Detecting and Preventing Billing Schemes in Fraudulent Disbursements

What Are Fraudulent Disbursements? 

Fraudulent disbursements are the most common form of asset misappropriation. According to the Association of Certified Fraud Examiners (ACFE), this type of fraud occurs when an employee makes a distribution of organizational funds or manipulates a disbursement/payment function for a dishonest purpose (e.g., submitting false invoices for payment, altering timecards, or making personal purchases with company funds). 

Fraudulent disbursements are on-book fraud schemes. This means that the checks (cash) leave the entity and are recorded in the books, thus creating a trail. Billing fraud schemes are just one type of fraudulent disbursement, although the most common and costly. 

Understanding Billing Schemes: The Most Common Fraudulent Disbursement 

Billing schemes involve an organization’s purchasing function. They cause the organization to buy goods or services that are nonexistent, overpriced, or unnecessary. This kind of fraudulent billing can significantly impact an organization’s cash flow. 

The three main categories of billing schemes are:

1. Shell company schemes are when an employee submits invoices for payment from a fictitious company controlled by the employee. 
2. Pay-and-return schemes occur when an employee overbills a vendor to pocket the overpayment amount once returned to the organization. 
3. Personal schemes are when an employee submits an invoice for personal purchases to the company for payment, or when an employee uses a company credit card for personal purchases. 

Key Indicators of Billing Scheme Fraud 

Key indicators of a billing scheme fraud will vary based on the industry and the individual organization, but some key indicators to be aware of include:  

• Frequent changes in vendor names or billing addresses. 
• Consistent presence of unknown or new vendors. 
• A change in billing patterns (e.g., bi-monthly changed to bi-weekly).
• A change in billed amounts. 

The employees involved in the scheme may display certain red flags, such as an increase in luxurious purchases (e.g., new clothes, jewelry, or cars) or a change in their lifestyle, such as vacationing more frequently or at higher-end locations. 

Internal Controls to Prevent Billing Schemes  

Internal controls work to protect and detect potential threats and can be designed to prevent billing schemes. Organizations that implement and regularly monitor their internal controls experience benefits in many ways, such as safeguarding resources and mitigating risks. Your organization should, at a minimum, implement the following internal controls that can help prevent billing schemes or other disbursement fraud:

• Monitor accounts payable for fraudulent disbursements. 
• Keep the purchasing department separate from the accounting, receiving, payment, and shipping departments. Purchasing and receiving functions should be segregated from invoice processing, accounts payable, and general ledger functions. 
• Pre-number purchase orders and describe them as items, quantities, prices, and dates. 
• Require competitive bids for all purchases, or at least at a designated threshold amount.
• Make the receiving department prepare reports and maintain a log for all items received. The accounting and purchasing department should furnish copies of reports.  
• Match vendor invoices, receiving reports, and purchase orders before recording the related liability. The record of goods returned to vendors should also match vendor credit memos.  
• Record purchase orders in a purchase register or voucher register before processing through cash disbursements. Reconcile the ledger or voucher register monthly to the general ledger control accounts.  
• Implement control methods to check for duplicate invoices and purchase order numbers.
• Review monthly credit card statements for irregularities. 
• Restrict access to the accounts payable sub-ledger and the general ledger by creating an audit trail. For example, write-offs of accounts payable balances should require the manager's approval. 
• Maintain a master vendor file that is reviewed and analyzed for abnormal or suspicious activity.  

Prevent a Future Billing Scheme 

Billing schemes are the most common type of fraudulent disbursement, accounting for 22% of all asset misappropriation schemes, according to ACFE’s Occupation Fraud 2024: A Report to the Nations. However, since there is a paper trail, this type of fraud can be detected or prevented with due diligence procedures in place. Contact us below to discuss strategies to help your organization mitigate potential fraud.