Category Archives: Cash Fraud

Cash In – Cash Out

One of our associate Chapter members has become involved in her first fraud investigation just months after graduating from university and joining her first employer. She’s working for a restaurant management consulting practice and the investigation involves cash theft targeting the cash registers of one of the firm’s smaller clients. Needless to say, we had a lively discussion!

There are basically two ways a fraudster can steal cash from his or her employer. One is to trick the organization into making a payment for a fraudulent purpose. For instance, a fraudster might produce an invoice from a nonexistent company or submit a timecard claiming hours that s/he didn’t really work. Based on the false information that the fraudster provides, the organization issues a payment, e.g., by sending a check to the bogus company or by issuing an inflated paycheck to the employee. These schemes are known as fraudulent disbursements of cash. In a fraudulent disbursement scheme, the organization willingly issues a payment because it thinks that the payment is for a legitimate purpose. The key to the success of these types of schemes is to convince the organization that money is owed.

The second way (as in our member’s restaurant case) to misappropriate cash is to physically remove it from the organization through a method other than the normal disbursement process. An employee takes cash out of his cash register, puts it in his pocket, and walks out the door. Or, s/he might just remove a portion of the cash from the bank deposit on their way to the bank. This type of misappropriation is what is referred to as a cash theft scheme. These schemes reflect what most people think of when they hear the term “theft”; a person simply grabs the money and sneaks away with it.

What are commonly denoted cash theft schemes divide into two categories, skimming and larceny. The difference between whether it’s skimming or larceny depends completely on when the cash is stolen, a distinction confusing to our associate member. Cash larceny is the theft of money that has already appeared on a victim organization’s books, while skimming is the theft of cash that has not yet been recorded in the accounting system. The way an employee extracts the cash may be exactly the same for a cash larceny or skimming scheme. Because the money is stolen before it appears on the books, skimming is known as an “off-book” fraud. The absence of any recorded entry for the missing money also means there is no direct audit trail left by a skimming scheme. The fact that the funds are stolen before they are recorded means that the organization may not be “aware” that the cash was ever received. Consequently, it may be very difficult to detect that the money has been stolen.

The basic structure of a skimming scheme is simple: Employee receives payment from a customer, employee pockets payment, employee does not record the payment. There are a number of variations on the basic plot, however, depending on the position of the perpetrator, the type of company that is victimized, and the type of payment that is skimmed. In addition, variations can occur depending on whether the employee skims sales or receivables (this post is only about sales).

Most skimming, particularly in the retail sector, occurs at the cash register – the spot where revenue enters the organization. When the customer purchases merchandise, he or she pays a cashier and leaves the store with whatever s/he purchased, i.e., a shirt, a meal, etc. Instead of placing the money in the cash register, the employee simply puts it in his or her pocket without ever recording the sale. The process is made much easier when employees at cash collection points are left unsupervised as is the case in many small restaurants. A common technique is to ring a “no sale” or some other non-cash transaction on the employee’s register. The false transaction is entered on the register so that it appears that the employee is recording the sale. If a manager is nearby, it will look like the employee is following correct cash receipting procedures, when in fact the employee is stealing the customer’s payment. Another way employees sometimes skim unrecorded sales is by conducting sales during nonbusiness hours. For instance, many employees have been caught selling company merchandise on weekends or after hours without the knowledge of the owners. In one case, a manager opened his store two hours early every day and ran it business-as-usual, pocketing all sales made during the “unofficial” store hours. As the real opening time approached, he would destroy all records from the off-hours transactions and start the day from scratch.

Although sales skimming does not directly affect the books, it can show up on a company’s records in indirect ways, usually as inventory shrinkage; this is how the skimming thefts were detected at our member’s client. The bottom line is that unless skimming is being conducted on a very large scale, it is usually easier for the fraudster to ignore the shrinkage problem. From a practical standpoint, a few missing pieces of inventory are not usually going to trigger a fraud investigation. However, if a skimming scheme is large enough, it can have a marked effect on a small business’ inventory, especially in a restaurant where profit margins are always tight and a few bad sales months can put the concern out of business. Small business owners should conduct regular inventory counts and make sure that all shortages are promptly investigated and accounted for.

Any serious attempt to deter and detect cash theft must begin with observation of employees.  Skimming and cash larceny almost always involve some form of physical misappropriation of cash or checks; the perpetrator actually handles, conceals, and removes money from the company. Because the perpetrator will have to get a hold of funds and actually carry them away from the company’s premises, it is crucial for management to be able to observe employees who handle incoming cash.