Misappropriation Schemes – Using the company checking account to perpetrate fraud

Overview

Common indicators, resources and prevention tips for misappropriation schemes executed through business checking accounts.

List of Schemes

1. Authorized Check Maker
2. Forged Checks
3. Altered Checks

Scheme No. 1

Authorized Check Maker

Description

This scheme is carried out by a person who is authorized to create and sign checks for the company. A common version of this scheme involves making the actual check payable to the perpetrator or paying for a personal expense (such as the credit card company of the perpetrator or family member), then altering the payee name in the electronic accounting records to make the disbursement appear to be made to a legitimate, authorized vendor.

Indicia

Vendor Inquiry
• A vendor may call to inquire about the status of an invoice that appears within the accounting records to have already been paid

Validation Resource(s)

• Comparisons of canceled checks with the accounting system check register to identify if there are differences between the actual and purported payees

Prevention Tips

• Someone other than the check maker should open the bank statements and prepare the reconciliation
• Positive Pay systems may also limit the risk of this type of scheme

Indicia

Review of Expenses

• If checks are being disbursed to pay an individual’s personal expenses in addition to the company’s routine expenses, unusual increases in monthly expenses may be noticeable
• Note that the perpetrator may attempt to conceal the increase in expenses by preparing a manual journal entry to decrease the affected expense accounts

Validation Resource(s)

• Review of monthly expense account activity and trends and detailed analysis of anomalies can identify inappropriate payments
• Review of documentation related to manual journal entries that are recorded as credits to expense accounts will identify if the journal entries are properly supported and approved

Prevention Tips

• For small businesses, the owner should open and review the contents of the bank statement
• If canceled checks are not included with the bank statements, an online review of the cancelled checks should be performed

Scheme No. 2

Forged Checks

Indicia

Checks Not Recorded in System

• Through bank reconciliation procedures, identification of checks that have cleared the bank but are not recorded in the accounting system

Validation Resource(s)

• Comparisons of cancelled checks with the accounting system check register to determine if the checks are recorded
• Further analysis of checks are found to be unrecorded in the system
• Review of endorsement on check might reveal parties that are involved in the scheme

Prevention Tips

• Develop adequate procedures to protect custody and access to the company’s check stock

• Develop policies for adequate disposal of unused check stock

• Someone other than the check maker should open the bank statement, reconcile the account and report unrecorded checks to an appropriate person

Scheme No. 3

Altered Checks

Description

An individual intercepts legitimate signed company checks and alters the payee and/or check amount. The person is not authorized to create or sign checks for the company, although typically, he or she is responsible for receiving banks statements with cancelled checks and performing the bank reconciliations. The altered checks subsequently are destroyed in order to conceal the alteration.

This scheme may also be perpetrated by unrelated third parties who steal signed checks from mailboxes. The most common scenario involves altering the original payee name or amount by using chemical or mechanical means (e.g., correction fluid, “check washing” solution or pen eraser) and inserting different information, in similar print, in order to avoid detection.

Indicia

Physical Appearance

• Presence of correction fluid or other physical evidence that the check has been altered
• Cancelled checks missing from the files

 

Validation Resource(s)

• Physical examination of cancelled checks, noting the presence of alterations

Prevention Tips

• Implement adequate segregation of duties to ensure that anyone with access to check stock, or who is involved in the cash disbursement process, (1) does not receive bank statements or cancelled checks and (2) is not involved in the bank reconciliation process
• Positive Pay systems may also limit the risk of this type of scheme

Indicia

Collection Inquiry

• To the extent that legitimate payees’ checks are intercepted and altered, there are likely to be inquiries from the legitimate payee about the status of payment

 

Validation Resource(s)

• Comparison of cancelled checks and the accounting system check register and supporting documentation to identify discrepancies

 

Prevention Tips

• For small businesses, the owner should open and review the contents of the bank statement
• If cancelled checks are not included with the bank statements, a review online with the bank should be performed