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teeming and lading
is 
the theft of cash or cheque receipts. Setting subsequent receipts, not necessarily from the same 
customer, against the outstanding debt conceals the theft.
1.1.5 Fictitious customers 
This is a more elaborate method of stealing inventory. Bogus orders are set up, and goods are 
despatched on credit. The 'customer' then fails to pay for the goods and the cost is eventually written off 
as a bad debt. For this type of fraud to work, the employee must have responsibility for taking goods 
orders as well as the authority to approve a new customer for credit. 
1.1.6 Collusion with customers 
Employees may collude with customers to defraud the business by manipulating prices or the quality or 
quantity of goods despatched.
(a) 
For example, a sales manager or director could 
reduce the price
charged to a customer in return 
for a cut of the saving. Alternatively, the employee could write off a debt or issue a credit note in 
return for a financial reward. 
(b) 
Another act of collusion might be for the employee to 
suppress invoices
or underrecord quantities 
of despatched goods on delivery notes. Again, the customer would probably provide the employee 
with a financial incentive for doing this. 
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PART C: ACCOUNTING AND REPORTING SYSTEMS, CONTROLS AND COMPLIANCE 
 
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1.1.7 Bogus supply of goods or services
 
This typically involves senior staff who falsely invoice the firm for goods or services that were never 
supplied. One example would be the supply of consultancy services. To enhance authenticity, in many 
cases the individual involved will set up a personal company that invoices the business for its services. 
This type of fraud can be quite difficult to prove. 
1.1.8 Paying for goods not received
 
Staff may collude with suppliers, who issue invoices for larger quantities of goods than were actually 
delivered. The additional payments made by the company are split between the two parties. 
1.1.9 Meeting budgets/target performance measures
 
Management teams will readily agree that setting budgets and goals is an essential part of planning and 
an important ingredient for success. However, such targets can disguise frauds. In some cases, knowing 
that results are unlikely to be questioned once targets have been met, employees and/or management 
siphon off and pocket any profits in excess of the target.
1.1.10 Manipulation of bank reconciliations and cash books
 
Often the simplest techniques can hide the biggest frauds. We saw earlier how simple a technique 
teeming and lading is for concealing a theft. Similarly, other simple measures such as incorrect 
descriptions of items and use of compensating debits and credits to make a reconciliation work 
frequently ensure that fraudulent activities go undetected.
1.1.11 Misuse of pension funds or other assets
 
This type of fraud has received a high profile in the past. Ailing companies may raid the pension fund 
and steal assets to use as collateral in obtaining loan finance. Alternatively, company assets may be 
transferred to the fund at significant overvaluations. 
1.1.12 Disposal of assets to employees 
It may be possible for an employee to arrange to buy a company asset (eg a car) for personal use. In this 
situation, there may be scope to manipulate the book value of the asset so that the employee pays 
below market value for it. This could be achieved by overdepreciating the relevant asset. 
1.2 Intentional misrepresentation of the financial position of the business 
Here we consider examples in which the intention is to overstate profits. Note, however, that by 
reversing the logic we can also use them as examples of methods by which staff may deliberately 
understate profits. You should perform this exercise yourself. 
1.2.1 Overvaluation of inventory 
Inventory is a particularly attractive area for management wishing to inflate net assets artificially. There 
is a whole range of ways in which inventory may be incorrectly valued for accounts purposes. 
(a) 
Inventory records may be manipulated, particularly by deliberate miscounting at inventory counts. 
(b) 
Deliveries to customers may be omitted from the books. 
(c) 
Returns to suppliers may not be recorded. 
(d) 
Obsolete inventory may not be written off but rather held at cost on the statement of financial 
position. 
1.2.2 Irrecoverable debt policy may not be enforced 
Aged receivables who are obviously not going to pay should be written off. However, by not enforcing 
this policy, management can avoid the negative effects it would have on profits and net assets. 
1.2.3 Fictitious sales 
These can be channelled through the accounts in a number of ways. 
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CHAPTER 10
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IDENTIFYING AND PREVENTING FRAUD