Fraud detection can be made easier by using some common sense methods
Certain theories make use of a principle called “reduction ad absurdum”. According to this principle, conclusions can sometimes be derived indirectly, by proving that all other conclusions are absurd and not possible. In such theories, the derived solution would appear to be the only logical solution. Certain frauds which are very cleverly done can be very difficult to detect. This doctrine is effective sometimes in such situations, by highlighting the absurdity of certain findings as elucidated in the example below.
There was a five-star hotel with a recreation centre. It had sports, games and food facilities such as swimming, squash, billiards and snooker, pool, a gymnasium, sauna and steam baths, cafes and restaurants, etc. Walk-in customers could utilise any of the facilities by purchasing a digital ticket of a minimum value of Rs 1,000. To play a game or to have food, the digital digital ticket had to be presented to an attending cashier at the relevant outlet. Cash payments to any of the outlets were prohibited and a digital ticket was essential to use a facility. Playing a game or having food would be registered as saies’ in the computerised system through swipe reader machines and the value on the digital ticket would keep getting reduced according. On his way out the customer could collect the unutilized balance on his digital ticket at the refund counter by surrendering the ticket.
For any reason, if a game had to be abandoned midway, say on account of power failure or machine failure or if an item of food was sold out, the sale registered earlier could be reversed or cancelled in the system only by the general manager. Only he had password to access a special feature called “void sales” on the system which could cancel sales registered earlier, and restore the value debited on the digital ticket of a customer.
For sometime the management of the hotel had been disturbed. The recreation facility collections were very low compared to similar centres even though the average numbers of customers visiting their centre was much higher. Revenue leakage was suspected. A fraud examiner had been appointed to look into the matter.
One day while conducting a cash verification, the internal auditors reported a cashier with surplus cash of Rs. 2754 at the refund counter. The cashier confessed that he had been pocketing a part of the refund payable in those cases where customers did not bother to check the correctness of the amount returnable. For example, if Customer ‘A’ had to rightfully receive a refund of Rs.175 the cashier would initially hand over Rs. 125, and pause for a few seconds. If ‘A‘ did not check the balance due, he would leave immediately assuming that the refund was correct and the cashier would pocket the balance Rs. 50. However if ‘A’ waited expectantlv, the cashier would hand over the balance Rs. 50 as a matter of routine. The cashier therefore had surplus cash compared to what he should have had as per the system. The management fired the cashier.
The fraud examiner however pointed out that the cashier refund fraud was a minor fraud being one of the oldest tricks and universally attempted by almost every cashier. Careless Customers were few and could not be a cause of a major revenue leakage. Further he pointed out that in this fraud, there was no loss to the management since there was no excess outflow of money. A part of the refund due to the customer was collected by the cashier. In simple words, the cashier had deceived the customers and not the management. It would be absurd to conclude that the revenue leakage was attributable to this fraud.
He came across a situation which fitted in perfectly with the principle of reductio ad absurdum. Thirty customers, who had come in at different times during the day, all collected their refunds, (amazingly full value Rs 1 .000) at the closing time, midnight. If these refunds were to be true and believed, they indicated that each of these customers came some time independently during the day, paid Rs. 1,000 each for admission, but did not play any game or sport, ate or drank nothing, and waited till midnight to collect their refunds. Truth can be stranger than fiction, but it was preposterous to imagine that 30 customers did nothing the whole day. These refunds were therefore absurd, and true facts had to be established.
The fraud examiner was convinced that the customers would come for enjoying the recreation facilities and it was unthinkable that they would just laze around and not utilise any facility at all. In order to get more information, he studied the database in the system and found that it was possible to obtain a report of sales registered as well as cancelled sales for each digital ticket issued. He therefore painstakingly compiled the utilisation and void sales report for those 30 customers, he found that there were indeed sales registered on those tickets but all of them were cancelled by the general manager at the same time in the evening around the time his duty ended! It was now certain that void sales were being misused. The fraud examiner reported to the management that he suspected that the leakage in collections was related to inflated refunds on account of inflated sales. It one could ‘reverse’ sales at will, refunds paid would naturally be greater and consequently the collections would he lower. The motivation for an employee to reverse a sale could be to oblige or favour a friend or a regular customer in return for a consideration. However it was unlikely that obliging a few friends could really result in a major leakage. The actual fraud was not yet clear.
The void sales and refunds data for the past one month were examined. More clues started fitting in the reductio ad absurdum theory. The fraud examiner came across 25 to 30 refunds of the kind that he had observed earlier, practically for everyday in the month at the same time -midnight. It was found that the voiding of sales was incredibly high and 90 per cent of these were authorised by the general manager at his own terminal at one time, usually at the end of his duty hours. It was absurd. if the refunds were to be believed, that everyday some 25-30 customers visited the centre, utilised various facilities, and in the evening just when the general manager was scheduled to go off duty, they would all demand reversal of sales registered on their tickets, and then wait till midnight to collect their refunds!
The next step was corroborating the facts and events from the customers. Some of the customer’s addresses were available and on contacting them, the truth of the matter was established. Like other customers they had come, played games or had eaten in the cafes and collected their refunds by surrendering their tickets before going away. None of them had demanded any sales reversals or cancellations and certainly not waited till midnight to collect their refunds. It was now possible to confront the general manager with this evidence. He confessed having defrauded the hotel in collusion with several cashiers, in particular the late night refund cashier. The tools used in the fraud were the digital tickets and the ‘void’ or ‘cancellation’ feature in the system. The fraud (damage estimated at an average of Rs. 30,000 per day) was perpetrated as follows.
Suppose a customer ‘A’ visited the centre and bought a digital ticket of Rs. 1,000. He played and ate and utilised Rs. 750 on the digital ticket. He then returned his digital ticket and collected his refund of Rs. 250. At this stage the cashier at the refund counter did not delete the customer name from the system as required. The ticket was kept alive in the system and at an opportune moment handed over to the general manager to reverse all sales made on the ticket. Once the reversing or voiding was completed by the general manager, the ticket of customer ‘A’ now had utilisable full value Rs. 1,000 even though the customer had long since collected his refund and gone. All such tickets which had been restored to full utilisable value would then be handed over to some friend. At midnight, this friend of the general manager would show up with all the 30 tickets and claim a full refund of Rs. 1,000 for each of them. The late night cashier at midnight would refund the full value of all such tickets, the proceeds of which would be shared by all perpetrators later. Thus most void sales authorised by the general manager were fraudulent. To provide a cover up, certain cashiers at each of the outlet were in fact given the password by the general manager for vending genuine sales complaints. This loose control over the password was deliberate so as to encourage some misuse by the lower level cashiers (for example, granting favours to friendly customers for some consideration). This served as a shield to the main fraud and to minimise customer complaints relating to sale cancellations which would have been an impediment to the main fraud.
The principle of reductio ad absurdum was therefore very effective in understanding this fraud. Without such innovative methods, management would find it extremely difficult to apprehend perpetrators of fraud particularly where collusion exists.