Using an organization's credit to commit fraud, part 2

By Joseph R. Dervaes, CFE, ACFE Fellow, CIA

  joseph-dervaes-80x80.jpg    Fraud's Finer Points 


As discussed in part one, there are many types of fraud in which employees use an organization's credit to purchase assets (i.e., goods and services) for personal benefit. Unauthorized use of company credit cards, purchasing cards, travel credit cards or business charge accounts are some of the most common areas in which I've encountered fictitious expense schemes. We previously discussed company credit cards, and now we will continue with purchasing credit cards and travel credit cards. 

MarchApril-credit-cardPURCHASING CREDIT CARDS 

Think about how the organization's petty cash fund operates, and you'll have a good grasp about how purchasing credit cards, or "P-cards," operate. In a petty cash fund operation, employees purchase relatively small items on behalf of an organization and then seek reimbursement for expenses from the account custodian. The custodian then periodically submits the documents for all purchases to the organization's accounts payable function to reimburse the fund. In a P-card operation, employees purchase assets on behalf of the organization on a much larger scale. 

P-cards are similar to other types of credit cards that organizations use in their normal course of business, except these cards are limited to purchasing transactions based upon specific, agreed-upon parameters. The primary difference between P-cards and any other type of company credit card is that an organization must enter into an agreement with the local bank to establish a P-card system exclusively for the company. The agreement also states that the credit transactions will be with vendors in the organization's geographic area based upon the bank's rules of use. The bank then bills the organization for total charges each month.

Organizations should use P-cards only when it makes good business sense to do so. P-cards work great for some things, but they aren't a substitute for an organization's purchasing function or department. The primary responsibility for charges on P-cards rests with an organization.

When P-cards were first introduced, many organizations feared that employees would either abuse the new purchasing systems or commit fraud using the cards. But as with most new systems, these organizations soon discovered they could mitigate their fears by properly monitoring the overall processes. Some of the largest state agencies and local governments in my state (Washington) now use P-cards to purchase millions of dollars in goods and services each year with relatively few problems. In my experience, P-card fraud has not been systemic within any of these organizations. The key to success is to implement a strong system of internal controls to aggressively monitor employee transactions for any deviation from expectations.

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