Wk 5 Discussion (Corruption in a Global Economy) - Post 1

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records in preparation for an IRS audit. The hotel bookkeeper graciously faxed the “guest” a

copy of the King hotel bill.

On the bill, King had listed her occupation as a travel agent, giving her business address as

the local office of Spicewood Travel. To receive a 50 percent discount on her room rate—a

savings worth $412—she furnished the manager with her business card and an Airline

Reporting Corporation number, a code issued by an international clearinghouse to identify

every travel-booking agency. Though Reed suspected King might have gone on other

company-subsidized trips, “Antigua was the only one we flushed out. We only needed one.”

Further analysis of King’s credit statements showed that she charged three other airline

tickets over a seven-month period and received three corresponding credits that canceled

out the price of the trips, saving her $834.

The fraud examiners clearly proved that King had breached her duty to act in the

company’s best interests in connection with her role as the company’s purchasing agent.

And she had also derived some benefit from a vendor—another violation of corporate

policy. ElectroCity’s personnel handbook addresses both issues: “Employees must disclose

any outside financial interest that might influence their corporate decisions or actions. If

the company believes that such activities are in conflict with the company’s welfare, the

employee will be expected to terminate such interests. Such interests include but are not

limited to personal or family ownership or interest in a business deemed a customer,

supplier, or competitor.”

King broke other rules listed in the personnel handbook as well: “Employees may not use

corporate assets for their personal use or gain. Employees and their families must never

accept any form of under-the-table payments, kickbacks, or rebates, whether in cash or

goods, from suppliers.” Contrary to company policy, King had set up an off-site mini-agency

using the company’s phone, accepted travel discounts from a vendor for continued and

increased business, and received an estimated 10 percent of the agency’s billings in

kickbacks.

Based on their findings, the examiners also determined that King violated the state’s

commercial bribery statute and could be liable for civil damages if the company decided to

press charges. While Reed said that her transgressions warranted immediate termination,

the ex-cop recommended against pursuing criminal action, given King’s age and the ill

health of her unemployed husband. “When you take someone to court, the only options you

have are fines or prison.”

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He takes full responsibility for the decision not to prosecute King. Like police officers,

security professionals must make appropriate assessments based on the circumstances,

Reed said. “The bad ones always follow the book, regardless of what’s best for the

community.”

“We made the case, corrected the system within the company, and damaged her

professionally,” Reed said. Electro-City now requires all vendors to sign agreements

acknowledging prohibitive behavior and gifts to all its employees, who now number 3,200.

The errant employee was not required to make restitution.

Reed next brought the results of their fraud examination to the president of Spicewood

Travel, who reacted with total silence and stunned disbelief. “The documentation was there.

They knew they were going to lose business.” The company also made verbal legal threats

against the agency in the beginning. They held prolonged negotiations to recover $20,000,

an estimate of two years of overcharges, “but another VP dropped that ball,” said Reed.

The corporation’s director of investigations conducted a corporate interview with King to

make a final determination of the nature and extent of her relationship with Spicewood and

to elicit evidence of any other kickback arrangements that might have adversely affected

the company. Reed suggested that King be asked to furnish investigators with a full written

disclosure of her interests and activities in connection with Spicewood and any other

suppliers.

During the interview, King composed her thoughts in a handwritten letter to the president

of ElectroCity:

Dear Mr. Smith:

I must say that I am sorry. It never dawned on me that what I did was in conflict of my

trusted position here at ElectroCity. I truly screwed up; there is no explanation other than

that. There was no consideration on my part that a reduced price was anything other than

that. I never even thought about it. I am truly sorry, especially because I feel I have broken a

trust that we have built over the years. Please understand that I meant nothing against

ElectroCity or anyone. Additionally, I didn’t even see that special rate as a benefit from a

supplier, only as a manner by which I could save some dollars personally.

Respectfully,

Rita Mae King

King had misused her authority as a purchasing agent and had violated her duty to

ElectroCity. “She was remorseful in the sense that she was now going to have to bite the

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bullet,” said Reed. “I think she probably kicked herself because she didn’t get more out of

the scam. She felt that she was a woman who worked very hard at a very difficult job, was

unappreciated, and was not compensated properly by a male-dominated class system in

corporate America.”

Several names and details have been changed to preserve anonymity.2

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Purchasing Schemes

The majority of conflict schemes in our studies were purchasing schemes, and the most

common of these was the overbilling scheme, the kind of fraud Rita Mae King committed in

the preceding case study. We have already briefly discussed conflict schemes that involved

false billings (see Case 1132, above). Because these frauds are very similar to the billing

schemes discussed in Chapter 4 of this book, it will be helpful to discuss the distinction we

have drawn between traditional billing schemes and purchasing schemes that are classified

as conflicts of interest.

Though it is true that any time an employee assists in the overbilling of her company there

is probably some conflict of interest (the employee causes harm to her employer because of

a hidden financial interest in the transaction), this does not necessarily mean that every

instance of false billing will be categorized as a conflict scheme. In order for the scheme to

be classified as a conflict of interest, the employee (or a friend or relative of the employee)

must have some kind of ownership or employment interest in the vendor that submits the

invoice. This distinction is easy to understand if we look at the nature of the fraud. Why

does the fraudster overbill her employer? If she engages in the scheme only for the cash, the

scheme is a fraudulent disbursement billing scheme. If, on the other hand, she seeks to

better the financial condition of her business at the expense of her employer, this is a

conflict of interest. In other words, the fraudster’s interests lie with a company other than

her employer. When an employee falsifies the invoices of a third-party vendor to whom she

has no relation, this is not a conflict of interest scheme, because the employee has no

interest in that vendor. The sole purpose of the scheme is to generate a fraudulent

disbursement.

One might wonder, then, why shell company schemes are classified as fraudulent

disbursements rather than conflicts of interest. After all, the fraudster in a shell company

scheme owns the fictitious company and therefore must have an interest in it. Remember,

though, that shell companies are created for the sole purpose of defrauding the employer.

The company is not so much an entity in the mind of the fraudster as it is a tool. In fact, a

shell company is usually little more than a post office box and a bank account. The fraudster

has no interest in the shell company that causes a division of loyalty; he simply uses the

shell company to bilk his employer. Shell company schemes are therefore classified as false

billing schemes.

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A short rule of thumb can be used to distinguish between overbilling schemes that are

classified as asset misappropriations and those that are conflicts of interest: If the bill

originates from a real company in which the fraudster has an economic or personal

interest, and if the fraudster’s interest in the company is undisclosed to the victim company,

then the scheme is a conflict of interest.

Now that we know what kinds of purchasing schemes are classified as conflicts of interest,

the question is: How do these schemes work? After our lengthy discussion about

distinguishing between conflicts and fraudulent disbursements, the answer is somewhat

anticlimactic. The schemes work the same either way. The distinction between the two

kinds of fraud is useful only to distinguish the status and purpose of the fraudster. The

mechanics of the billing scheme, whether conflict or fraudulent disbursement, do not

change (see Exhibit 10-7). In Case 464, for instance, a purchasing superintendent defrauded

his employer by purchasing items on behalf of his employer at inflated prices from a certain

vendor. The vendor in this case was owned by the purchasing superintendent but

established in his wife’s name and run by his brother. The perpetrator’s interest in the

company was undisclosed. The vendor would buy items on the open market, then inflate

the prices and resell the items to the victim company. The purchasing

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superintendent used his influence to ensure that his employer continued doing business

with the vendor and paying the exorbitant prices. (A more detailed analysis of overbilling

frauds is found in Chapter 4.)

EXHIBIT 10-7: Conflicts of Interest

Fraudsters also engage in bid-rigging on behalf of their own companies. The methods used

to rig bids were discussed in detail earlier in this chapter. Briefly stated, an employee of the

purchasing company is in a perfect position to rig bids, because he has access to the bids of

his competitors. Since the fraudster can find out the amounts of the bids of other vendors,

he can easily tailor his own company’s bid to win the contract. Bid waivers are also

sometimes used by fraudsters to avoid competitive bidding outright. In Case 1473, for

instance, a manager processed several unsubstantiated bid waivers in order to direct

purchases to a vendor in which one of his employees had an interest. The conflict was

undisclosed, and the scheme cost the victim company over $150,000.

In other cases a fraudster might ignore his employer’s purchasing rotation and direct an

inordinate number of purchases or contracts to his own company. Any way by which a

fraudster exerts his influence to divert business to a company in which he has a hidden

interest is a conflict of interest.

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But not all conflict schemes occur in the traditional vendor–buyer relationship. Several of

the cases in our survey involved employees’ negotiating for the purchase of some unique,

typically large asset such as land or a building in which the employee had an undisclosed

interest. It is in the process of these negotiations that the fraudster violates his duty of

loyalty to his employer. Because he stands to profit from the sale of the asset, the employee

does not negotiate in good faith on behalf of his employer; he does not attempt to get the

best price possible. After all, the fraudster will reap a greater financial benefit if the

purchase price is high.

An example of this type of scheme was found in Case 2421, in which a senior vice president

of a utility company was in charge of negotiating and approving mineral leases on behalf of

his company. Unknown to his employer, the vice president also owned the property on

which the leases were made. The potential harm in this type of relationship is obvious—

there was no financial motive for the vice president to negotiate a favorable lease for his

employer.

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Turnaround Sales

A special kind of purchasing scheme that we have encountered in the ACFE studies is called

the turnaround sale, or flip. In this type of scheme an employee knows his employer is

seeking to purchase a certain asset, and takes advantage of the situation by purchasing the

asset himself (usually in the name of an accomplice or shell company). The fraudster then

turns around and resells the item to his employer at an inflated price. We have already seen

one example of this kind of scheme in Case 464 discussed above, in which a purchasing

supervisor set up a company in his wife’s name to resell merchandise to his employer.

Another interesting example of the turnaround method occurred in Case 1379, in which the

CEO of a company, conspiring with a former employee, sold an office building to the CEO’s

company. What made the transaction suspicious was that the former employee had

purchased the building on the same day that it was resold to the victim company, and for

$1.2 million less than the price charged to the CEO’s company.

Sales Schemes

The ACFE studies identified two principal types of conflict schemes associated with the

victim company’s sales. The first and most harmful is the underselling of goods or services.

Just as a corrupt employee can cause his employer to overpay for goods or services sold by a

company in which he has a hidden interest, so, too, can he cause the employer to undersell

to a company in which he maintains a hidden interest (see Exhibit 10-7).

Underbillings

In an underbilling scheme, the perpetrator sells goods or services below fair market value

to a vendor in which he has a hidden interest. This results in a diminished profit margin, or

even a loss on the sale, depending on the size of the discount. Two employees who sold their

employer’s inventory to their own company at off-spec prices, causing a loss of

approximately $100,000, used this method in Case 2427. Another example was found in Case

2684, when an employee disposed of his employer’s real estate by selling it below fair

market value to a company in which he had a hidden interest, causing a loss of

approximately $500,000.

Writing Off Sales

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The other type of sales scheme involves tampering with the books of the victim company to

decrease or write off the amount owed by an employee’s business. For instance, after an

employee’s company purchases goods or services from the victim company, credit memos

may be issued against the sale, causing it to be written off to contra accounts such as

Discounts and Allowances. A plant manager in Case 2197 used this method; this fraudster

assisted favored clients by delaying billing on their purchases for up to sixty days. When the

receivable on these clients’ accounts became delinquent, the perpetrator issued credit

memos against the sales to delete them.

A large number of reversing entries to sales may be a sign that fraud is occurring in an

organization. The fraudster in Case 2197 avoided the problem of too many write-offs by

issuing new invoices on the sales after the “old” receivables were taken off the books. In this

way, the receivables could be carried indefinitely on the books without ever becoming past

due.

In other cases, the perpetrator might not write off the scheme, but simply delay billing. This

is sometimes done as a favor to a friendly client, not as outright avoidance of the bill but

rather as a dilatory tactic. The victim company eventually gets paid, but loses time value on

the payment that arrives later than it should.

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Other Conflict of Interest Schemes

Business Diversions

In Case 1258, an employee started his own business to compete directly with his employer.

While still employed by the victim company, this employee began siphoning off clients for

his own business. This activity clearly violated the employee’s duty of loyalty to his

employer. There is nothing unscrupulous about free competition, but when a person acts as

a representative of his employer it is certainly improper to try to undercut the employer

and take clients. Similarly, the fraudster in Case 2161 steered potential clients away from his

employer and toward his own business. There is nothing unethical about pursuing an

independent venture (in the absence of restrictive employment covenants such as

noncompete agreements), but if the employee fails to act in the best interests of his

employer while carrying out his duties, then this employee is violating the standards of

business ethics.

Resource Diversions

Finally, some employees divert the funds and other resources of their employers to the

development of their own business. In Case 209, for example, a vice president of a company

authorized large expenditures to develop a unique type of new equipment used by a certain

contractor. Another firm subsequently took over the contractor, as well as the new

equipment. Shortly after that, the vice president retired and went to work for the firm that

had bought out the contractor. The fraudster had managed to use his employer’s money to

fund a company in which he eventually developed an interest. This scheme involves

elements of bribery, conflicts of interest, and fraudulent disbursements. In this particular

case, if the vice president had financed the equipment in return for the promise of a job, his

actions might have been properly classified as a bribery scheme. Case 209 nevertheless

illustrates a potential conflict problem. The fraudster could just as easily have authorized

the fraudulent expenditures for a company in which he secretly held an ownership interest.

While these schemes are clearly corruption schemes, the funds are diverted through the use

of a fraudulent disbursement. The money could be drained from the victim company

through a check tampering scheme, a billing scheme, a payroll scheme, or an expense

reimbursement scheme. (For a discussion of the methods used to generate fraudulent

disbursements, please refer to Chapters 4–8.)

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Financial Disclosures

Management has an obligation to disclose to the shareholders significant fraud committed

by officers, executives, and others in positions of trust. Management does not have the

responsibility of disclosing uncharged criminal conduct of its officers and executives.

However, if and when officers, executives, or other persons in trusted positions become

subjects of a criminal indictment, disclosure is required.

The inadequate disclosure of conflicts of interest is among the most serious of frauds.

Inadequate disclosure of related-party transactions is not limited to any specific industry; it

transcends all business types and relationships.

Preventing and Detecting Conflicts of Interest

Conflict of interest schemes are violations of the rule that a fiduciary, agent, or employee

must act in good faith, with full disclosure, in the best interest of the principal or employer.

Most schemes are a violation of the maxim that a person “cannot serve two masters.” Some

of the more common schemes involve an employee’s, manager’s, or executive’s interest in a

customer or supplier and receipt of gifts. Often, the employee, manager, or executive is

compensated for her interest in the form of “consulting fees.”

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The prevention of conflicts of interest can be difficult. The primary resource for heading off

this complex act is a company ethics policy that specifically addresses the problems and

illegalities associated with conflicts of interest and related offenses. The purpose of the

policy is to make the position of the company absolutely clear, to define what constitutes a

conflict or an improper relationship, and to express in no uncertain terms that conflicts are

not appropriate and will not be tolerated. The absence of a clear policy leaves an

opportunity for a perpetrator to rationalize his behavior or to claim ignorance of any

wrongdoing.

A policy requiring employees to complete an annual disclosure statement is also an

excellent proactive approach to preventing conflicts of interest. Comparing the disclosed

names and addresses with the vendor list may reveal real conflicts of interest and the

appearance of such. Communication with employees regarding their other business

interests is also advisable.

In order to detect conflicts of interest, organizations should concentrate on establishing an

anonymous reporting mechanism to receive tips and complaints; this is how most conflict of

interest cases are detected. Complaints typically come from employees who are aware of a

coworker’s self-dealing, or from vendors who have knowledge that a competing vendor who

has ties to an employee of the organization is being favored.

Another detection method that can be helpful is to periodically run comparisons between

vendor and employee addresses and phone numbers. Obviously, if a vendor is owned or run

by an employee of the organization without that fact having been disclosed, this would

constitute a conflict of interest.

PROACTIVE COMPUTER AUDIT TESTS FOR DETECTING CORRUPTION

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Title Category Description Data file(s)

Stratify vendor payments by approval limits, especially directly under (e.g., 5%) the approval limit.

All A high incidence of invoice payments directly below an approval limit may be an attempt to circumvent a management review.

• Paid invoice

Stratify inventory actual to standard price.

All Inventory prices may be agreed to that are higher than normal as part of the fraud schemes. This stratification will direct audit efforts on those parts exceeding the standard price.

• On-hand inventory

Identify trends in obsolete inventory over two or more periods.

All Inventory that has been overpurchased will generally result in obsolescence, which should be identified through trend analysis.

• On-hand inventory

Age inventory by the date of last part issuance.

All Inventory that has been overpurchased will generally result in obsolescence, which should be identified through trend analysis.

• On-hand inventory

Calculate number of months of inventory that is on hand (on a part-by- part basis) and extract those with a high number of months.

All Inventory that has been overpurchased will generally result in obsolescence, which should be identified through trend analysis.

• On-hand inventory

• Shipment log

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Title Category Description Data file(s)

Extract all parts greater than zero in cost that have had no usage in the current year.

All Inventory that has been overpurchased will generally result in obsolescence, which should be identified through trend analysis.

• On-hand inventory

• Shipment log

Identify inventory price greater than retail price (if inventory is for sale).

All Inventory prices may be agreed to that are higher than normal as part of the fraud schemes.

• On-hand inventory

Identify inventory receipts per inventory item that exceed the economic order quantity or maximum for that item.

All Inventory quantities may be agreed to that are higher than normal as part of the fraud schemes.

• Receiving log

• Inventory master file

Identify duplicate payments based on various means that would be made with intent by the employee and accepted with intent by the vendor.

All Duplicate payment tests can be enacted on the vendor, invoice number, amount. More complicated tests can look where the same invoice and amount are paid yet the payment is made to two different vendors. Another advanced test would be to search for same vendor and invoice when a different amount is paid.

• Paid invoice

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Title Category Description Data file(s)

Calculate the ratio of the largest purchase to next- largest purchase by vendor.

All By identifying the largest purchase to a vendor and the next-largest purchase, any large ratio difference may identify a fraudulently issued “largest” purchase.

• Paid invoice

Calculate the annualized unit price changes in purchase orders for the same product in the same year.

All Assesses price changes in purchases for potential fraudulent company purchases and employee payments.

• Purchase order

List all vendors who had multiple invoices immediately below an approval limit (e.g., many $999 payments to a vendor when there is a $1,000 approval limit), highlighting a circumvention of the established control.

All Multiple invoices below an approval limit may be an attempt to circumvent a management review.

• Paid invoice

Extract round- dollar payments and summarize by vendor.

All Payments made in round dollars have a higher incidence of being fraudulent and should be scrutinized closely.

• Paid invoice

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Title Category Description Data file(s)

Review payments with little or no sequence between invoice numbers.

All Vendors issuing phony invoices many times will invoice the company with no gaps in invoice sequence.

• Paid invoice

List payments to any vendor that exceed the twelve- month average payments to that vendor by a specified percentage (e.g., 200%).

All Large payments are unusual and should be scrutinized as potentially being fraudulent.

• Paid invoice

List payments to any vendor that exceed the twelve- month average payments to any vendor within the purchase category (e.g., supplies, fixtures) by a specified percentage (e.g., 200%).

All Large payments are unusual and should be scrutinized as potentially being fraudulent, especially when analyzed in relation to other vendors of similar products.

• Paid invoice

Summarize invoice payment general ledger activity by type of purchase, and identify areas with less than three vendors.

All By summarizing general ledger activity, the vendors by type of purchase (e.g., fixtures, transportation) can be identified. Types with less than three vendors could identify an area where few vendors are being used, reducing competitive influence, and providing the opportunity for fraudulent activity.

• Paid invoice

• General ledger distribution

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Title Category Description Data file(s)

Calculate the average payment by general ledger activity type and review for payments made that exceed that average by a large percentage (e.g., 100%).

All By summarizing general ledger activity by type of purchase (e.g., fixtures, transportation) high value payments may be identified to fraudulent vendors.

• Paid invoice

• General ledger distribution

Summarize by vendor the number of inferior goods based on number of returns.

All Inferior quality may be reduced to companies with employees receiving fraudulent payments.

• Receiving log

Identify delivery of inventory to employee address by joining employee address to shipment address file.

All Inventory may be shipped directly to an employee address to act as consideration to the employee for fraudulent activity.

• Shipment register

• Employee address

Identify delivery of inventory to addresses not designated as business addresses.

All Inventory may be shipped to an employee address that is entered into the system to appear as a regular business address. Such a shipment would act as consideration to the employee for fraudulent activity. The identification of whether an address is legitimately a business one can be done via software databases such as Select Phone Pro.

• Shipment register

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Title Category Description Data file(s)

Match the vendor master file to the employee master file on various key fields.

All Compare telephone number, address, tax ID numbers, numbers in the address, PO Boxes, and ZIP code in vendor file to information in employee files, especially for employees working in the accounts payable department.

• Vendor master file

• Employee master file

Identify vendor addresses not designated as business addresses.

All The identification of whether an address is legitimately a business one can be done using software databases such as Select Phone Pro.

• Vendor master file

Review Internet resources, online newspaper archives, background check, and commercial credit databases for related parties of employees.

All Review of Internet resources such as AuditNet.org, online newspapers such as newyorktimes.com and wsj.com, and other online background databases may identify employee related parties.

• N/A

                     

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SUMMARY

As we learned in Chapter 1, occupational fraud can be divided into three major categories:

asset misappropriations, corruption, and fraudulent statements. Corruption occurs when an

employee of an organization wrongfully uses his influence in a transaction to procure some

benefit for himself or another person, contrary to the employee’s duty to the organization

for which he works. Corruption schemes are broken down into four categories: bribery,

illegal gratuities, economic extortion, and conflicts of interest.

Bribery is the offering, giving, receiving, or soliciting any thing of value to influence an

official act or business decision. Bribery schemes generally fall into two categories:

kickbacks and bid-rigging schemes. Kickbacks involve collusion between employees and

vendors and almost always strike the purchasing function of the target company. Kickbacks

typically involve the overbilling of the victim organization, though in some schemes the goal

is only to divert extra business to a particular vendor. Bid-rigging schemes can be

categorized based on the stage of bidding at which the perpetrator exerts his influence. This

type of scheme may take place in the presolicitation phase, the solicitation phase, or the

submission phase of the bidding process.

Although illegal gratuities are similar to bribery schemes, they differ in that an illegal

gratuity is paid as a reward for a decision that has already been made, rather than in an

attempt to influence an impending decision. Illegal gratuity schemes can, and do, develop

into bribery schemes when an understanding results that future business decisions

benefiting the person or company that gave the illegal gratuity will be rewarded.

The third category of corruption is economic extortion, which occurs when one person

demands a payment from another in order to make a decision that will either benefit the

payer or prevent the occurrence of economic harm, such as loss of business.

Conflicts of interest are the fourth category of corruption. They occur when an employee,

manager, or executive has an undisclosed economic or personal interest in a transaction

that adversely affects the perpetrator’s employer. Most conflict of interest schemes fit into

one of two main categories: purchasing schemes and sales schemes. Purchasing schemes

generally involve a perpetrator who has a hidden interest in a vendor and who helps that

vendor overbill his employer. Turnaround sales are another type of purchasing scheme that

takes place when an employee knows his company is about to purchase an asset (such as

land), acquires it, and then sells it to the company at an inflated price.

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In sales schemes, the perpetrator typically causes her employer to sell goods or services at

below fair market value to a vendor in which she has a hidden interest. Another form of

sales scheme occurs when an employee writes off sales to a vendor in which she has a

secret interest, or generates fraudulent discounts on behalf of that vendor.

Other conflict of interest schemes include business diversions, in which the perpetrator

steals customers from his employer, and resource diversions, in which the perpetrator uses

his employer’s cash or property for the benefit of a company he secretly owns.

ESSENTIAL TERMS

Bid-pooling

A process by which several bidders conspire to split contracts, thereby ensuring that

each gets a certain amount of work.

Bid-rigging

A process by which an employee assists a vendor to fraudulently win a contract

through the competitive bidding process.

Bid-splitting

A fraudulent scheme in which a large project is split into several component projects

so that each sectional contract falls below the mandatory bidding level, thereby

avoiding the competitive bidding process.

Bribery

The offering, giving, receiving, or soliciting of something of value for the purpose of

influencing an official act.

Business diversions

A scheme that typically involves a favor done for a friendly client. Business diversions

can include situations in which an employee starts his own company and, while still

employed by the victim, steers existing or potential clients away from the victim and

toward his own new company.

Collusion

A secret agreement between two or more people for a fraudulent, illegal, or deceitful

purpose, such as overcoming the internal controls of their employer.

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Commercial bribery

The offering, giving, receiving, or soliciting of something of value for the purpose of

influencing a business decision without the knowledge or consent of the principal.

Conflict of interest

A situation in which an employee, manager, or executive has an undisclosed economic

or personal interest in a transaction that adversely affects the company as a result.

Economic extortion

The obtaining of property from another when the other party’s “consent” has been

induced by wrongful use of actual or threatened force or fear.

Illegal gratuities

The offering, giving, receiving, or soliciting of something of value for, or because of, an

official act.

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Kickbacks

Schemes in which a vendor pays back a portion of the purchase price to an employee

of the buyer in order to influence the buyer’s decision.

Need recognition scheme

A presolicitation-phase bid-rigging conspiracy between the buyer and contractor

whereby an employee of the buyer receives something of value to convince his

company that it has a “need” for a particular product or service.

Official act

The decisions or actions of government agents or employees. Traditionally, bribery

statutes proscribed only payments made to influence public officials.

Purchasing scheme

A conflict of interest scheme in which a victim company unwittingly buys something

at a high price from a company in which one of its employees has a hidden interest.

Resource diversions

The diversion of assets from the victim company.

Sales scheme

A conflict of interest scheme in which a victim company unwittingly sells something at

a low price to a company in which one of its employees has a hidden interest.

Slush fund

A noncompany account into which company money has been fraudulently diverted

and from which bribes can be paid.

Specifications scheme

A presolicitation bid-rigging conspiracy between the buyer and vendor wherein an

employee of the buyer receives something of value to set the specifications of the

contract to accommodate that vendor’s capabilities.

Turnaround sales

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10-1

10-2

10-3

10-4

10-5

10-6

10-7

10-8

10-9

10-10

10-11

10-12

10-1

A purchasing scheme wherein an employee knows that his company plans to purchase

a certain asset, takes advantage of the situation by purchasing the asset himself, and

then sells the asset to his employer at an inflated price.

Underbilling

A sales scheme that occurs when an employee underbills a vendor in which she has a

hidden interest. As a result, the company ends up selling its goods or services at less

than fair market value, which creates a diminished profit margin or loss on the sale.

REVIEW QUESTIONS

(Learning objective 10-2) What are the four categories of corruption?

(Learning objective 10-4) How are bribery, extortion, and illegal gratuities different?

(Learning objective 10-5) What are the two classifications of bribery schemes?

(Learning objective 10-6) What are some of the different types of kickback schemes?

(Learning objective 10-7) What is a bid-rigging scheme?

(Learning objective 10-7) How are bid-rigging schemes categorized?

(Learning objective 10-8) How might competition be eliminated in the solicitation phase

of a bid-rigging scheme?

(Learning objective 10-8) What types of abuses may be found in the submission phase of

a bid-rigging scheme?

(Learning objective 10-11) What is a conflict of interest?

(Learning objective 10-12) What is meant by the term turnaround sale?

(Learning objective 10-12) How are underbillings usually accomplished?

(Learning objective 10-12) What is the difference between business diversions and

resource diversions?

DISCUSSION ISSUES

(Learning objective 10-3) Offering a payment can constitute a bribe, even if the illegal

payment is never actually made. Why?

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10-2

10-3

10-4

10-5

10-6

10-7

(Learning objective 10-1) What is the common ingredient shared by the four

classifications of corruption?

(Learning objective 10-3) What is the difference between official bribery and

commercial bribery?

(Learning objectives 10-6 and 10-9) If you suspected someone of being involved in a

kickback scheme, what would you look for?

(Learning objective 10-6) An employee can implement a kickback scheme regardless of

whether she has approval authority over the purchasing function. How might this be

accomplished?

(Learning objectives 10-7, 10-8, and 10-9) What are some clues that might alert you to

possible fraudulent activity at the different stages of a bid-rigging scheme?

(Learning objective 10-11) How do conflicts of interest differ from bribery?

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