Latest / VoraPrep Audio — Professional Licensure & Certification Exam Prep / [CFE] CFE1: Fraudulent Disbursements: Unmasking Billing, Payroll, and Expense Schemes
Transcript
- Hey, welcome to VoraPrep Audio. Thanks for tuning in. Let’s start with a scenario you’re likely to see on the exam. And you'll definitely see it in the real world. Imagine you’re a Certified Fraud Examiner, a CFE. You’ve just walked into a manufacturing company. Their profits are tanking, but revenues are totally flat. Something’s wrong. You start digging through the books and spot a couple of weird things right away. First, there’s a huge spike in payments for "consulting fees." These payments are going to a brand-new vendor who only has a PO box for an address. Second, a bunch of employees all submitted expense reports for the same fancy restaurant, on back-to-back nights. Your job is to figure out what’s going on. This is the world of fraudulent disbursements. It’s one of the biggest categories of asset misappropriation. The core idea is simple: an employee tricks the company into paying for something it shouldn't. Think of it like a leaky plumbing system in a house. The company's cash is the water. A fraudulent disbursement is when an employee secretly drills a new hole in a pipe. They divert that water to their own bucket. They aren’t just stealing cash from the register. They’re manipulating the system itself. They use invoices, payroll, and expense reports to make the cash flow out. On the surface, it all looks legitimate. So, how do they do it? There are a few main ways this happens. You need to be able to spot the differences. The most common is probably a billing scheme. This is when the fraudster submits a fake invoice to get the company to cut a check. Maybe they create a totally fake vendor, what’s known as a "shell company." That's what you might be seeing with that consulting firm that only has a PO box. That’s a huge red flag. Another version of this is when they use a real vendor but just inflate the invoice. Or, they buy something for themselves and sneak the invoice into a stack of legitimate business expenses. You’re looking for things like vague descriptions on invoices. A classic is just "consulting services." You should also look for vendor addresses that just happen to match an employee’s home address. But what if the fraudster isn't in accounts payable? What if they're in HR or payroll? Then their tool of choice might be a payroll scheme. This is where they manipulate the payroll system. The classic move here is the "ghost employee." They create a fake person in the system. Then the company starts cutting paychecks to someone who doesn't actually work there. The money often goes right into the fraudster's own bank account. What are the red flags for this? You might see employees with no tax deductions. Or you might find duplicate bank accounts in the payroll master file. Maybe you see someone getting a crazy amount of overtime that just doesn't make sense for their job. Then you have check tampering. This one is a bit more old-school, but it absolutely still happens. This is where someone physically messes with a company check. They might forge the signature of an authorized check signer. Or they might take a legitimate check written to a vendor, alter the payee name to their own, and then cash it. Sometimes, the authorized signer is the problem. They have the authority to sign checks, so they just write one to themselves for a fake reason. The signs to look for here are things like missing checks in a sequence. Or you might see checks made out to "cash" that aren't for petty cash. And finally, there's expense reimbursement schemes. We've all probably seen a small version of this. This is where employees claim reimbursement for fake or inflated expenses. They might submit a receipt for a fancy dinner with a "client" that was actually their anniversary dinner. That’s called a mischaracterized expense. Or they might submit a receipt for a fifty-dollar taxi ride when it was only twenty. That’s an overstated expense. Or they could just make one up entirely. That's a fictitious expense. The giveaways here are often a lack of original receipts. Also watch for lots of expenses that are rounded to an even number. Another red flag is seeing expenses that are consistently just under the amount that requires a manager’s second approval. So when you're faced with a potential fraud, what’s the process? It’s pretty logical. First, you try to put it in one of those four buckets. Is this an invoice problem? That points to a billing scheme. Is it a payroll issue? Then you’re looking at a payroll scheme. Is it a physical check? Check tampering. An employee expense report? You get the idea. Once you’ve categorized it, you start hunting for those specific red flags. You dig into the documents. For that weird consulting vendor, you’d pull every invoice and every payment record. You'd check the vendor address against employee addresses. You’d look for a real contract or purchase order. For the payroll ghost, you’d look for their W-4, their employee file, and their performance reviews. You’re looking for what isn't there. After you've analyzed the evidence, you can pinpoint the specific scheme. It's not just a "billing scheme," it's a "shell company scheme." It's not just a "payroll scheme," it's a "ghost employee scheme." Getting specific is key. And that specificity tells you what to do next. You'll recommend investigation steps, like interviewing the person who approved the payments. You'll also suggest better internal controls to stop it from happening again. Usually, that means better segregation of duties. For example, the person who can add a new vendor shouldn’t also be the one who approves invoices from that vendor. Now, a couple of traps to watch for on the exam. It’s easy to mix these schemes up. A ghost employee feels a little like a shell company. They’re both fake entities receiving money. But remember the key difference. If the payment comes through the payroll system, it’s a payroll scheme. If it comes through accounts payable from an invoice, it’s a billing scheme. The payment method is what matters. Another major point, especially for the CFE exam, is about your role. Your job is to find the facts and identify the scheme. It is NOT your job to say "this person is guilty." The Association of Certified Fraud Examiners has a strict ethical code on this. You never, ever express an opinion on guilt or innocence. You present the evidence. That's it. Let the legal system handle the rest. Okay, let's walk through a quick example. An auditor finds that a company, Tech Innovations, is paying a vendor called "IT. Solutions Corp." They're paying for very generic "consulting services." The payments were all approved by the Head of IT. It turns out, the Head of IT’s home address is the same as the registered address for "IT. Solutions." What kind of scheme is that? If you're thinking billing scheme, you're on the right track. More specifically, it’s a shell company scheme. The employee created a fake company to bill their own employer. The services they billed for probably never happened. And that matching address is the smoking gun. Here’s another one. A CFE at a logistics company notices an entry-level clerk, John Doe, has been getting paid for 30 hours of overtime. This happens every single week, for a year. That’s odd. Digging deeper, there’s no W-4 form on file for him. His name isn't on any company org charts. What does that sound like? That’s a classic ghost employee. It’s a payroll scheme. The person likely doesn’t exist. All those red flags point to the same conclusion. The crazy overtime for a junior role, the missing tax forms, the fact that nobody knows him... it all points to a fake employee set up to drain money through payroll. To wrap this up, let's review the key takeaways. Fraudulent disbursements are all about an insider tricking the company into making a payment. Remember the four main types: billing, payroll, check tampering, and expense reimbursement. Know the red flags for each. And understand that the best defense is always strong internal controls, especially good segregation of duties. Finally, remember your role. You find facts. You identify the scheme. But you never, ever declare guilt. VoraPrep is a full exam-prep app — lessons, practice questions, and an AI tutor in one place. Get started at Vora Prep dot com.