Inside Job: Countering Cash Skimming

Like Taking Milk from a Baby

Cash skimming is one of the most common and easiest types of occupational fraud, regardless of an organization’s size. Fortunately, there are relatively uncomplicated ways to fight it.

Look for These Red Flags

Regardless who skims money, the effect on your enterprise remains the same: Revenue is lower than it should be while the costs of producing it remain the same. There are warning signs that indicate the possibility of fraud at your organization. Here is a checklist of tell-tale signs. They don’t necessarily indicate fraud, but the more red flags the greater the likelihood skimming is occurring at your business: 1. Declining or flat revenue. 2. Increasing cost of sales. 3. Increasing or excessive inventory shrinkage. 4. Narrowing ratio of cash sales to credit card sales. 5. Shrinking ratio of cash sales to total sales. 6. Increasing ratio of gross sales to net sales. 7. Discrepancies between customer receipt and company receipt. 8. Customer complaints and inquiries. 9. Forged, missing or altered refund documents.

The term comes from the fact that money is taken off the top, the way cream is skimmed from milk. The reasons cash skimming can be so easy — and tempting — is that the money is often stolen before it’s ever recorded. That means there’s no need to alter accounting records or convert stolen goods into cash. There are many variations on the skimming theme, and two of the most common are:

1. Unrecorded sales: A salesperson sells goods or services to a customer and collects the payment, but doesn’t ring up the transaction. This is sometimes accomplished by opening the business on weekends or after hours and pocketing all or most of the cash receipts.

Here’s another example that doesn’t involves sales: An apartment house manager collects rents in cash for an apartment that is shown as being vacant.

2. Understated sales: An employee records a sale for less than the actual price and pockets the difference. In another version, the employee records a discount that the customer never receives and pockets the amount of the discount.

But skimming can also target refunds and accounts receivable. Those variations, however, require some alterations to books and records to avoid detection. For example, in receivables skimming, the thefts are often those that are simply unrecorded on the books. When funds are diverted from accounts receivable, the amount owed can be reduced on the books by write-off schemes.

Since any employee who comes in contact with cash can skim money, the usual suspects are salespeople, cashiers, mail clerks, and bookkeepers. But keep in mind that senior executives can easily override controls and skim cash. When senior management is involved the losses are usually much larger.

The key to preventing this type of fraud is to set up controls. How you go about doing that depends on the number of employees and the complexity of your enterprise’s accounting system.

Even a very small business can have effective internal controls that may consist simply of the owner carefully paying attention to a few cheques and keeping tight controls over employee access to cash and other assets. In any case, employees who handle cash should be bonded.

At the top of the list of effective ways to battle skimming is to segregate employees’ responsibilities. This means being sure that:

• The person receiving payments and opening mail doesn’t also record incoming payments. Cheques that are received should be stamped “for deposit only”.
• Cash receipts should be sequentially numbered, and all receipts should be accounted for.
• A list of money, cheques and other receipts received in the mail should be prepared by someone other than the bookkeeper or individuals who record payments.
• Bank deposits should be made by someone who does not receive cash and cheques. The same applies to custody of deposits.
• Individuals with signing authority on bank accounts should not be responsible for bookkeeping or reconciling the bank accounts.
• Cash refunds and discounts should require approval.
• Cashiers should not have access to bookkeeping records, bank statements, incoming mail, or customer statements.

These controls can be put into effect with as few as three people. If you are the owner and the bookkeeper, only two people are needed to put these controls into effect.

Talk to a professional about other types of fraud and how to protect your company’s bottom line from less-than-honest employees.

Like Taking Milk from a Baby