Corruption is fraud committed in the form of illegal payments to employees of businesses or government. This type of fraud consists of kickbacks or other gifts and gratuities. Perpetrators range from the expected high-ranking executive to low-level clerk. Individuals who make illegal payments engage in the transaction in exchange for personal gain that will result from the employee's "favor" to the so-called corrupt payer. This part of the series describes common illegal payment schemes and methods for building circumstantial cases against suspected corrupt recipients.

Cash and Accounts Receivable Fraud Schemes
Asset misappropriation schemes to be discussed in this section include:

• Cash fraud schemes.
• Accounts receivable fraud schemes.

• Skimming.
• Larceny.
• Fraudulent disbursements.

• Unrecorded sales.
• Understated sales.
• Theft of incoming checks.
• Swapping checks for cash.

Fraudulent Disbursements
Fraudulent disbursements are "on-book" fraud schemes, meaning that cash leaves the company fraudulently. However, an audit trail exists because the cash was recorded on the books. Fraudulent disbursement schemes are of the following types:

• Check tampering schemes.
• Register disbursement schemes.
• Billing schemes.
• Expense reimbursement schemes.
• Payroll schemes.

• Lapping.
• Fictitious receivables.
• Improper posting of credits.

Lapping
Lapping, one of the most common fraud schemes, is the recording of a payment on a customer's account sometime after the payment has been received. In a typical scenario, Customer A's payment is diverted. Customer B's payment is credited to Customer A's account to cover the diversion. When Customer C makes a payment, it is credited to Customer B's account, and so on. Refer to Fig. 2.1 for an illustration of lapping.

Improper Posting Have Credits
In this accounts receivable scheme, a credit is posted to a customer's account either as a discount, return, or a write-off of the account. The posting may be to cover up a theft, but it also may be a fraud in itself.

Inventory and Fixed Asset Fraud Schemes
Asset misappropriation schemes to be discussed in this section include:

• Inventory fraud schemes.
• Fixed asset fraud schemes.

• Appropriating inventories and supplies for personal use.
• Stealing inventory.
• Theft of scrap.
• Charging embezzlements to inventory.

Stealing Inventory
Inventory is stolen for sale to outsiders. It may be sold at an employee's own business, flea market, or garage sale to co-conspirators or unsuspecting purchasers.

Theft of Scrap
The theft of scrap to sell for cash is a common practice. Because the amounts are generally insignificant to the financial statements of the company, scrap sales usually are not well controlled and good inventories are not maintained.

Charging Embezzlements to Inventory
Because inventory accounts generally are not reconciled until the end of each year, it is a simple matter to charge embezzlements to these accounts. Embezzlements may be concealed through an expense or inventory account, which are closed at the end of the year

Fixed Asset Fraud Schemes
Some fixed assets that are easily removed from the premises (e.g., tools, hand-held calculators, and computers) are especially prone to employee theft. Fixed assets that are either too cumbersome for employees to remove from the premises or are of no use to the employee are less likely to be misappropriated. Another common fraud is the unauthorized personal use of fixed assets by employees. This type of fraud is especially likely for fixed assets that are easily removed from (or consumed on) the company's premises.

Personal use of assets (e.g., personal computers or long distance calls) can develop into a fraud or an abuse situation if management does not address the subject via improved controls. In addition to the improper usage of the asset itself, the loss of productive time might be more costly than the use of the asset.