Asset Misappropriation: Cash Receipts

Asset misappropriation is the most common form of occupational fraud. There are three major categories of asset misappropriation schemes. Cash receipts schemes are discussed in this section, fraudulent disbursements of cash are addressed in the next section, and the following section covers schemes involving the theft of inventory and other noncash assets.

Cash is the focal point of most accounting schemes. Cash, both on deposit in banks and on hand at the company’s location, can be misappropriated through many different schemes. These schemes can be either on-book or off-book, depending on where they occur.

Cash receipts schemes fall into two categories: skimming and larceny. The difference in the two types of fraud depends completely on when the cash is stolen. 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 been recorded in the accounting system. The way in which an employee extracts the cash might be exactly the same for a cash larceny or skimming scheme.

Skimming

Cash Larceny

Theft of Cash on Hand

Key Points: Financial Transactions and Fraud Schemes (Skimming & Asset Misappropriation)

Skimming Overview

• Definition: Skimming is the theft of cash before it enters the accounting system, leaving no direct audit trail since stolen funds are unrecorded. Known as “off-book” fraud.
• Perpetrators: Skimming can be done by anyone handling customer payments (e.g., salespeople, tellers, cash handlers).
• Challenges: Skimming is hard to detect because the victim might not realize cash was received.

Types of Skimming Schemes

1. Sales Skimming:
   • Employees steal cash by not recording a sale.
   • Typically occurs at cash registers or when receiving customer payments in person.
2. Understated Sales:
   • Transactions are recorded at a reduced amount compared to the actual payment (e.g., falsified receipts or altered sales totals).
   • Examples: Selling 100 units but recording only 50 or reducing sales amounts on invoices.
3. False Discounts:
   • Employees grant “discounts” fraudulently by keeping the discounted amount for themselves.
4. Theft of Incoming Checks:
   • Checks sent via mail are stolen instead of being recorded and posted to the customer’s accounts.
   • Can include schemes such as substituting checks for receipted currency to conceal theft.
5. Short-Term Skimming:
   • Temporarily holding stolen payments in an interest-bearing account, then eventually posting the payment while keeping earned interest.

Concealment Methods for Skimming

• Concealing receivables skimming requires fraudulent actions since receivable payments are expected:
  • Forcing account balances to appear accurate.
  • Destroying or altering transaction records.
  • Lapping: Using subsequent payments to cover for prior skimmed transactions.

Detection of Skimming

• Use analytical procedures such as:
  • Vertical/Horizontal Analysis: Examining sales trends to identify anomalies.
  • Ratio Analysis: Analyzing metrics to detect potential fraud.
  • Confirming large account balances or transactions directly with customers or cross-referencing checks.

Prevention of Skimming

• Internal Controls:
  • Ensuring separation of duties and proper documentation of all financial transactions.
  • Management communication and implementation of strict recording policies.

Key Concept: Inventory Shrinkage

• When sales skimming involves goods, it results in discrepancies between physical and recorded inventory (known as shrinkage). High levels of shrinkage may indicate fraud.

Focus on consistently applying strict auditing, reporting, and monitoring practices to prevent and detect these schemes effectively.

Skimming Controls Checklist

The effective management of risks related to skimming centers around implementing robust internal controls for the receipt process and monitoring deficiencies. These are essential questions that auditors or management can use to review the integrity of cash-handling procedures and identify potential red flags for fraud.

Controls for Incoming Payments

1. Mail Handling:
   • Is mail opened by a person independent of the cashier, accounts receivable bookkeeper, or any other accounting personnel involved in posting journal entries?
   • Is the delivery of unopened business mail prohibited to employees who have access to accounting records?
2. Responsibilities of the Employee Opening Mail:
   • Does the employee apply restrictive endorsements (e.g., “For Deposit Only”) to all checks received?
   • Is a detailed list of money, checks, and other receipts prepared when opening mail?
   • Are all remittances forwarded to the person responsible for preparing and making the daily bank deposit?
   • Is the total of remittances provided to an independent person who compares it to the authenticated deposit ticket and the amount recorded?
3. Use of Lockbox:
   • Is a lockbox service used for receiving customer payments directly through the bank?

Controls for Cash Transactions & Sales

1. Cash Receipts:
   • Are cash receipts prenumbered, with numbers reviewed for accountability?
   • Is there an independent daily check to reconcile prenumbered receipts with cash collections?
   • Are cash receipts deposited intact daily into the company’s bank account, without being used for daily expenses?
2. Approvals:
   • Are cash refunds subject to prior approval by authorized personnel?
3. Employee Bonding:
   • Are employees handling receipts bonded (insured against fraudulent actions)?

Segregation of Duties

1. Accounts Receivable Bookkeeper:
   • Is the accounts receivable bookkeeper restricted from:
     • Preparing the bank deposit?
     • Accessing the cash receipts journal?
     • Handling collections from customers?
2. Cashier Restrictions:
   • Are cashiers restricted from:
     • Accessing accounts receivable records?
     • Accessing bank and customer statements?
3. General Ledger:
   • Is the person responsible for general ledger postings independent of the cash receipts and accounts receivable functions?
4. Customer Complaints:
   • Is an independent person (not involved in cash handling or accounts receivable) assigned to address customer complaints related to billing or payments?

Banking Controls

1. Check Cashing Policies:
   • Are banks instructed not to cash checks made payable to the company?
2. Bank Deposits:
   • Does the company enforce policies ensuring that all money and checks are deposited promptly, intact, and independently verified?

Physical Security Controls

• Are areas where physical handling of cash occurs reasonably safeguarded (e.g., locked storage, access restrictions)?
• Are there video monitoring systems or surveillance in areas where cash is handled?

Cash Larceny Summary for Exam Preparation

Definition
Cash larceny is the intentional theft of cash (currency or checks) that has already been recorded in an employer’s accounting records. It differs from skimming, where cash is stolen before it is recorded .

Key Concepts

1. Point of Theft:
   • Cash Register: Most common location due to frequent cash transactions. Imbalances between the cash drawer and register log indicate theft .
   • Bank Deposits: Employees steal cash during the deposit process, often concealing it as “deposits in transit” .
   • Other Receipt Points: Theft occurs at locations like mailrooms through unauthorized manipulation of received checks .
2. Detection:
   • Regular reconciliation of cash drawer totals against register logs .
   • Analysis of cash receipts, journal entries, and deposit processes for irregularities .
   • Watch for altered or destroyed register logs and customer complaints about uncredited payments .
3. Concealment Methods:
   • Reversing Transactions: Void or refund transactions to make register totals match cash on hand .
   • Register Log Manipulation: Alter sales figures to hide theft, though usually detectable .
   • Destroying Evidence: Destroy or deface transaction records to prevent detection .
   • Unsupported Journal Entries: False entries in accounting systems to balance records .
4. Prevention & Controls:
   • Separation of Duties: Ensure employees don’t control an entire transaction process .
   • Surprise Cash Counts: Conduct unannounced checks of cash registers and deposits .
   • Physical Security: Safeguard cash in secure storage until deposited .
   • Personnel Policies: Implement mandatory vacations and regular rotation of duties .
5. Control Objectives:
   • Complete and accurate recording of all cash receipts .
   • Timely deposit of daily cash receipts in full .

Summary Tips

• Focus on reconciliation, monitoring cash flows, and proper separation of duties to detect and prevent cash larceny .
• Watch for red flags like frequent journal entries to cash, discrepancies in customer accounts, or missing records .

Theft of Cash on Hand

Another way cash can be misappropriated involves the theft of cash on hand. This type of fraud scheme differs from cash larceny and skimming in that it relates to cash that is kept in a secure place, such as a vault or safe. Employees who have access to this stored cash might have the ability to misappropriate or steal these funds.