Case Study 1.

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Fraud Audit Manual Fraud Scheme Categories

FRAUD CATEGORIES EXAMPLES/SCHEMES DESCRIPTION

I. CORRUPTION Conflict of interest Occurs when an agency’s personnel or official/s is/are involved in multiple
interests, one of which could possibly corrupt the motivation for an act in the
other.
Kickback scheme Kickbacks are the receiving or giving anything of value to influence a decision
that benefits an agency’s personnel or officials.
Bid rigging scheme Bid rigging is a form of fraud in which a contract is promised to one party even
though for the sake of appearance several other parties also present a bid.
Illegal gratuities In the typical illegal gratuities scenario, a decision is made which happens to
benefit a certain person or company. The party who benefited from the decision
then gives a gift to the person who made the decision.
Economic extortion An agency’s personnel/official demands that a vendor/contractor pay him in
order to make a decision in that vendor’s/contractor's favor.
II. ASSET Larceny of cash Intentional taking away of recorded cash by an agency’s personnel/official
MISAPPRORIATION without the consent and against the will of the agency.
Skimming of cash Intentional taking away of cash by an agency’s personnel/official prior to the
recording of cash in the agency’s records/books.
Shell company Shell company schemes use a fake entity established by a personnel/official of an
agency to bill the agency for goods or services it does not receive. The
personnel/official converts the payment to his or her own benefit.
Pass-through Pass-through schemes use a shell company established by personnel/official of
an agency to purchase goods or services for the agency, which are then marked
up and sold to the agency through the shell. The personnel/official converts the
mark-up to his or her own benefit.
II. ASSET Pay-and-return Pay-and-return schemes involve a personnel/official of an agency purposely
MISAPPRORIATION causing an overpayment to a legitimate vendor. When the vendor returns the
overpayment to the agency, the personnel/official embezzles the refund.

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 Case Study 1.0
Fraud Audit Manual Fraud Scheme Categories

FRAUD CATEGORIES EXAMPLES/SCHEMES DESCRIPTION

Personal purchases Using of agency’s accounts to buy items for a personnel/official of an agency for
personal use, their businesses, their families, and so on.
Ghost employee scheme Salary payments made to fictitious or former employees (maybe a real or fake
person).
Falsified wages Involves fraudulently increasing the size of an employee's paycheck by falsifying
the number of hours worked or increasing wage rate.
Mischaracterized expenses Requesting reimbursement for a personal expense by claiming that the expense
is agency related.
Overstated expenses This scheme can be accomplished in a number of ways including altered receipts
showing a much higher cost, over purchasing or overstating personnel/official of
an agency’s expenses reimbursement.
Fictitious expenses Personnel/official of an agency seeking reimbursement for fictitious expenses.
This is accomplished by producing fictitious receipts, obtaining blank receipts
from vendors, or claiming the expenses of others.
Multiple reimbursements This scheme can be accomplished thru submission of a single expense several
times. An example of a multiple reimbursement scheme is the submission of
several types of support for the same expense.
False refund scheme In this scheme, an agency’s personnel/official can either process an entirely
fictitious refund or merely overstate the amount of a legitimate refund and skim
the excess money.
Forged maker scheme May be defined as a check tampering scheme in which an agency’s
employee/official misappropriates a check and fraudulently affixes the signature
of an authorized maker thereon.
II. ASSET Forged endorsement Check tampering scheme in which an agency’s personnel/official intercepts an
MISAPPRORIATION scheme agency’s check intended to pay a third party and converts the check by endorsing
it in the third party's name.
Altered payee scheme An agency’s personnel/official intercepts an agency’s check intended for a third
party and alters the payee designation so that the check can be converted by the
personnel/official or an accomplice.

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 Case Study 1.0
Fraud Audit Manual Fraud Scheme Categories

FRAUD CATEGORIES EXAMPLES/SCHEMES DESCRIPTION

Authorized maker scheme Occurs when an agency’s personnel/official with signature authority on an
agency’s account writes fraudulent checks for his/her own benefit and signs his
own name as the maker.
Receivables write-off Involves posting of entries to contra revenue accounts such as "discounts and
scheme allowances" to cover skimming of receivables.
Receivables lapping scheme Lapping is the crediting of one account through the abstraction of money from
another account.
Asset Requisitions & Agency’s personnel/official use internal asset requisitions and transfer paperwork
transfers to gain access to merchandise/supplies which they otherwise might not be able
to handle without raising suspicion. In the process of this movement, the thief
steals the merchandise/supplies.
Unconcealed larceny This fraud is where an employee simply takes inventory from the agency’s
schemes premises without attempting to conceal the theft in the books and records.
III. FRAUDULENT Timing differences Recording of revenues and expenses in improper periods
STATEMENTS
Fictitious revenue Recording of sales of goods and services that did not occur
Concealed liabilities Understating liabilities and expenses, often through liability/expense omission or
capitalized expenses
Improper disclosures Failure to disclose or include all significant information appropriately in the
financial statements and in management’s discussion and analysis

III. FRAUDULENT Asset/Revenue Deliberate non-disclosure of revenue or misrepresentation of expenses to slash

STATEMENTS understatements bottom line profit. This understatement can be done directly or through
accelerated depreciation.
External documents Falsification of government official documents such as birth certificates and
marriage certificate.
Note: These fraud scheme categories do not encompass all possible fraud schemes and risks associated with the Public Sector. It is the responsibility of COA auditors to update and determine the
other possible fraud schemes and risk within their respective audited agencies.

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