Detecting Fraudulent Billing Frauds Under The Shell Company Schemes: From the Perspective of Hong Kong Auditors

Abstract

Asset misappropriation, which occurred in the vast majority of fraud schemes, involved stealing or misusing the company’s assets and resources by perpetrators through false invoicing and shell company schemes. False invoicing occurred when a perpetrator created a fictitious vendor for purchasing goods for the employer, used false invoices to make a claim for payment and diverted the fund to its own account. The main purpose of this study is to detect fraudulent billing frauds under the shell company schemes which pose significant risk to the organizations. Shell company operations mainly involve 1) a perpetrator created a shell company, which was only a fictitious name with P.O. Box address, added it to the current vendor master file to facilitate the company’s purchases and also used it to receive payment from false billings; and 2) the shell company was also used as an intermediary to assist the pass-through scheme wherein a legitimate vendor sold goods to this shell company which in turn resold goods to the victim organization with a certain percentage markup on price. Shell company and billing schemes did not receive much attention in prior audit literature and audit practices. This study aimed to investigate the level of effectiveness of red flags in detecting the fraudulent billing schemes from the perspective of auditors (inclusive both external and internal auditors) in Hong Kong and also to explore the effectiveness of fraud data analytics in detecting the billing schemes under the shell companies. For the assessment and perception of red flags for fraud detection, the study extracted a total of 15 red flags from Kassem’s framework and used questionnaire survey to examine the auditors’ responses to red flags in detecting fraudulent billings and release the resultant ranking. Sem-structured interviews were used to obtain data about the effective use of data analytics by auditors to detect fraudulent billings under the shells.