Employee Fraud: Fraudulent Vendor Invoices...

Embezzlement of company resources by employees has been and will continue to be a difficult area for all businesses. One form of embezzlement happens when an employee, typically a bookkeeper, accounts payable clerk or a check signer, obtains money by creating a fictitious vendor through which funds are funneled. Typically embezzlement happens by trusted employees.

In the simplest form, an employee creates invoices from a fictitious company. This invoice is submitted for payment along with the valid accounts payable invoices. Checks are generated and mailed to the vendors. The employee then deposits the check in his/her personal account.

In more complex scams, multiple employees are involved. This example typically happens to larger, more sophisticated companies. An employee in shipping/receiving and an employee with purchase authorization create the fraudulent vendor invoice. The purchase authorization employee authorizes the order of widgets from a fictitious company. The shipping/receiving employee creates a fictitious receiving document stating that the widgets were received. Then accounts payable pays the vendor. The check is then deposited into a bank account which is then typically split between the employees.

Another example, an actual case, an employee worked in the accounts payable department of a large automobile dealership. Auto dealerships assume debts on cars which are traded-in on the purchase of a new car. This employee submitted her car loan payments along with all the other turned-in car loan payments on a monthly basis: a free car.

Often, the employee who intends to commit fraud will obtain a credit card from the same company that issues the company credit cards or the owner's personal credit card (American Express, First USA Bank, etc.) and will incur substantial debt and pay his/her card balances with company funds. Reviewing not only the payee but also the amount of checks will allow the owner to catch this sort of fraud earlier.

Some actions an employer can take to reduce the threat of embezzlement and assist in identifying the perpetrator(s) are listed below. These actions do not automatically imply a fraudulent vendor, but will assist business owners in identifying where more questions should be asked.

Be prepared to prosecute, even if the individual is your friend. People who are not prosecuted will likely move on to do the same to another business owner. If they are not prosecuted, that next business owner will never know, even if he/she runs criminal and background checks. In prosecuting, you will be required to provide proof of the embezzlement. A paper trail is necessary.

Please contact Berntson Porter & Company if you would like additional information or assistance in taking some of the actions listed above.