Running Head: Fraud investigation report

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Table of Contents

Abstract
Introduction
Types of billing schemes
Findings of the investigations
How the scheme was hatched and operated
Conclusions and recommendations
References

Abstract

The subject of this investigative report is an alleged asset fraudulent disbursement scheme in the procurement department of the Plant of Lakes, Inc. The investigations were commenced as a result of an anonymous tip received by the company on June 12, 2007 that a company employee had been submitting false expense claims for billing to the company.

After piecing together all the relevant enquiries and reviews of relevant documents that were deemed necessary in obtaining an independent nonbiased factual account of the alleged crime, this report submits to confirm that indeed the alleged fraud was committed.

This report therefore aims to detail the evidence supporting this deduction by examining the scale of the fraud and detailing in a chronological manner the findings of the investigations. The report concludes with a list of recommendations and action plans required to be done firstly to the culprits to deter such future actions by other employees and secondly to improve the system in order to completely seal the identified loopholes.

Introduction

An asset fraudulent disbursement scheme is a form of fraud whereby, the perpetrator usually a company employee dishonestly hatches a plan to take company funds through false expense claims by concealing the details of the expense such that it will only appear as a normal expense. Fraudulent disbursements may be classified into five major subcategories. These are; check tampering, register disbursement schemes, billing schemes, expense reimbursement schemes and payroll schemes (wells, 2011).

According to a 2008 survey by the Association of Certified fraud Examiners, fraudulent disbursements account for 63.9 percent of all frauds committed within a company (Singleton and Singleton, 2010). In all the five subcategories of fraudulent disbursements, billing schemes so far remain the most prevalent and preferred scheme used to commit fraud. A 2009 Global Fraud Survey found this form of fraud to contribute about 52 percent of the fraudulent disbursements (wells, 2011).

Billing schemes refers to frauds whereby, the perpetrator intelligently exploits the company accounting system to steal funds through submission of bogus claims guised in one form or another (wells, 2011). Our investigations centered mainly on this form of fraud as our initial tip off indicated that this was most certainly the avenue used to commit fraud in Plant of Lakes Inc.

Types of billing schemes

Billing schemes are the most prevalent types of frauds committed in an organization and may take three different forms. These are; Shell vendor schemes, personal purchases schemes, and non-accomplice vendor schemes (Roberson & Birzer, 2009).

Shell vendor schemes

Shell vendor schemes refers to a situation whereby a fictitious company which is usually formed with the sole purpose of committing fraud, is used to generate fraudulent claims to the target company upon which when the checks are drawn are channeled to the perpetrator.

Since the shell vendor must by all means be guised to be a genuine vendor to erase suspicion from the relevant authorities, the perpetrator must be in a position of authority or influence to ensure that the phony vendor is added or enlisted as a genuine vendor and that the fraudulent invoices are also approved without attracting undue attention.

Alternately, another version of shell vendor scheme are pass through schemes where the perpetrator actually do the actual purchasing of the invoiced goods but jointly with the vendor inflates the claims. The inflated amounts is either shared by the vendor and employee or wholly channeled to the employee (Pedneault, et al, 2012).

Non-accomplice vendor schemes

Non-accomplice vendor schemes unlike the above cases of a shell vendor, involves a genuine and legitimate vendor who rather innocently find themselves unknowingly being used by the perpetrator to advance their ill motives.

This is achieved through the perpetrator overbilling the company using the vendors invoice but later intercepting the check before it reaches the vendor or asking for a refund from the vendor of the overbilled amount. Alternately the perpetrator may requisition unwanted merchandise and process the payments only to later return the merchandise and intercept the refund check (Albrecht et al, 2011).

Personal purchases schemes

These kinds of schemes involve employees using the company’s funds to foot bills incurred to purchase their own personal items. According to Singleton and Singleton (2010), these kinds of frauds are the easiest to perpetrate especially with the advancement in e-procurement systems and a variety of purchase methods.

Findings of the investigations

Following the investigations that were conducted between the months of August to November 2009, credible facts were obtained to the extent that the now terminated Associate director of purchasing, Mr. Smith and his administrative assistant, Ms. Bad were involved in fraudulent deals aimed to exploit the company for their own personal gains.

In conjunction and from the support and cooperation received from Mr. Jones of Sterns, an approved vendor, we were able to ascertain that Mr. Smith and his administrative assistant Ms. Bad had formed a personal purchases scheme which they used to benefit themselves at the expense of the company’s resources.

All these was made possible through a corporate purchased card that was given to the then Associate director of purchasing, called Mr. Smith; the card would be used to purchase personal items from Sterns for him and his administrative assistant then billed to the company as purchase of company assets.

Mr. Smith would then in conjunction with his administrative assistant conjure to conceal their irregular deals by making a copy of the invoice for filing in the company records but not before altering the true identity of the items being invoiced. After the alterations, this would appear as a genuine purchase of company asset and thus escape any suspicions of being detected by the company management or even auditors.

How the scheme was hatched and operated

The scheme by Mr. Smith and Ms. Bad according to information received from Mr. Jones of Stern seems to have been hatched about 6 months ago. In the scheme, Mr. Smith or Ms. Bad would walk into an approved vendor store and using the corporate purchased card issued to Mr. Smith, make personal purchases and be issued with an invoice.

The two would then proceed to make a copy of the obtained original invoice but making sure they alter the identity of the actual purchased personal item with a more acceptable regularly required item for use by the company and often retailing about the same price. Their main objectives in doing this are mainly two.

First, by having a copy of the invoice complete with details such as the vendor name and address as well as the referred invoice number, it would elicit little suspicion should the vendor present their accrued statement of accounts for settlement. Secondly, by changing the identity of the item bought to one resembling items more commonly consumed in the company, it would be easier to maneuver in ensuring they pass through the procure system without suspicion (Rittenberg, Johnstone & Gramling 2011).

In our first step towards our efforts to substantiate they existence of the above we scheme, we observed that the company has done well in establishing and maintaining a physical assets database. The purpose of this database is to record all non disposable items worth $1,000 or more purchased by the company.

Each of such items would be recorded in the database after being assigned a barcode and a unique ID number label in order to trace it. This database and perhaps why Mr. Smith deemed it necessary to incorporate Ms. Bad in his scheme is in the custody of the administrative assistant who maintains and updates it.

In order to ascertain the allegation made, we deemed it necessary to examine all expense claims by members of staff invoiced to the company in the last financial year. A careful scrutiny of these claims revealed that about “$8,795.60 in false invoices had been submitted for reimbursement through the purchasing department” (Albrecht 2011). We did not have solid evidence though but as first step, we established as our first and main suspect the purchasing director.

This was in consideration that the tip offered was that a computer server supposedly purchased was false and that in place a high definition flat screen television had been bought. In addition, all this would not have passed without raising any suspicion to the director if at all he was not involved. With all these information in mind, we set forth to examine and compare the physical assets database with the purchased assets file as per the company financial accounts.

Our first suspicions were raised when we noted that, for the alleged purchase of a computer server there was no original invoice but only a copy. This prompted us to check for the item in the physical assets database and to more of our surprise, no such record of a purchase of a computer server was present in the database and “no ID number had been issued of any similar item in the past 10 months” ( Wells 2011).

Just to confirm it was not an omission, we contacted the vendor, Sterns, who was alleged to have supplied the same item as per the details of the invoice copy via their contact person Mr. Jones. Mr. Jones confirmed the existence of similar invoice number billed to Plant of Lakes, Inc. but for HD Television and not a Server. The allegations had been partly confirmed and after further examining the purchases records and assets database no HD television had been purchased by the company.

We decided to visit Sterns in order to interrogate and get more details from Mr. Jones. Mr. Jones told us of his suspicions in the past 6 months when outside the norm Mr. Smith and Ms. Bad made 2 and 3 purchases respectively using Mr. Smith’s purchase card from the vendor but instead advised they would personally come to pick up the purchased items.

To substantiate these claims we picked invoices of the items purchased from the vendor but personally picked up by either Mr. Smith or Ms. Bad where only copies of the original invoices albeit different as to the item purchased were found in the plant purchasing records. It is here that with all the facts gathered we concluded our investigations convinced beyond reasonable doubt that we had solid evidence to prove that Mr. Smith and Ms. Bad had established a personal purchases scheme to defraud the company.

Conclusions and recommendations

It is our considered opinion that the associate director in charge of purchasing, Mr. Smith and the administrative assistant, Ms. Bad jointly conceived a personal purchases scheme to defraud the company. As such, we recommend for their immediate termination of their services with the company and opening of criminal proceedings against them for their fraudulent activities. In addition, we wish to recommend the following measures to guard against such future activities and improve the system;

In future all expense claims be settled upon verification and authentication of the originality of the source documents
That, a monthly credit activity report on corporate charge cards to be generated and a routine review of all expenditures done.

References

Albrecht, S. W. et al (2011). Fraud Examination, 4^th Edition. New York: Cengage Learning

Pedneault, S. et al (2012). Forensic Accounting and Fraud Investigation for Non-Experts, 3^rd Edition. New York: John Wiley & Sons, 2012

Rittenberg, L. E., Johnstone, K. and Gramling, A. (2011). Auditing: A Business Risk Approach, 8^th Edition. New York: Cengage Learning

Roberson, C. and Birzer, M. (2009). Introduction to Private Security: Theory Meets Practice. Oxford: Allyn & Bacon, Incorporated, 2009

Singleton, T. W. and Singleton, A. J. (2010). Fraud Auditing and Forensic Accounting, 4^th Edition. New York: John Wiley & Sons, 2010

Wells, J. T. (2011). Corporate Fraud Handbook: Prevention and Detection. 3^rd Edition. New York: John Wiley & Sons

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