Financial Transactions and Fraud Schemes
Financial Transactions and Fraud Schemes
This domain tests recognition of fraud schemes by their mechanics, concealment, and red flags. The CFE fraud tree organizes schemes into asset misappropriation, corruption, and financial statement fraud, with consumer and cyber fraud also tested.
Core rules
- Asset misappropriation: cash larceny (cash taken after recording), skimming (cash taken before recording), check tampering, billing schemes, payroll and expense reimbursement schemes, and inventory theft.
- Corruption: bribery, illegal gratuities, conflicts of interest, and extortion. Look for undisclosed relationships, vendor favoritism, and unusual payments.
- Financial statement fraud: fictitious revenue, timing differences, improper valuation, concealed liabilities, and inadequate disclosures. It usually involves management override and intent to deceive.
- Consumer fraud: advance-fee, identity theft, investment, and payment fraud. Cyber fraud uses phishing, business email compromise, and account takeover.
- Red flags are not proof; they direct inquiry. Match the scheme to the accounting record affected.
Worked example
A company pays a vendor with no contract, a PO box address, sequential invoice numbers, and approvals from one supervisor. The supervisor also approves the vendor master file. This fits a billing scheme: a fictitious or shell vendor is inserted into accounts payable. Reasoning: the loss is recorded as a legitimate payment, so concealment depends on vendor approval and payment authorization. Evidence to seek: vendor master audit trail, invoice metadata, bank account ownership, bid records, and approval logs. The scheme is not skimming because cash was not taken before recording; it is a fraudulent disbursement.
Traps
Do not call every cash theft skimming. Skimming occurs before entry; larceny after. Do not classify a kickback as a billing scheme: corruption involves improper influence, while billing involves a fraudulent invoice. Do not assume financial statement fraud is only revenue overstatement; understatement and disclosure fraud count. Do not treat red flags as conclusions.