How to prevent and detect billing schemes.

Feburary 27, 2024

A billing scheme is a fraudulent disbursement scheme in which a person causes their employer to issue a payment by submitting invoices for fictitious goods or services, inflated invoices, or invoices for personal purchases.

Billing schemes present a significant risk given that they are the most common form of asset misappropriation and cause the highest median loss. According to Occupational Fraud 2022: A Report to the Nations, the median loss from billing schemes was $100,000.

The main types of billing schemes are invoicing through shell companies, invoices via non-accomplice vendors, and personal purchases with company funds.

Invoicing through shell companies is where fictitious entities are created for the sole purpose of committing fraud. Once a shell company is created, the fraudster employee will start billing the employer. In most cases, the fraudsters are either in a position of approval for the fictitious invoices or they target inattentive or overly trusting supervisors. The fraudster may also collude with employees with other duties to overcome well-designed internal controls, which makes it difficult to detect. Many employees involved in shell companies bill their employers for services rather than goods, which makes it difficult to detect.

In some cases, fraudsters may use non-accomplice vendor invoices. This includes pay-and-return schemes where the fraudster will double-pay or overpay a non-accomplice vendor and then request the vendor to return the excess and intercept the refund.

Many fraudsters simply buy personal items with the company’s money using their employer’s account. This includes personal purchases made through false invoicing and running through the accounts payable system. Similar to invoicing through shell companies, these fraudsters are either in the position of approving invoices or they use inattentive supervisors. Some employees also make personal purchases on company credit cards. Credit card fraud is often committed by employees who are in the position to approve their own expenses.

The following methods may be used to prevent or detect billing schemes:  

  • Establish and implement adequate segregation of duties among those who perform key processes (initiate payments, prepare checks, review, authorize, or sign checks or approve electronic payments, mail checks, edit vendor master files, open mail or copy checks received, and reconcile bank accounts).
  • Review all supporting documents prior to signing a check or authorizing an electronic payment.
  • Establish control methods to check for duplicate invoice numbers.
  • Periodically review accounts payable and vendor lists for strange vendor names and addresses (e.g., post office box addresses).
  • Implement appropriate bank reconciliations and review procedures, checking for appropriate endorsements.
  • Analyze vendor purchases for abnormal levels.

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