Terms and Definitions to Know

Embezzlement. Fraudulent appropriation of funds or property entrusted to your care but actually owned by someone else. May be carried out in a myriad of ways

Revenue Diversion. A type of embezzlement that involves diversion of revenue (monies) away from intended beneficiary to alternate beneficiary. For example, an employee intercepts checks or wire transfers and diverts them to his or her own benefit. Typically, the employee then destroys related documents, entries or files, such as sales orders, to avoid detection.

Skimming. A form of revenue diversion (embezzlement) in which cash is stolen from an organization before it is recorded on the organization’s books.

False Sale. The common factor is that the embezzler records only part of the sale transaction. Remember, two sets of transactions are recorded in a sale:

1. Financial sale (credit) and collection of cash or recording the debtor (debit)
2. Reduction of existing inventory in perpetual records (credit) and “cost of sale” entry in the records (debit)

The idea of this fraud/theft is to record reduction of inventory (the second part of the transaction) while not recording a sale. Employee takes the inventory for his or her benefit, records a transaction in the books that reduced the inventory but no sale is recorded and the business collects no money. When inventory items are large or have to be released or delivered from a storeroom, a false delivery docket is used to direct delivery or release of stock under what appears to be a legitimate sale. Computerized systems make these frauds more difficult but certainly not impossible.

False Purchase: False-purchase schemes are based on the theft of inventory before it is ever recorded in the company’s books. The first part of the scheme is to order items to be stolen, and steal them at the point of receipt. A more sophisticated version is to have inventory delivered directly to another location by the supplier so that it does not even have to be moved from the premises.
The idea of the scheme is to record the financial side of the purchase so the supplier is paid, but not record receipt of items into inventory records. Purchased items thus are never missed and never recorded as received.

Bid Rigging: Fraudulent activity that may occur when a purchaser solicits bids to purchase goods or services. Bidders agree in advance who will submit the winning bid. The purchaser, which depends on competition between bidders to generate the lowest competitive price, receives instead a “lowest bid” that is higher than the competitive market would bear.

Fraudulent Disbursements: A type of fraud in which the perpetrator causes his organization to disburse funds through some trick or device.

• Fictitious billing is carried out by submission of a fictitious bill (invoice) to your company for payment of goods not provided or services not performed.
• Check tampering is conversion of an organization’s funds by forging or altering a check on one of the organization’s bank accounts, or stealing a check the organization has legitimately issued to another payee.

Check Kiting: Possible only when a person can write checks on and make deposits in two or more bank accounts. The check kiter takes advantage of “float,” the number of days between check deposit and funds collection. Assuming that it takes three business days for checks to clear, a simple kite between two banks could be accomplished as follows:

On Dec. 1, a check in the amount of $5,000 drawn on bank A is deposited in bank B. On Dec. 2, the check kiter cashes a $5,000 check payable to cash and drawn on bank B with a teller at bank B. Because the original kited check will be presented to bank A on Dec. 4, the check kiter on or before that date will deposit a $6,000 check drawn on bank B in bank A not only to ensure payment of the original kited check but to increase the amount of the kite.

As the process repeats, kited checks become larger, more cash is withdrawn, and the scheme continues until the shortage is covered or the kite “breaks” when one of the banks refuses to honor a kited check because funds on deposit are uncollected.

Kickback: Money paid illegally to gain concessions or favors. For example, an employee agrees to steer purchases or contracts of its employer to a certain vendor in exchange for cash payments or other personal benefits.