Sample Listing Of Fraud Schemes - Deloitte
Sample listing offraud schemesCentre for Corporate Governance
Sample listing of fraud schemesThe following listing of possible fraud schemes can beutilized by management and auditors to assist inidentifying possible fraud risks, scenarios, and schemeswhen performing or evaluating management's fraud riskassessments. The listing of fraud schemes is notintended to be a complete listing of all possible fraudschemes for all industries.Fraudulent Financial Reporting SchemesImproper Revenue RecognitionSide Agreements - Sales terms and conditions may bemodified, revoked, or otherwise amended outside of therecognized sales process or reporting channels and mayimpact revenue recognition. Common modificationsmay include granting of rights of return, extendedpayment terms, refund, or exchange. Sellers mayprovide these terms and conditions in concealed sideletters, e-mails, or in verbal agreements in order torecognize revenue before the sale is complete. In theordinary course of business, sales agreements can andoften are legitimately amended, and there is nothingwrong with giving purchasers a right of return orexchange, as long as revenue is recognized in the properaccounting period with appropriate reserves established.“Roundtrip” Transactions - Recording transactions thatoccur between two or more companies for which thereis no business purpose or economic benefit to thecompanies involved. These transactions are oftenentered into for the purpose of inflating revenues orcreating the appearance of strong sales growth.Transactions may include sales between companies forthe same amount within a short time period, or theymay involve a loan to or investment in a customer sothat the customer has the ability to purchase the goods.Cash may change hands, but payment alone does notlegitimize the transaction or justify the recognition ofrevenue if there is no underlying business purpose oreconomic benefit for the transactions.Bill and Holds - A bill and hold transaction takes placewhen products have been booked as a sale but deliveryand transfer of ownership has not occurred as of thedate the sale is recorded. The transaction may involve alegitimate sales or purchase order; however, thecustomer is not ready, willing, or able to accept delivery2 2009 Deloitte Touche Tohmatsu India Private Limitedof the product at the time the sale is recorded. Sellersmay hold the goods in its facilities or may ship them todifferent locations, including third-party warehouses.Altering Shipping Documentation - By creating phonyshipping documentation, a company may falsely recordsales transactions and improperly recognize revenue. Byaltering shipping documentation (commonly changingshipment dates and/or terms), a company can increaserevenue in a specific accounting period regardless of thefacts and circumstances that the transaction and theresulting revenue should have been recorded in thesubsequent accounting period.Agreements to “Sell-Through” Product - These salesagreements include contingent terms that are based onthe future performance of the buyer of the goods(commonly distributors or resellers) and impact revenuerecognition for the seller. These contingent terms may or
falsification or modification of accounting records in anattempt to hide the terms or conditions that mayrequire the sales reduction (e.g., purchase orders,invoices and sales contracts).Inventory Schemesmay not be included in the sales agreements and maybe provided in side agreements. “Sell through”agreements are similar to consignment sales and caninvolve shipment of goods to a party who agrees to sellthem to third parties. A sale is not considered to havetaken place (and therefore revenue should not berecorded) until the goods are sold to a third party (acustomer or end-user) with no additional contingentsales terms.Up-Front Fees - Some sales transactions requirecustomers to pay up-front fees for services that will beprovided over an extended period of time. Companiesmay attempt to recognize the full amount of thecontract or the amount of the fees received before theservices are performed (and before revenue is earned).In some instances, the scheme may involve thefalsification or modification of accounting records (e.g.,purchase orders, invoices and sales contracts).Holding Accounting Periods Open - Improperlyholding accounting records open beyond the end of anaccounting period can enable companies to recordadditional transactions that occur after the end of areporting period in the current accounting period. Thisscheme commonly involves recording sales and/or cashreceipts that occur after the end of the reporting periodin the current period. Schemes sometimes includefalsification or modification of accountingdocumentation (dates on shipping documents, purchaseorders, bank statements, cash reconciliations, cashreceipt journals, etc.) in an attempt to cover the trail ofthe fraud.Failure to Record Sales Provisions or Allowances Some sales transactions require companies to recordprovisions or reductions to gross sales amounts (e.g., toaccount for future sales returns). By failing to recordsales provisions or reductions, companies can improperlyoverstate revenues. The scheme may involve theInflating the Value of Inventory - Inventory valuationscan be manipulated in a number of ways, including:moving inventory between locations to fictitiously inflateinventory quantities, postponing and under-reporting ofwrite-downs and reserves for obsolescence,manipulating unit valuations applied to on handinventories, and improper inventory capitalization.Off-Site” or Fictitious Inventory - Companies may“create” inventory by falsifying journal entries, receivingand shipping reports, purchases orders, or cycle counts.Companies may participate in these schemes todecrease cost of sales as a percentage of sales ormaintain inventory balances for debt covenants or otherreasons.Other Financial Reporting SchemesFraudulent Audit Confirmations - Fraudulent auditconfirmations can impact all types of accounts ortransactions that are confirmed with third parties (sales,cash, accounts receivables, debt, liabilities, etc.).Schemes may involve collusion with third parties whoreceive the audit confirmations or may involve thecompany providing the auditors with false contactinformation (false mailingaddresses, fax numbers, phone numbers, etc.) so thatconfirmations are diverted to co-conspirators involvedin the scheme.“Refreshed” Receivables - In order to mask risingaccount receivable balances (including known orsuspected uncollectible balances) while avoidingincreasing the bad debt provision, a company may“refresh” the aging of receivables and improperlyrepresent A/R balances as being current in natureinstead of showing the true age of the receivables. Thismay occur with exchange transactions with customers,where customers can receive “credits” to their accountsand allowed to repurchase goods where little, if any, 2009 Deloitte Touche Tohmatsu India Private Limited3
physical transfer of merchandise occurs. Some schemesmay simply modify or edit dates of invoices in the A/Rsystem that results in a “restart” of the aging process forthe modified receivables. Schemes may involve thefalsification or improper modification of accountingdocumentation (invoices, purchase orders, changeorders, shipping reports, etc.) to cover up the fraudscheme.Promotional Allowance Manipulations - Promotionalallowances may be provided as rebates, incentives, orother credits to buyers/customers as an incentive topurchase products. Allow-ances may take the form ofvolume discounts, reimbursements for special handling,co-advertising reimbursements, slotting fees, etc. Oftenpromotional allowances are based on future events(such as purchase volumes over a specified period oftime, future advertising costs, etc.) and often requireconsiderable estimates that may be manipulated orbiased. Some schemes involve the early recognition ofrevenue on up-front fees collected or the failure toaccrue for rebates or credits that are likely to be earnedby the buyer. Other fraud schemes involve fraudulentfinancial reporting and the misclassification of credits onthe income statement.Adjustments to Estimates - Estimates are commonthroughout the accounting process and can bemanipulated to impact revenues, expenses, assetvaluations, and/or liabilities. Management is often in aposition where it can influence or bias estimates.Common fraud schemes involve the reduction ofaccruals or reserves in order to increase earnings in thecurrent period, and may involve the earlier creation ofexcess reserves or “cookie-jar reserves”when the company was in a financial position to createa “cushion” against future losses.Off-Balance-Sheet Entities and Liabilities - Someschemes involve the use of “off-balance-sheet” vehiclesor special purposes entities to conceal liabilities. Offbalance-sheet vehicles may be allowable under IndianGAAP; however, some schemes are designed to utilizethese entities or transactions to conceal debt andmisstate liabilities on the balance sheet and may alsohave income statement impact as well.4 2009 Deloitte Touche Tohmatsu India Private LimitedImproper Asset Valuations - There is often a directrelationship between the overstatement of assets andinflation of earnings. Many fraud schemes involve the“hiding” or misplacement of debits on the balance sheetthat should be recorded on the income statement.These debits are often improperly recorded as assets ora reduction to existing liabilities. Overvaluing assets isoften considered a relatively “simple” way to directlymanipulate reported earnings.Phony “Investment Deals” - Designed to overstateassets and earnings, schemes can deliberately overstateexisting investments or create fictitious investments.Investments may also be intentionally misclassifiedresulting in the improper recognition of gains or failureto recognize losses. Other schemes are designed to hideor defer losses from sales or permanent write downsfrom impairments.Improper Capitalization of Expenses - Capitalexpenditures are costs that benefit the company overmore than one accounting period, and accordingly, theexpenditures should be amortized over the life of theasset. Companies may improperly capitalize certainexpenditures in order to avoid recognizing the fullamount of the expense in the current period. Expensesmay be capitalized into various asset accounts, and mayinclude software development costs, research anddevelopment costs, start-up costs, interest costs,advertising costs, inventory and labor costs, etc.Adding Back Outstanding Checks to Cash - Cashreconciliations can be manipulated in order to inflateending cash balances. Some schemes are accomplishedwith one “reconciling” item or adjustment on thereconciliation, or may involve selecting and removingspecific checks from the outstanding check registers.Unjustified Consolidation Entries - Some schemesoccur during the financial closing and consolidationprocess and involve un-justified or fictitiousconsolidation entries. Often there is limited accountingdocumentation or explanations for consolidation entriesand activities.
Intercompany Manipulations - Similar to otheraccounting schemes involving consolidations,intercompany manipulations may have limiteddocumentation or explanations for inter-companyentries and activities. Schemes may occur toover/understate balances or may involve the creation offictitious transactions.Related Parties That “Create” Transactions - Relatedparty transactions are made with entities that arecontrolled or influenced by the company. Schemes mayinvolve improper or inadequate disclosure oftransactions or more elaborate schemes to “create”fictitious transactions between entities, often with theintent to increase reported revenues or assets.Disclosure Frauds - Fraudulent disclosures may includeproviding false information or the failure to discloserequired information. Schemes may involve a company'sfailure to disclose certain transactions with relatedparties, material asset impairments, unrecorded liabilitiesor accounting practices that violate Indian GAAP.Schemes may involve a company'sfailure to disclose certain transactionswith related parties, material assetimpairments, unrecorded liabilitiesor accounting practices that violateIndian GAAP.Misappropriation of assetsSkimming of Cash - Skimming schemes often involvethe sales cycle, where employees embezzle by notrecording the sale or full amount of the cash collected.A typical skimming scheme might involve a retail storewhere an employee collects cash from a customer,pockets the money, and avoids recording thetransaction in the point of sales system. Other skimmingschemes are not limited to cash transactions and mayinvolve diverting customer checks.Fraudulent Disbursements - Schemes may includebilling schemes, procurement fraud, theft of companychecks, payroll and “ghost employee” schemes, andexpense reimbursement schemes. A commonprocurement scheme is to set up phony vendors orsuppliers in the accounts payable system or approvepayments for services that are received by the employeeor co-conspirator. Payroll schemes can includefalsification of hours worked creation of fictitiousemployees, failure to remove employees who have leftthe company and the diversion of payments toemployees or co-conspirators.Other fraud schemesBribery, Corruption, & Kickbacks - Corruption andbribery may take a variety of forms within anorganization and may include such items as vendorspaying “gratuities” to buyers to secure sales, buyerspaying premiums to vendors because of a buyer'spersonal relationships, payments to “shell companies”for soft services that are not actually rendered, paymentterms are “structured” to avoid proper approvalsignatures, or the same vendor may appear in thepayables system in numerous ways as a method ofmaking duplicate payments. Schemes may also involvepreferred service providers who are willing to paykickbacks to individuals for the company's business.Money Laundering - Money laundering is the processof con-cealing the source of illegally obtained money.This process is of critical importance to the perpetrator,as it enables the criminal to enjoy profits withoutrevealing their source. Activities may involve disguisingthe sources, changing the form, or moving the funds toa place where they are less likely to attract attention.Money laundering profits may come fromembezzlement, insider trading, bribery, computer fraudschemes, illegal arms sales, smuggling, and the activitiesof organized crime. 2009 Deloitte Touche Tohmatsu India Private Limited5
Questions to considerThe following is a list of some of the questions formanagement to consider when designing andevaluating antifraud programs and controls.Management should consider and evaluate the factsand circumstances for their organizations (e.g., theentity's industry, operations, geographical locations,size, organizational structure, and general economicconditions) and tailor their antifraud programs andcontrols accordingly. The following questions andthemes are adopted from various sources, including theSarbanes-Oxley Act of 2002, SEC's Final Rules onSarbanes-Oxley, SAS 99, PCAOB Auditing Standards No.2, COSO and Clause 49 of the listing agreement.Fraud Risk Assessment1. Does the company have formal and regularlyscheduled procedures to perform fraud riskassessments?8. Are fraud risk assessments updated periodically toinclude considerations of changes in operations, newinformation systems, acquisitions, changes in job rolesand responsibilities, employees in new positions, resultsfrom self-assessments of controls, monitoring activities,internal audit findings, new or evolving industry trends,and revisions to identified fraud risks within theorganization?9. Does management assess the design and operatingeffectiveness of the fraud risk assessments?10. Does management adequately document itsassessments and conclusions regarding the design andoperating effectiveness of the fraud risk assessments?11. Is the fraud risk assessment designed and operatingeffectively?Control Environment2. Are appropriate personnel involved in the fraud riskassessments?3. Are fraud risk assessments performed at allappropriate levels of the organization (such as the entitylevel, significant locations or business units, significantaccount balance or major process level)?1. Does the company maintain a proper tone at the top?Did management assess the tone of the organization todetermine if the culture encourages ethical behavior,consultation, and open communication? (Thisassessment can be made through anonymous culturalsurveys, inquiries and interviews, or by internal auditreview.)4. Does the fraud risk assessment include considerationof internal and external risk factors (including pressuresor incentives, rationalizations or attitudes, andopportunities)?2. Do the audit committee and the board of directorshave sufficient oversight of management's antifraudprograms and controls?5. Does the fraud risk assessment include theidentification and evaluation of past occurrences andallegations of fraud within the entity and industry? Doesit include the evaluations of unusual financial trends orrelationships identified from analytical procedures ortechniques?3. Does the internal audit function have sufficientinvolvement in antifraud programs and controls,including monitoring of the effectiveness of antifraudprograms and controls, given the size and complexity ofthe organization? Does the internal audit function reportdirectly to the audit committee?6. Does the fraud risk assessment consider the risk ofmanagement's override of controls?4. Does the company have a published code ofethics/conduct (with provisions related to conflicts ofinterest, related-party trans-actions, illegal acts, andfraud) made available to all personnel and doesmanagement require employees to confirm that they7. Does management consider the type, likelihood,significance, and pervasiveness of identified fraud risks?6 2009 Deloitte Touche Tohmatsu India Private Limited
accept and agree to follow it? Does the frequency ofexceptions undermine the code's effectiveness? Doesthe code comply will all applicable rules and regulations?5. Does the company have an ethics/whistleblowerhotline with adequate procedures to handle anonymouscomplaints (received from inside and outside thecompany), and to accept confidential submission ofconcerns about questionable ac-counting, internalaccounting control, or auditing matters? Are tips andwhistleblower complaints investigated and resolved in atimely manner?6. Does the company have formal hiring and promotionstandards, including background checks for thoseemployees with influence over financial reporting orinvolved in the preparation of the financial statements?7. Does the company have formal and effective trainingfor employees and new hires on issues of fraud, ethics,and the code of ethics/conduct?8. Does the company respond in a timely andappropriate manner to significant control deficiencies,allegations or concerns of fraud, and violations of thecode of ethics/conduct?9. Does management assess the design and operatingeffectiveness of the control environment?10. Does management adequately document itsassessments and conclusions regarding the design andoperating effectiveness of the control environment?11. Is the control environment designed and operatingeffectively?Antifraud Control Activities1. Does the company adequately map or link identifiedfraud risks to control activities designed to mitigate thefraud risks?2. Does management design and implementpreventative and detective controls (preventativecontrols are designed to stop fraud from occurring anddetective controls are designed to identify the fraud if itoccurs)?3. Does the company have controls that restrain themisappropriation of company assets that could result ina material misstatement of the financial statements?4. Does t
billing schemes, procurement fraud, theft of company checks, payroll and “ghost employee” schemes, and expense reimbursement schemes. A common procurement scheme is to set up phony vendors or suppliers in the accounts payable system or approve payments for services that are received by the employee or co-conspirator. Payroll schemes can include
Types of economic crime/fraud experienced Customer fraud was introduced as a category for the first time in our 2018 survey. It refers to fraud committed by the end-user and comprises economic crimes such as mortgage fraud, credit card fraud, claims fraud, cheque fraud, ID fraud and similar fraud types. Source: PwC analysis 2
Types of economic crime/fraud experienced Customer fraud was introduced as a category for the first time in our 2018 survey. It refers to fraud committed by the end-user and comprises economic crimes such as mortgage fraud, credit card fraud, claims fraud, cheque fraud, ID fraud and similar fraud types. Source: PwC analysis 2
Detection of Fraud Schemes Fraud is much more likely to be detected by tips than by any other method. 2012 Association of Certified Fraud Examiners, Inc. 26 Detection of Occupational Frauds 2012 Association of Certified Fraud Examiners, Inc. 27 Why Employees Do Not Report Fraud According to a Business Ethics Study (Association of Certified Fraud Examiners), employees do not .
Auditors are not effectively trained to detect or recognize fraud. One expert noted that fact patterns suggesting that fraud exists (i.e., fraud schemes) are unfamiliar to many auditors because they have not been trained in this area and because fraud is a rare event. Auditors' lack training in fraud detection methods or fraud investigation
Card Fraud 11 Unauthorised debit, credit and other payment card fraud 12 Remote purchase (Card-not-present) fraud 15 Counterfeit Card Fraud 17 Lost and Stolen Card Fraud 18 Card ID theft 20 Card not-received fraud 22 Internet/e-commerce card fraud los
Fraud by any other name is still fraud “Relatively few occupational fraud and abuse offenses are discovered through routine audits. Most Fraud is uncovered as a result of tips and complaints from other employees.” Association of Fraud
Fraud risk management strategy Fraud prevention Anti-fraud culture Risk awareness Whistleblowing Sound internal control systems A fraud policy statement, effective recruitment policies and good internal controls can minimise the risk of fraud. Fraud detection Performing regular checks. Warning signals/fraud risk indicators:
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