Would you know if your bookkeeper was running a pay and return scheme?

When an employee has their head set on embezzling money from their employers, their creativity can invent ingenious ways to defraud.  If an employee is that desperate for money or even addicted to the act of embezzlement itself, they are generally one step ahead in planning how they can steal from you.  Enter a pay and return scheme.  If an employee realizes that their boss is looking over each and every check that goes out to a vendor, then it will become that much more difficult to try and embezzle funds from a victim organizations bank account either by check fraud, wire transfers or payroll schemes.  Billing Schemes on the other hand come in several different forms.  The most commonly known is a shell company which is created for the sole purpose of defrauding.  Another billing scheme which is often missed is a pay and return scheme.  In this scheme, the vendor is generally unaware that a fraud scheme is occurring and the bookkeeper will do one of three things:

  1. Purposely overpay a vendor on an actual invoice
  2. Purposely double pay a vendor invoice
  3. Purposely pay the wrong vendor for an invoice

Once the bookkeeper has successfully overpaid an invoice, they will wait for the check to clear and then contact the vendor directly to tell them about their mistake.  The bookkeeper will then ask the vendor to issue a refund check.   If the victim organization has other invoices that are due the vendor will generally request a credit to be applied to their account.  The bookkeeper will then argue and request that a check needs to be issued to refund the over-payment.  Once the vendor issues a check, the bookkeeper intercepts the check intended for the victim organization and deposits it into their shell account or on instances will deposit it into their own account.

The over-payment is never voided from the checkbook register and reconciles to the bank statement as a cleared check and the refund check is never entered into the accounting system at all.

How could you prevent a pay and return scheme:

  1. Always compare invoices, packing slips and purchase orders to checks paying for those goods are services.
  2. Look for duplicate payments not only in your checkbook register, your general ledger report as well as your actual bank statement and cleared checks.
  3. Compare payments made to vendors with their monthly vendor statement.  Vendor statements will show refund payments!

It is not that difficult to protect your small business from fraud.  You can do this by reviewing your financial data and learning the fraud schemes and methods and getting fraud prevention tools that will assist you in setting up a simple internal control system.


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