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ACCOUNTS RECEIVABLE FRAUD

Overview of the Accounts Receivable Process


1.

Credit Decisions
The supplier of goods and services checks if the prospective customer is
of sufficient credit worthiness to warrant the supply of the products or
services under an account arrangement.

2.

Billing and Bill Distribution


This happens once the goods/services have been supplied. Payments are
completed by the customer once they are ready to pay.

3.

Receipting, Allocations and Reconciliation


This step is undertaken by an Accounts Receivables (AR) Officer. The AR
Officer identifies a payment deposited into the supplier bank
account, receipts it into the AR system, allocates it to an invoice and
reconciles to ensure that the payment is correct.

4.

Collections
The Collections Officer identifies all invoices that are short paid or unpaid
as of the due date and collects them.

5.

Disputes Management
If the customer disputes a bill/invoice, this step is typically managed
between a Collections Officer and the customer.

6.

Bad Debts Write-off and Recovery


Once the bill/invoice reaches a set date and/or is under dispute and is not
resolvable to the satisfaction of the supplier, it would then be considered
a bad debt and eventually be written off resulting to a loss.
Recovery occurs when bad debts are paid either in whole or in part which
results to producing income.

Accounts Receivable Fraud Schemes


1. Lapping/Hiking
a. How it is done
It occurs when an employee steals cash by diverting a payment
from one customer, and then hides the theft by diverting cash
from another customer to offset the receivable from the first
customer. This type of fraud can be conducted in perpetuity,
since newer payments are continually being used to pay for
older debts, so that no receivable involved in the fraud ever
appears to be that old.
b. Prevention
Separate responsibilities so that no single employee handles all
aspects of collection, deposit, recording, and reconciliation

Assigning a rotation of employees to accounting positions, and


restricting each employee's access to their current job role
Mandatory vacations will also disrupt a fraudster's plans, and
can serve as a deterrent because potential fraudsters know that
a scheme requiring daily cover-ups won't be feasible
Have an employee in a non-cashier position send account
statements to customers and clients. Savvy clients know when
payment details are fishy, and will contact the company to alert
them. Companies should contact customers to confirm that
statements have been received, to ensure that statements
aren't being intercepted
Audit cash receipt transactions regularly, and implement
surprise inspections as well.
Monitor trends in your accounts receivable. A growing delay in
payment processing across all accounts can indicate that a
lapping scheme is in progress.
Have the bank provide authenticated deposit slips, which can be
compared to remittance advices to confirm names, dates, and
amounts of individual payments.
Implement company-wide policies encouraging employees to
report known or suspected fraudulent activity.
c. Detection
Workaholic streak development
- Employees responsible for cash handling and recording
work longer hours and never take vacations so as to
intercept incoming payments to divert them to previous
accounts
Extreme employee financial stress
- Employees responsible for cash handling and recording
are under extreme financial stress urging them to
simply borrow the company funds
2. Sales Data Manipulation/Skimming Fraud
a. How it is done
It occurs when the perpetrator steals cash receipts before the
transaction is recorded in a company's financial records; thus, it
is often referred to as an "off-the-books" scheme. Employees
who receive payments from customers on account and convert
the remittances for personal gain. An employee can carry out
this scheme over longer periods of time before being detected if
he or she also has the ability to manipulate the billing system.
b. Prevention
Adequate segregation of duties
Regular customer remittance advice comparison
Regular journal entry review
Customer complaint mechanism

Immediate endorsement of checks received with "For Deposit


Only" to an account controlled by the company
c. Detection
Declining gross profit margin
- This decline could be a sign of skimming cash receipts
and not recording the corresponding deduction to the
accounts receivable
Unusual issuance of credit memos
- If unusual credit memos have been issued toward a
customer's accounts, the perpetrator may have
attempted to cover up the company's refund of a
customer deposit that was initially misappropriated
Difference of outstanding and listed customer invoice
- In some cases, the outstanding customer invoice for
which a payment was applied by the perpetrator may be
different than the invoice listed on the customer's
remittance advice. This occurs when the perpetrator is
using a lapping scheme to conceal the skimming scheme.
For example, if the customer intended to pay invoice
#003 per the remittance advice but the perpetrator
instead applied the customer payment to invoice #002, it
is likely that the perpetrator previously skimmed the
payment for invoice #002 and must now conceal the
misappropriation
Unusual number of customer charge-offs
- An unusual number of customer charge-offs may indicate
that the perpetrator is identifying an amount as
uncollectible when the customer's payment has already
been received and misappropriated by the perpetrator
3. Fraudulent Delinquency of Accounts/Write-off Schemes
a. How it is done
If an account is marked as delinquent, it may be included in a
company's allowance for doubtful accounts and written off
from gross receivables. When this happens, payments on the
account may no longer be accounted for to the best of the
company's ability. An employee with access to the accounts
classification system can mark a current account as
delinquent and begin pocketing the payments
b. Prevention
Adequate segregation of duties
Regular customer remittance advice comparison
Regular journal entry review
Customer complaint mechanism
Immediate endorsement of checks received with "For Deposit
Only" to an account controlled by the company
c. Detection

Unusual number of customer charge-offs


Infrequent patterns on customer accounts in subsequent
audit
4. Diversion of Delinquent Payments Scheme
a. How it is done
An employee with access to payment processing can
divert payments that come from delinquent accounts,
knowing that these accounts may have been written off
and may not be well-monitored
b. Prevention
Have an employee in a non-cashier position send account
statements to customers and clients. Savvy clients know
when payment details are fishy, and will contact the
company to alert them
c. Detection
Customer verification of outstanding credit status
5. Kiting
a. How it is done
It occurs through opening accounts at two or more
institutions and using "the float time" of available funds to
create fraudulent balances. This fraud has become easier
in recent years due to new regulations requiring banks to
make funds available sooner, combined with increasingly
competitive banking practices
b. Prevention
Restricted policies regarding depositors' use of
uncollected funds
Monitor SAFEBANK
Restricted access in questionable accounts
c. Detection
Signature and payee on kited checks are often the same
Area abnormalities (many out-of-area checks)
Frequent deposits, check writing, and balance inquiries
Escalating balances
Bank abnormalities (deposited checks are usually drawn
on the same banks)
Average length of time money remains in account is short
NSF (frequent NSF problems)
Keep banks from recognizing frequency of transactions by
using ATM, night drop, drive up, and other branches for
deposits and withdrawals
6. Check-for-Cash Substitution
a. How it is done

It usually occurs when a company receives some sort of


unexpected payment and the employee who receives
the incoming check sets it aside without recording it, and
when an equal amount of currency has been received, the
employee takes the currency and replaces it with the
check
b. Prevention
periodically performing surprise test counts in the
middle of the day of cash and check collections
c. Detection
Validation of the form of payment (i.e., cash, check, and
credit card) by the employee responsible for reconciling
the account

References:
-

http://info.ansoniacreditdata.com/blog/accounts-receivable-fraud-lappingwhat-it-is-and-how-to-prevent-it
http://www.accountingtools.com/questions-and-answers/what-is-lappingfraud.html
https://www.ippayments.com/accounts-receivable/accounts-receivable-arautomation/
http://www.zouzias.com/custom13.php
http://info.ansoniacreditdata.com/blog/accounts-receivable-fraud-schemesyou-need-to-know
http://www.alliedbizgroup.com/resources/publications/embezzlementskimming-fraud-prevention-and-detection.html
http://brisbaneacfe.org/library/occupational-fraud/skimming-debtors-receiptscash-frauds/
http://www.ftpress.com/articles/article.aspx?p=2101527&seqNum=4
http://www.ckfraud.org/ckfraud.html
http://www.thefreelibrary.com/Check+kiting%3A+detection,
+prosecution+and+prevention.-a015139850
http://cpa-scribo.com/fraud-check-for-cash-substitutions/
http://algaonline.org/index.aspx?Nid=419
http://www.thenortongroup.net/nnotes2.html

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