Fraud Schemes: Cash (#239)
/In this podcast episode, we discuss fraud schemes related to the theft of cash. Key points made are noted below.
Cash fraud is popular, because cash is usually untraceable – so if you can stuff it into your pocket and get off the premises with it, you’ve probably gotten away with a minor crime. I say a minor crime, because most organizations don’t keep a whole lot of cash on the premises, just enough to meet their immediate needs - so the theft of cash is fairly small.
Skimming
Let’s go through a few fraud schemes. One of the most effective ways to steal cash is to remove a portion of any incoming cash before it gets recorded in the company’s records, which is called skimming. There’re some really obvious ways to do this, like pocketing the cash from the sales of a hot dog stand, where there isn’t any record keeping. And some techniques are way more sophisticated. I remember one time back in the 1980s, when Deloitte was hired to investigate the theft of cash from one of the bars on the Queen Elizabeth 2 cruise ship. The task was to have Deloitte people sit at the bar all day and watch the bartenders. They couldn’t figure it out, until someone mentioned the number of cash registers at the bar – which was one register more than there were supposed to be. The scam was that the bartenders added their own cash register, rang up a portion of the sales on that register, and then took the cash from the register. That’s quite innovative.
It’s even possible for the owners of a business to engage in skimming. When they steal money from their own business, the company earns less money, so it pays a reduced amount of income taxes. And the owners don’t report the stolen amounts on their personal income tax forms. So, in a twisted sort of way, stealing from your own company makes sense. The problem for an owner is that the owner sets the tone for the business, so if other employees see the skimming going on, they’ll probably do it too.
So how can you cut back on skimming? One approach is to require credit card payments in order to keep cash off the premises, but that doesn’t work too well in some types of businesses where cash payments are the norm. Another possibility is to install security cameras. Even if no one is watching the cameras, just having them present makes employees wonder if someone is documenting what they’re doing.
A good way to detect skimming after the fact is to monitor the gross margin percentage over time. The margin should go down when there’s skimming, because sales drop while the cost of goods sold remains the same.
But no matter what you do, the main problem is that skimming usually involves fairly small amounts of cash, so you might spend more money monitoring employees than you save by having no skimming. This is a tough call. In some organizations, they realize there’s some skimming going on, but they choose not to waste time tracking it down.
Discounted Sales
So let’s move along to a different type of cash fraud, which is discounted sales. In this situation, a customer buys something, and the sales clerk records it normally, so the system records a sale and outgoing inventory. Up to this point, everything is normal. However, then the sales clerk records a promotional discount in the system, takes the amount of the discount out of the cash register, and pockets the cash. The customer never knows, because he’s probably already walked away. This approach is clever, and the sales clerk can get away with it if he only records a few of these discounts each week. Otherwise, the controller will notice a lot of discounts being charged through the system, and will investigate.
It’s possible to stop this type of fraud by requiring supervisory approval before a discount can be recorded in the cash register, though that means calling over the supervisor – which might not be efficient. And of course, you can also install security cameras over the sales clerks.
Fake Refunds
A variation on discounted sales fraud is the fake refund. In this case, the employee creates a credit memo for a refund back to a customer, and then intercepts the check payment before it goes out, signs it over to himself, and deposits the check in his own bank account. There are some variations on this. One approach is to record a product return in the accounting system from a customer, which triggers an automatic refund payment in the system. Or, the employee could authorize a volume discount for a customer.
Fake refunds are always triggered by someone in the accounting department who also has access to outgoing checks. Otherwise, some of the refund payments will get out to actual customers, and they might contact the company about why they’re receiving a payment that they weren’t expecting. Therefore, a good way to keep it from happening is to maintain tight control over outbound check payments.
A good way to detect fake refunds is to look for actual inventory counts that are lower than their book balances. The difference is caused by fake returned goods being logged into the system.
Altered Receipts
And finally, cash can be stolen by altering receipts. This is most common in small firms, where a bookkeeper has control over the entire accounting process. They can intercept cash payments and alter receipts to cover the theft. As long as the bookkeeper keeps the amount of theft fairly small, any minor discrepancies between the amount of cash on hand and the amount stated in the books will probably be written off to expense with no investigation.
To keep this from happening, different people have to be responsible for the receipt of cash, recording cash, and depositing it at the bank. When you can do this, the person recording receipts has no incentive to alter records, while the person handling cash has no control over the recordation process.
Parting Thoughts
I’ll finish with a few thoughts about cash fraud. First, it can be really difficult to spot, especially when the person stealing cash keeps it down to small amounts and doesn’t steal very frequently. In those cases, the grand total stolen over time will probably be pretty small, and the person engaged in the theft is both smart and careful. So, you may never figure out what’s going on. And, if you install some expensive systems to spot the fraud, this type of person is too smart to keep stealing, and will just stop. So the perpetrator is still there, but you can’t prove anything.
Which does not mean that your basic choice is to either let these people keep on stealing or spend a lot of money to catch them. Another possibility is to keep all avenues of communication open – with employees and customers, and anyone else who might have cash dealings with the firm. These people may notice that something isn’t quite right, and you want to be on good enough relations with them that they’ll come to you about it.
And also, vary your routine a bit. For example, occasionally reconcile an account that you usually ignore. Or come back to the office after you’ve left for the day. Or come in early. Or switch jobs with someone else for a few days. By being unpredictable, you might find evidence of cash fraud. It’s not easy, but you might get lucky.