The scenario describes classic red flags of a shell company scheme: a vendor with no physical address (P.O. Box), invoices just below approval thresholds to avoid scrutiny, and a lack of supporting documentation like contracts or purchase orders. This suggests a fictitious entity was created by an insider to fraudulently receive company funds.

A sharp, unexplained increase in the accounts receivable to sales ratio can be a strong indicator of premature revenue recognition. If revenue is recorded before a sale is complete or before collection is assured, receivables will grow faster than legitimate, collected sales. This ratio helps spotlight that disconnect.

This is a fundamental distinction. Skimming is the theft of cash *before* it enters the accounting system (e.g., stealing cash from a sale before ringing it up). Cash larceny is the theft of cash *after* it has been recorded on the company’s books (e.g., stealing cash from a register drawer after the day’s sales have been logged). The point of entry into the records is the key differentiator.

A conflict of interest exists when an employee has a hidden or undisclosed personal or economic interest in a transaction that adversely affects the employer. Here, the purchasing manager has a duty to the company but has a hidden personal relationship (spouse owns the supplier) that influences their decision-making, causing the company to overpay. This is the foundational violation upon which other schemes like overbilling are built.

While all are weaknesses, poor physical security over unused check stock is the most direct enabler of a forged maker scheme. If an individual can easily access blank checks, they can simply take one and forge an authorized signature. The other options facilitate different types of check fraud (like authorized maker schemes or concealed check schemes) but are not the most direct path to outright signature forgery on a company check.

The allowance for doubtful accounts is a contra-asset account, and the periodic adjustment to it is recorded as Bad Debt Expense. Reducing the allowance without justification decreases Bad Debt Expense on the income statement, which artificially increases net income. On the balance sheet, it results in an overstatement of net accounts receivable and, consequently, retained earnings (equity).

This is a classic example of rationalization, one of the three elements of the Fraud Triangle. The suspect is attempting to justify their unethical actions by framing them as normal, acceptable, or as a form of compensation. They are not denying the act, but rather providing a reason why they believe it was justified, which is a common behavior in fraudsters.

Billing schemes involve causing the company to issue a payment for a fraudulent invoice. To do this, the fraudster must be able to introduce a false invoice into the accounts payable system and ensure it gets approved for payment. Therefore, compromising the accounts payable function—either by having direct access or by colluding with someone who does—is essential for the false invoice to be processed and paid.

While not definitive, round-dollar amounts can be a red flag. In legitimate commerce, invoices and expenses often result in specific, non-rounded amounts (e.g., $9,876.42). Round numbers, especially large ones, can sometimes indicate that a figure was fabricated or estimated (like a kickback or a fictitious invoice) rather than being the result of an actual, itemized business transaction.

The scenario describes classic red flags of a shell company scheme: a vendor with no physical address (P.O. Box), invoices just below approval thresholds to avoid scrutiny, and a lack of supporting documentation like contracts or purchase orders. This suggests a fictitious entity was created by an insider to fraudulently receive company funds.0