ACFE Procurement Fraud and Vendor Schemes 1 — Questions and Answers
Question 1: Which type of procurement fraud occurs when an employee creates a fictitious vendor and submits invoices for goods or services never provided?
- Bid rigging
- Shell company fraud (Correct answer)
- Kickback scheme
- Duplicate payment fraud
Correct answer: Shell company fraud
Shell company fraud involves setting up a fictitious vendor entity to submit fraudulent invoices, diverting payments to the fraudster.
Question 2: In a kickback scheme involving procurement, which party typically initiates the fraudulent arrangement?
- An external auditor
- A company employee with purchasing authority (Correct answer)
- The CFO
- A government regulator
Correct answer: A company employee with purchasing authority
Kickback schemes typically involve an employee with purchasing authority who awards contracts to vendors in exchange for secret payments.
Question 3: What is 'bid splitting' in the context of procurement fraud?
- Sharing a winning bid among multiple vendors
- Dividing a large purchase into smaller ones to avoid competitive bidding thresholds (Correct answer)
- Submitting the same bid to multiple buyers
- Splitting the kickback between two employees
Correct answer: Dividing a large purchase into smaller ones to avoid competitive bidding thresholds
Bid splitting involves breaking a large purchase into smaller transactions to circumvent policies requiring competitive bidding above certain dollar thresholds.
Question 4: Which red flag most strongly suggests a conflict of interest in a vendor relationship?
- A vendor with multiple product lines
- A vendor's address matching an employee's home address (Correct answer)
- A vendor with a long payment history
- A vendor operating in multiple states
Correct answer: A vendor's address matching an employee's home address
A vendor address matching an employee's home address is a strong red flag indicating the employee may have an undisclosed financial interest in the vendor.
Question 5: What is a 'pay-and-return' scheme in accounts payable fraud?
- Returning merchandise for a cash refund
- Paying a vendor twice and keeping the duplicate payment refund (Correct answer)
- Paying early to obtain a discount and returning the savings
- A vendor returning defective goods for payment
Correct answer: Paying a vendor twice and keeping the duplicate payment refund
In a pay-and-return scheme, an employee processes a duplicate payment to a vendor, and when the vendor refunds it, the employee intercepts and keeps the refund check.
Question 6: Which analytical technique is most effective for detecting fictitious vendors in a vendor master file?
- Ratio analysis
- Benford's Law analysis of invoice amounts
- Duplicate name and address matching (Correct answer)
- Variance analysis
Correct answer: Duplicate name and address matching
Matching for duplicate vendor names, addresses, phone numbers, and tax IDs is the most direct method to identify fictitious or duplicate vendors in the master file.
Question 7: In procurement fraud, what does 'specification manipulation' involve?
- Altering invoice specifications after delivery
- Writing bid specifications tailored to a favored vendor's capabilities (Correct answer)
- Changing product specifications to reduce quality
- Manipulating contract terms after award
Correct answer: Writing bid specifications tailored to a favored vendor's capabilities
Specification manipulation involves crafting bid requirements so narrowly or specifically that only a favored vendor can qualify, rigging the selection process.
ACFE Procurement Fraud and Vendor Schemes 1
Which type of procurement fraud occurs when an employee creates a fictitious vendor and submits invoices for goods or services never provided?