Accounts Receivable Fraud, Part Seven

Stealing the Statements


Fraud's Finer Points

I'm closing our discussion about accounts receivable fraud with this column by unveiling some of the more creative methods fraud perpetrators use to steal money from the organization. We'll also examine some learning objectives from the final type of on-book accounts receivable fraud scheme I see routinely in state and local government.  

Stealing the statements

The critical issue for any accounts receivable fraud is access to the computer accounting system containing all the customer accounts. As indicated in earlier articles, fraud perpetrators must do one of two things when cash receipts are misappropriated in these schemes:

o Write-off the account through some type of adjustment or cancellation of the debt due from the customer. We dealt with this alternative in the September/October column. It's the primary method of choice for concealment of irregular activity.

o Take no further action and allow the account to become delinquent. This alternative is risky because customer feedback about the account balance usually detects these cases. I'm going to deal with this alternative in this column.

Some fraudsters who steal customer payments in accounts receivable systems don't have the ability to write-off the account balances to conceal the unauthorized activity. Thus, these employees must resort to "stealing the statements" of the customer accounts that have been manipulated to conceal the delinquent account balance from the customer and to conceal the theft from the organization. This is accomplished in two ways. Fraudsters usually do this inside the organization before the statements are mailed. But they also do this outside the organization after the statements have been mailed. In both scenarios, the customer's normal billing statement is intercepted and changed. The customers then receive manually prepared statements indicating that they owe only the amount due from charges in the current billing period. To make the scheme work, the fraud perpetrator must be successful in concealing the delinquent account balances from both the customer and the organization.

As you might imagine, these schemes are often quite complex. Perhaps that's what makes them so interesting to those of us who study the behavior of employees who employ these tactics to misappropriate funds. But these schemes are almost always doomed to fail because eventually the fraud perpetrator will make a mistake. When stealing the statements is the concealment method chosen by the perpetrator, the fraudster's mistake is that he somehow misses a manipulated account and allows the organization to send a delinquency notice to the customer. The customer then responds by saying, "My account isn't delinquent, I paid my bill." The customer then produces a cash receipt or canceled check to prove this condition. If the cashier or accounting clerk who manipulated the account is also responsible for responding to customer complaints, they often tell customers that the organization is experiencing computer problems. They then make fictitious account adjustments that conceal the irregular activity and promise the customer that it won't happen to them again. This cover-up enables the fraudster to correct mistakes and to keep the scheme active often for long periods of time. This is why an independent customer service function must be created to carefully listen to customer complaints and research every problem thoroughly. An independent investigation of account irregularities usually detects fraud right away.


For full access to story, members may sign in here.

Not a member? Click here to Join Now and access the full article.