Employees may commit fraud against their employers by getting the employer to improperly disburse funds. One way this could happen is through an improper check or electronic disbursement. Another way is through a shell company scheme, whereby the employee sets up a fake vendor which issues invoices to the company for products or services that are not actually provided to the company.
These types of billing schemes could be detected with some of the following techniques:
- Analyze disbursements, looking for many large round amounts, or amounts falling just below a threshold that requires additional approval for payment.
- Look for unusually large expenses, unexplained variances in expenses between years, or expenses that exceed budgeted amounts. Billing schemes may inflate expenses enough to cause one or all of these comparisons to yield questionable results.
- Examine the financial statements for variances in expenses that should track predictably with revenue. Cost of goods sold is a popular account in which to conceal theft via billing schemes because of the high level of activity in this account. If the account varies significantly from expected values when compared to revenue, however, this might indicate a billing scheme.
- Cross-check addresses of employees and vendors, looking for exact matches or close matches.
- Compare vendor addresses to mail drop address databases to check for businesses that may not have a legitimate location.
- Examine invoices for suspicious data. Are invoice numbers consecutive, such that it looks like the vendor is only issuing invoices to your company? Is there suspiciously little detail on the invoices? Are there obvious typos? Is basic company information like phone number missing?
- Verify ownership of vendors that are suspected shell companies. While many fraudsters will use fictitious names to disguise the ownership of the shell companies, sometimes real names are used and can offer clues in cases of suspected fraud.
- Look for signs of legitimate business for the purported vendor. Do they have a website and an ongoing social media presence? What shows up on Google Maps street view? Is there evidence of other customers? Do they exist as far as anyone else knows?
- Collusion between employees will make such schemes much more difficult to detect. Normal checks and balances that are carried out by multiple employees may be thwarted if those employees decide to team up to commit fraud.
Verification of the validity of a vendor is not terribly difficult. One of the easiest ways to find out if a vendor really exists to do legitimate business is by looking for an active presence on the internet and social media. Look for a business registration with the city, county, or state. Find out if the vendor is incorporated, who is listed as the registered agent, or whether a DBA filing (“doing business as”) has been made. Check court records for any evidence of the existence of a real company.
Consider contacting companies in the same industry as the company for whom you are investigating, to find out if they have knowledge of the vendor or have done business with the vendor. Simple procedures like visiting the address on file or using Google Maps street view for the address on file can provide important information.
Vendors might also be verified through a service like Dun & Bradstreet (D&B), which maintains business credit history information. Access to their records is available for a fee, and a history of doing business with other companies will help verify that the vendor in question is a bona fide company. The absence of a credit history with D&B should not necessarily be considered proof that a vendor is phony, however. Many small businesses simply have never established an account with D&B, as their business may not need one. It is important to use the absence of a credit profile in conjunction with all other available information to determine the legitimacy of a vendor.
Do not use a single one of these data points as an indicator of the legitimacy of a vendor. Look at the totality of the circumstances before making a decision about whether a billing scheme may be in progress.