Billing Fraud Schemes Lessons Learned

Many small business owners hire friends and family or have employees who have been with them for years. They may also have vendors they have become close with and do business with regularly. It is easy for small business owners to become lax in their oversight as they trust their employees and other close business relationships. Small business owners beware—recent research has shown that organizations with the fewest employees had the highest median loss due to fraud. Becoming too trusting could put you and your business at risk, and billing fraud schemes are growing. One recent study conducted by Barclays showed that billing fraud in the first three months of 2022 was up six percent from 2021.

In the 2022 Report to the Nations, published by the Association of Certified Fraud Examiners (ACFE), false billing schemes caused the highest median loss and were the most common form of asset misappropriation. Billing schemes account for about thirteen percent of all frauds in small businesses, which is the second most prevalent type of asset misappropriation affecting businesses with less than one hundred employees.

Billing schemes occur when an employee causes their employer to pay fictitious invoices, by creating fake invoices that never existed, inflating prices, duplicating invoices, or by purchasing personal items and submitting the invoice to their employer for reimbursement.

Perpetrators of billing schemes have multiple ways to commit fraud in small businesses. Take for example, an assistant operations manager of a sports dome. With his position at the company, and being a trusted employee, Alex was able to pull off four different billing fraud schemes, over ten years, causing losses to his employer totaling $491,829. His original fraud consisted of Alex colluding with vendors to help him doctor the invoices to not be flagged as fixed asset purchases. Alex purchased large, expensive equipment and picked up these items from the vendor instead of having them delivered to the warehouse, per standard operating procedures, to avoid needing a receiving signature. The vendor broke the invoice up into smaller amounts, listing consumable items, as opposed to items triggering the fixed asset threshold, and submitted them to Alex’s employer for payment. Alex then sold the items for his personal gain. He avoided scrutiny as the invoice falsely listed quickly consumable items that were not often inventoried.

Alex’s second scheme came by colluding with a different vendor. Alex had the vendor submit completely fake invoices to his company, which his company paid, even though no goods or services were received, and Alex and the vendor split the proceeds. Since Alex was a long-time trusted employee and had purchasing power, the invoices submitted and approved by him were not carefully inspected.

In his third scheme, Alex colluded with another vendor to influence the competitive bid process so that this vendor would win more bids. The vendor and Alex then shared the profits from the bids won.

The fourth scheme Alex committed may have been the easiest to commit yet was the demise of his fraud run. He simply used the company’s credit card to purchase small tools and other equipment which he would then sell to pawn shops. This is how law enforcement discovered the stolen goods. Since Alex was given permission to use the company credit cards to purchase equipment for the business, higher level management did not question his purchases.

Alex’s frauds were undetected for ten years. A few changes to his company’s internal control would have likely caught him early or stopped him completely.

  • Segregation of duties is vital—one employee/manager should not have the ability to purchase items, sign the receiving reports, and approve vendor invoices for payment.
  • Management should be looking closely at who signs receiving orders.
  • There should also be a whistleblower hotline available. It is possible that a vendor approached by Alex for collusion might have been willing to blow the whistle anonymously.
  • Greater oversight by management may have caught this fraud sooner.

Small businesses often have fewer controls in place to prevent and detect fraud. For this reason, small businesses are twice as susceptible to billing fraud schemes than are larger organizations. Now is the time to ramp up your internal control. R&A can help your small business with a risk assessment and review of your controls. Preventing fraud before it happens is far better than detecting fraud.