Check- tampering Schemes

12/3/2007

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Thomas A. Buckhoff

Check- tampering Schemes

by Thomas A. Buckhoff

Biography: Dr. Thomas A. Buckhoff, Ph.D., CPA, CFE, is an associate professor of forensic accounting at Georgia Southern University. He is also a partner with Forensic Solutions, LLC - a forensic accounting firm specializing in fraud detection, investigation and prevention consulting services. Buckhoff may be reached by e-mail at tbuckhoff@georgiasouthern.edu.

"Melanie Roberts" was married with two young children and active in school and other community organizations. She was admired and respected by her family, friends and neighbors. Melanie worked as the executive secretary for an international charitable organization, and its board of directors liked Melanie and trusted her completely. She had complete control over both cash receipts and cash disbursements, and her work was rarely, if ever, reviewed by others. Like many charitable organizations, Melanie's employer did not consider internal controls to be necessary, believing that its noble charitable mandate would deter would-be thieves. Who would dare steal from an organization that provides disaster relief to needy families? Well, Melanie would and did. Despite her impeccable reputation within the organization and the community, Melanie was a common thief who stole more than $60,000 from her employer. Melanie simply wrote checks to herself, cash and others by signing her own name and then forging a second signature, when required. She would then record/disguise the fraudulent transactions in the organization's books as legitimate expenditures. Some "red flags" that the inattentive board of directors failed to recognize include:

• Melanie refused to convert a manual check-writing system to a computerized one.

• During Melanie's tenure as executive secretary, not one annual audit was conducted, even though it was required by the organization's charter.

• On the rare occasion that a board member requested financial information from Melanie, she always had an excuse as to why she could not provide the requested information. Often Melanie claimed that she simply had forgotten to bring the information with her to the board meeting.

• When her employer began experiencing cash-flow problems-which unbeknownst to the board were due to her theft-Melanie persuaded the board to close the office space it rented out and allow her to perform the executive secretary duties from her home.

Eventually, a new group of board officers was elected, including a new president and treasurer. When Melanie continued to "forget" to bring financial information requested by the new officers, the new president and the new treasurer went to Melanie's house and literally stood on her doorstep until she provided all of the organization's financial books and records. Since Melanie had not expected others to closely examine the books and records, evidence of her fraud was everywhere in the form of whited-out entries, erasures, missing checks, obviously forged signatures, payees on processed check images not matching the checkbook register, etc. Ultimately, Melanie was prosecuted, convicted and ordered to pay restitution to her employer and its insurance provider.

The Problem

Dishonest employees often obtain checks, place false information on them and divert the funds for personal gain. Such fraudulent check schemes are categorized as check-tampering schemes and are typically perpetrated by those with access to checks. According to the 2006 ACFE Report to the Nation on Occupational Fraud & Abuse, check-tampering schemes account for about 17 percent of all fraudulent cash disbursements with a median loss of $120,000 per scheme. These schemes typically fall into one of the following four categories:

• Forgeries. The fraudster forges either the required signature on the face or the payee endorsement on the back of the check.

• Altered checks. The fraudster obtains and alters a check (usually the payee is altered) so that either the fraudster or an accomplice can misappropriate the check for personal gain.

• Authorized maker schemes. The fraudster in this scheme is someone with check-signing authority who prepares, signs and misappropriates the check for personal gain. Melanie Roberts' scheme falls into this category, since she had check-signing authority.

• Concealed check schemes. The fraudster prepares and submits a fraudulent check, usually in a stack of checks to be signed, during a busy part of the day. The inattentive check signer then signs the check and returns it to the person who prepared it.

Detection and Prevention

Check-tampering schemes are classified as on-book fraud schemes, since evidence of the fraud can be found by analyzing the books and records of the victim company. An effective way to detect or prevent such schemes is to segregate the responsibilities of preparing checks, signing checks and reconciling the bank statement to the checkbook register. In other words, these responsibilities should be carried out by three different people. The person reconciling the bank statement should verify that all payees, amounts, dates, signatures and check numbers for all checks processed by the bank match the information contained in the checkbook register. In addition, check signers must carefully and consistently do the following when signing checks:

• Before signing a check, examine all of the supporting documentation to ensure that the disbursement is for a legitimate business-related purpose. Do not sign any checks that have not been filled out or do not have supporting documentation.

• Make sure that the supporting documentation matches the information written on the check in terms of payee and amount.

• The check signer must control the mailing of the check. Never should a signed check be given back to the person who prepared it.

Most check-tampering schemes are possible because an inattentive check signer fails to comply with one or more of the above internal controls. Such lack of diligence by the check signer constitutes a breach of a fiduciary duty of care, which is a legally actionable offense.

Ideally, the goal of any organization should be to take actions that minimize opportunities to commit fraud and maximize the probability that fraudulent acts will be discovered. Such actions create a "perception of detection," which is the most effective deterrent to fraudulent activity.

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