SchemesExpense Reimbursement Schemes

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Perpetrators – Expense Reimbursement Schemes

12.4%23.9%

34.0%50.7%

67.8%

49.3%

0% 20% 40% 60% 80%

Owner

Manager

Employee

All Cases Exp. Reimb.

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Median Loss by Perpetrator

$900,000$700,000

$140,000$88,500

$62,000$68,500

$0 $200,000 $400,000 $600,000 $800,000 $1,000,000

Owner

Manager

Employee

All Cases Exp. Reimb.

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Size of VictimExpense Reimbursement Schemes

13.3%17.4%

19.8%10.1%

21.1%13.0%

45.8%59.4%

0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0%

10,000 +

1,000-9,999

100-999

1-99

All Cases Expense Reimbursment

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$105,500$68,500

$87,500

$100,000

$78,500 $200,000

$98,000$92,000

$- $50,000 $100,000 $150,000 $200,000

10,000 +

1,000-9,999

100-999

1-99

All Cases Expense Reimbursment

Median Loss by Number of EmployeesExpense Reimbursement Schemes

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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 DetectingMischaracterized 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 DetectingMischaracterized 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 DetectingOverstated 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 co-

workers 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. Inventory theft scheme

b. Billing scheme

c. Pay-and-return scheme

d. Off-book scheme

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1. Purchasing personal items using an organization’s money is what type of

scheme?

a. Inventory theft scheme

b. Billing scheme

c. Pay-and-return scheme

d. 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. Deposit in transit

b. Deposit lapping

c. Force balance depositing

d. 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. Deposit in transit

b. Deposit lapping

c. Force balance depositing

d. 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. A material false statement

b. Knowledge that the statement was false

c. Reliance on the false statement by the victim

d. 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. A material false statement

b. Knowledge that the statement was false

c. Reliance on the false statement by the victim

d. 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. Ghost employee schemes

b. False deduction schemes

c. Falsified hours and salary schemes

d. All of the above are correct

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9. Which of the following choices is not a payroll scheme?

a. Ghost employee schemes

b. False deduction schemes

c. Falsified hours and salary schemes

d. 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. Forged maker

b. Concealed checks

c. Authorized maker

d. 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. Forged maker

b. Concealed checks

c. Authorized maker

d. All of the above