Fraudulent Schemes

Fraudulent Schemes Report

Fraud is a problem for businesses that can be committed in several ways. Some common types of fraud is skimming, lapping, billing schemes, and financial statement fraud. If a company has been affected by fraud that does not mean the company will necessarily fail. A company can protect itself against fraud and help a company survive an act of fraud too. The key to controlling fraud is to have strong internal controls in place, to be aware of what the employees are doing, and to know where the cash comes from and where it goes.

Four of the common types of fraud are skimming, cash larceny, billing schemes, and financial statement fraud. Skimming is defined as the theft of cash from a victim entity prior to its entry in an accounting system (Wells, 2008). Some common types of skimming are:

a. Sales skimming is occurs when there is a sale made but the salesperson does not ring it up in the register.

b. After hours skimming, where an employee opens the business without the owners knowledge and keeps the money from sales.

c. Poor collection and recording procedures happens when a business does not use efficient methods to collect and record transaction, so it is easy for employees to keep some of the money.

d. Understated sales are when a sale is posted in the accounting books but for less than the real amount of the sale.

e. Check for currency substitutions are taking unrecorded checks that have been stolen and exchanging the money for receipted cash.

f. Theft in the mail room is employees take incoming checks instead of processing the transaction (Wells, 2008).

Cash Larceny is the intentional taking away of an employer's cash or checks without the approval and against the wishes of the employer (Wells, 2008). This type of larceny can happen in different ways. There is point of sales or taking the money from the cash register, reversing transactions, altering cash counts, or register tapes. Larceny of receivables is one of three things, force balancing, reversing entries, or destruction of records. Larceny from the deposits occurs when the person responsible for taking the cash to the bank takes money out before depositing the cash. This can include hiding the stolen deposit as a deposit in transit (Wells, 2008).

Billing schemes is just one of the five fraudulent disbursement schemes. When a person uses documentation such as invoices, credit card bills, or purchase orders to have the employer make a payment to someone is not owed money that is a billing scheme. The three types of billing schemes are shell company, non-compliance vendor scheme, and personal purchase scheme. The shell company scheme is a fake company created only to use in a fraud scheme. A non-compliance vendor scheme occurs when an employee uses an actual vendor to overcharge the company, the company pays the fraudulent amount but the employee pays the vendor what the company really owes and keeps the rest of the money. Personal purchase scheme is an employee using the company money to purchase personal items (Wells, 2008).

Financial statement fraud is usually done by upper management. Financial statement fraud occurs the least often, about 10% of all fraud, but it is the most costly at approximately $2 million each case (Coenen, 2011). This type of fraud is accomplished by the misstatement of numbers in the statement. The eight common ways to commit financial statement fraud are:

a. Overstatement of revenue

b. Understatement of expenses

c. Overstatement of assets

d. Understatement of liabilities

e. Improper use of reserves

f. Mischaracterization of one-time expenses

g. Misapplication of accounting rules

h. Misrepresentation or omission of information (Coenen, 2011)

Even if a company experiences fraud, it does not necessarily mean that the company will have to file for bankruptcy and close their doors. One example of a company that has rebounded back from fraud is a health services company called HealthSouth. HealthSouth's headquarters is located in Birmingham Alabama and in 2003 they were accused of accounting fraud totaling $2.6 Billion dollars committed by 19 employees. The company managed to avoid bankruptcy by finding ways to work with the banks and avoiding defaulting on bonds. The company also brought in new management to help the company rebound and to work with the Justice Department and the Securities and Exchange Commission (Freudenheim, 2005).

Ethical theory is the ethics and morals that a person has when dealing with others. If a person has a strong sense of morals and ethics he or she would not steal, cheat, or commit fraud. The reality of fraud is that there are pressures and problems that affect people and causes them to commit fraudulent acts. To avoid this problem a business could offer courses for ethical behavior and offer support groups to help employees deal with the stress and pressures in life. A business can limit the opportunities for committing fraud by having internal controls such as management supervision, division

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