Management and Organizational Studies 3367A/B Chapter Notes - Chapter 5: Internal Control, Bank Statement, E-Commerce Payment System

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Chapter 5 Check Tampering
Employee converts an organization's fund
o Fraudulently preparing a check drawn on the organization's account for his
own benefit
o Intercepting a check drawn on the organization's account that is intended for
a third party, converting that check to his own benefit
o A form of fraudulent disbursement and applies only to payments drawn on
the victim organization's bank accounts
o Third common form fraudulent disbursement
Perpetrator physically prepares the fraudulent check and makes it payable to
himself through one of several methods
5 methods are used to commit check tampering
o Forged maker schemes
An employee misappropriates a check and fraudulently affixes the
signature of an authorized maker thereon
A forged check schemes are usually committed by employees who lack
signatory authority on company accounts
Obtaining a check (committed by payable clerks)
With access or without (may steal)
Producing counterfeit checks
Prevention (safeguarding check stock)
Make check payable to
Perpetrator himself
An accomplice
A vendor
Forging the signature
Free-hand forgery
Photocopied forgeries
Automatic check-signing mechanisms
Miscoding fraudulent check (hiding the fraudulent nature of the check)
Converting the check (endorsement must be made)
Prevention and detection
Strict set of procedures for the handling of outgoing checks
Establish a restrictive list of authorized check signers
Keep track of who is approved to sign checks during a given
Verify signatures on returned checks, spot check
Strictly access to stamp and have a custodian maintain a log of
who uses the stamp and at what time
o Forged endorsement schemes
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Check tampering scheme in which an employee intercepts a company
check intended for a third-party and converts the check by signing the
third-party's name on the endorsement line of the check
Gaining access to blank checks and producing a signature that appears
Main dilemma is gaining access to a check after it has been written and
signed (either steal or reroute)
Intercepting checks before delivery
Employees involved in delivery of checks
Poor control of signed checks
Theft of returned checks
Rerouting the delivery of checks (alter address )
Converting the stolen check
Prevention and detection
Train employees to look for schemes
Establish routine procedures designed to help detect
Separate cutting checks, signing checks and delivering
Set up accounting system to detect duplicate payments
Restrict making changes to vendor records
Chart the date of mailing for every outgoing check
Installing camera surveillance
o Altered payee schemes
Intercepted check scheme in which an employee intercepts a company
check intended for a third-party and alters the payee designation
Alteration essentially makes the check payable to the fraudster and there
is no need to forge an endorsement or to obtain false identification
Altering checks prepared by others
Inserting a new payee
Insert the false payee's name in place of the true payee's
Fraudster changes the name of true payee
Tacking on (additional letters or words at the end of the real
payee designation)
Altering checks prepared by fraudster
Erasable ink
Blank checks
Converting altered checks
Prevention and detection
Separation of duties
Duty of reconciling the bank statement be separated from other
check-preparation functions
Matching all bank statement items to cancelled checks
Require that all checks be drafted in permanent ink to prevent
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o Concealed check schemes
Employee prepares a fraudulent check and submits it along with
legitimate checks to an authorized maker who signs it without a proper
The perpetrator prepares a check made out to himself, an accomplice, a
fictitious person, and so on. Instead of forging the signature of an
authorized maker, the employee takes the check to the authorized
maker, usually concealed in a stack of legitimate checks awaiting
o Authorized maker schemes
Most difficult to defend against
Employee with signatory authority on a company account writes
fraudulent checks for his own benefit and signs his own name as the
Overriding controls through intimidation
Poor controls
Prevention and detection
Difficult to detect because check signer is relied on to serve as a
Separate the duties of the check writing function
Check preparer and check signer
Check signers should not have access to blank checks
Require dual signatures for disbursements over a certain amount
Maintain up-to-date vendor lists and confirm all disbursements to
the lists, scrutinizing checks to unknown vendors
o Concealing check tampering
Forged endorsement schemes and altered payee schemes create a
problem for the fraudster because the checks are intended for a
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An investigation could be triggered and the fraud discovered
Fraudster reconciling the bank statement
Remove fraudulent check
Doctor the bank statement
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