Financial Transactions and Fraud Schemes
The organizing map
Almost every question in this domain hangs off the fraud tree: corruption, asset misappropriation, and financial statement fraud. Asset misappropriation is the most frequent and least costly per case; financial statement fraud is the rarest and the most expensive.
Asset misappropriation
Split cash schemes by when the money leaves:
- Skimming - cash is stolen before it is recorded. No journal entry is ever made, so the books stay internally consistent. Common forms: unrecorded sales, understated sales, and receivables skimming (lapping).
- Cash larceny - cash is stolen after it has been recorded.
- Billing schemes - an invoice is submitted and paid to a shell company, a pass-through, or a non-accomplice vendor.
- Check tampering, payroll schemes (ghost employees, commission schemes), expense reimbursement schemes (mischaracterized, overstated, fictitious, multiple reimbursements), and register disbursements (false voids and refunds).
Corruption
Bribery, illegal gratuities, economic extortion, and conflicts of interest, including bid rigging and kickbacks. Both parties benefit from silence, which is why corruption is the hardest category to detect.
Financial statement fraud
Five families: fictitious revenue, timing differences (recording revenue before the earnings process is complete), concealed liabilities and expenses, improper asset valuation, and improper disclosures. Look for round-trip transactions, premature recognition, and capitalized costs that belong in expense.
Traps
Skimming versus larceny is the single most tested distinction. A billing scheme requires a payment the organization does not legitimately owe - that is what separates it from a real vendor overbilling. And remember most asset misappropriation surfaces through tips, not audits.
Rule of thumb
Ask: "Was the money already on the books when it left?" No → skimming. Yes, and stolen directly → larceny. Yes, and paid out on a false document → a disbursement scheme.