Business fraud can be difficult to detect. In this article, we're going to go over several different types of accounts receivable fraud and the various red flags that can come up.
Check Kiting And Lapping
Check kiting allows fraudsters to build up a balance in bank one by writing hot checks from bank 2. Perpetrators use the delay in processing checks (i.e., float period) to take advantage of an interest-free loan.
Bank 1 isn't aware that the check from bank 2 is insufficient funds. The fraudster can then write another hot check to cover any difference, thus going undetected. This scheme can and often does involve more than two banks, as funds are floated between all the involved banks to keep the fraud scheme going.
Lapping involves stealing a customer payment and using any additional payments from that customer to cover the theft. For example, a customer has invoice 1000 due for $1000. A perpetrator steals the $1000 received from the client for invoice 1000. Then invoice 1001 due for $1500 from the same customer is received. $1000 of the $1500 is used to cover invoice 1001. Then $500 is put toward the 3rd payment for this customer.
In the above lapping scheme, if the customer decides to leave and pays their final invoice, total invoice billings for this customer will not match total money received. That scenario will certainly throw a red flag. The fraudster will have to get more creative to cover up the shortfall in funds. In that case, they may even use a payment from an entirely different customer to cover the deficit.
As with many fraud schemes, lack of segregation of duties is often where things tend to break down. Skimming accounts receivable sales receipts involves an employee receiving customer cash, recording the payment and then charging an expense account. They pocket the money for the same amount of the expense charge.
Because the employee has financial access to such a broad range of financial duties, they can conceal their activities easily. Closer tracking of bank account withdrawals against expenses can help in detecting these types of schemes. Segregation of duties will go a long way to preventing such frauds as well.
Old Or Closed Accounts
Older or closed accounts are often not monitored as strictly as active accounts. These might includes accounts where customers tend to pay slowly. When funds are received, an employee can simply pocket them due to the lack of monitoring of these types of accounts.
Without proper oversight, a collection agency can collect customer funds and remit a smaller amount to the company. This scheme can work well if the employee in the company is the only point of contact with the collection agency. In fact, the employee would likely be receiving a kick back from the collection agency to ensure the fraud is not detected.
Since the collection agency is collecting what they can from customers, it can be difficult to know what amount was received. A periodic audit with the collections agency and verification with their clients involved can determine the accuracy of collections.
Accounts Receivable is not actual money in the bank. An employee can fabricate invoices, which will inflate accounts receivable. But who might this benefit since an invoice isn't the same as receiving cash?
Sales people who work on a commission will benefit from an increase in accounts receivables, as it will show an increase in sales. To make this work, someone in control of accounts receivables will have to be in on the fraud.
Red flags for this type of fraud are invoices to fake customers or invoices that do not match the type of business a customer might generate. At some point, these invoices might simply disappear as part of the fraud and go undetected. Internal controls that monitor this type of activity can help with detecting fictitious sales.
Delays In Deposits
A person in a financial controller position has oversight of payment collections and knowledge of the checks and balances to ensure proper accounting and possibly fraud. That is, assuming such checks and balances are reliable or even exist.
Delays in payment deposits can be a sign of potential fraud. If the controller decides to collect cash payments directly from customers, this fact can be hidden by writing a receipt of payment and creating a corresponding deposit ticket. While the bank account isn't increasing, the paper trail can be enough to cover up the fraud.
This type of fraud means the controller will have to allow for some payments to make it into the account. Otherwise, there will be a significant gap between what the bookkeeping states and what the bank account states.
As fraudsters get more and more greedy, the gap is likely to increase. This is a giveaway that something is out of place. There should be a close monitoring of stated collections vs. the bank account to reflect those collections. While a logical gap might be present, it should be monitored closely for deviation.
Don't be taken by business fraud. Apruve can help with eliminating the above types of account receivable fraud.