Chapter 11

Cash Receipt Schemes and

Other Asset Misappropriations

A Case of Taking from the Poor to Give to the Rich

• Non-profit organization for families of 9/11 victims

• Anonymous tip alerted Board of Directors of misappropriation of funds

• Corporate officers were using organization’s income for personal use

• Inconsistent records with vendors

• Two sets of financial records

• Some transactions didn’t appear in original journals and ledgers

• Unauthorized personal expenditures on credit

Critical Thinking Exercises

Far off in the woods, there is a cabin. The cabin contains 3 people. Two are in one room; the other is alone in another room. All doors to the cabin are locked tight and have not been opened. All three people are dead. There was no sign of violence in this cabin. How did they die?

Skimming Schemes• Theft of cash from a victim entity prior to its entry in an

accounting system

• “Off-book” fraud

• No direct audit trail

• Can occur at any point where funds enter a business

• Subdivided based on whether they target Sales or Receivables

Sales Skimming• Most basic skimming scheme• Collect customer payment at point of sale and make

no record of transaction• Cash register manipulation• After-hours sales• Skimming by off-site employees• Poor collection procedures• Understated sales• Check-for-currency substitutions• Theft in the mail room – incoming checks

Preventing and Detecting Sales Skimming

• Viable oversight presence when cash enters organization– Management– Video cameras

• Customer complaints and tips• Cash register log-in and log-out times• Activity logs for off-site personnel• Reduce perceived opportunity to steal

Receivables Skimming• More difficult than skimming sales• Receivable payments aren’t logged into

accounting system• Lapping• Force balancing• Stolen statements• Fraudulent write-offs or discounts• Debiting the wrong account• Destroying or altering records of the transaction

Preventing and DetectingReceivables Skimming

• Strong internal controls• Separation of duties• Regularly rotate job duties• Make employees take yearly vacation• Supervisory approval for write-offs or

discounts• Properly trained audit staff• Automated tests• Trend analysis on aging of customer accounts

Proactive Computer Audit Tests to Detect Skimming

See details in chapter

Cash Larceny Schemes• Intentional taking away of an employer’s cash

without consent and against will of employer

• Money has already appeared on victim’s books

• Can take place whenever employee has access to cash

• Most larceny schemes involve the theft of cash– At point of sale– From incoming receivables– From the victim organization’s bank deposits

Larceny at the Point of Sale

• Large percentage of cash larceny schemes occur at point of sale

• That’s where the money is• Thefts from other registers• Death by a thousand cuts• Reversing transactions• Altering cash counts or cash register tape• Destroying register tapes

Preventing and DetectingCash Larceny at the Point of Sale

• Strong internal controls

• Segregation of duties

• Discrepancies between sales records and cash on hand

• Reports of discounts, returns, adjustments, and other concealing transactions

Larceny of Receivables

• Steal customer’s incoming payments

• Hide imbalances cause by the fraud

• Force balancing

• Reversing entries

• Destruction of records

Cash Larceny from the Deposit

• Taking money prior to depositing it

• Difficult to conceal

• Deposit lapping

• Deposits in transit

Preventing and DetectingCash Larceny from the Deposit

• Separating duties• Itemized deposit slip• Compare authenticated deposit slip to

organization’s copy of deposit slip, remittance list, and general ledger posting

• Deliver 2 copies of bank statement to different people in organization

Proactive Computer Audit Tests Detecting Cash Larceny

See details in chapter

Noncash Misappropriation Schemes• Misappropriation of inventory, supplies,

equipment, and other noncash assets• Noncash misappropriations fall into the

following categories– Misuse– Unconcealed larceny– Asset requisitions and transfers– Purchasing and receiving schemes– Fraudulent shipments

Misuse of Noncash Assets

• Two ways to misappropriate a company asset– Misuse– Steal

• Unauthorized use of a company asset with false statement

• Use of office equipment to do personal work on company time

• The costs of inventory misuse

Unconcealed Larceny Schemes• Employee takes property from the company

premises without attempting to conceal it in the books and records

• Take company assets without trying to justify their absence

• Most noncash larceny schemes are committed by employees with access to inventory

• “Management vs labor” mentality• The fake sale

Preventing and DetectingLarceny of Noncash Assets

• Segregation of duties– Requisitioning– Purchasing– Receiving

• Physical controls– Merchandise should be guarded and locked– Restrict access to authorized personnel

• Installation of security cameras• Physical inventory counts on a periodic basis• Mechanism for receiving customer complaints

Asset Requisitions and Transfers• Use of internal documents to gain access to

merchandise• Move noncash assets from one location to

another• Overstate supplies or equipment for project

and pilfer excess• Falsify forms and remove noncash assets from

warehouse or stockroom

Purchasing and Receiving Schemes

• Purchasing and receiving functions are used to facilitate theft of noncash assets

• False billings– Purchase merchandise that company doesn’t

need

• Noncash misappropriations– Intentionally purchased but misappropriated by

the fraudster

• Falsifying incoming shipments

False Shipments of Inventory and Other Assets

• Fraudster creates false shipping and sales documents to make it appear that inventory was sold not stolen

• No risk of being caught stealing on site• Victim company unknowingly delivers

targeted assets• Understate legitimate sales so accomplice is

billed for less

Other Schemes• Employees tailor their thefts to the

organization– Security systems– Record-keeping systems– Building layout– Day-to-day operations

• Write off assets to make them available for theft

Concealing Inventory Shrinkage• Unaccounted-for reduction in inventory• Shrinkage is one of the red flags that signal

fraud– “Where did inventory go?”

• Altered inventory records• Fictitious sales and accounts receivables• Write off inventory and other assets• Physical padding

Altered inventory records

• Change the perpetual inventory record so that it will match the physical inventory count (a.k.a “forced reconciliation”)

• Result: appearance that no shortage exists

Fictitious sales and accounts receivable

• Create fake sales to mask the theft of assets• Debit accounts receivable (cash)

Credit sales account • Issues created: Uncollectible accounts receivable (or

missing cash)• Solution: – “Sell” to a large client who may not notice and will

pay for the fake sale– Write-off the receivable after an appropriate

period of time

Write-off inventory and other assets

• Write off inventory as “obsolete”

• Result: Remove assets from the books before or after they are stolen – no shortage

Physical padding

• Make it appear that there are more assets present

• Example: – Empty boxes in warehouse– Set up a “wall” of product where nothing behind

the wall exists

Preventing and Detecting Noncash Thefts That are Concealed by Fraudulent Support

• Separate duties of ordering goods, receiving goods, maintaining perpetual inventory records, and issuing payments

• Match invoices to receiving reports before payments are issued

• Match packing slip to purchase order to prevent

• Monitor increases in bad debts expense

Preventing and Detecting Noncash Thefts That are Concealed by Fraudulent Support

(Continued)• Reductions to perpetual inventory should be

properly supported• Reconcile materials ordered for projects to

the actual work done• Periodically perform trend analysis on

inventory designated as scrap• Only remove assets with proper authority

Proactive Computer Audit Tests for Detecting Noncash Misappropriations

See details in chapter