Occupational Fraud - pt 2 image

Cashing-In:  Catching False Receipts and Receivables

Part 2 of 7 Occupational Fraud 

By:   Mark Palmer, President e:countable, LLC

Preventing embezzlement is a constant challenge for a small business owner when cash is involved.

In our previous post, I shared an example of “borrowing” and how one retail store manager got caught rolling deposits forward.  He stole or borrowed cash from Day 1’s deposit, then delayed making Day 1’s deposit until he could use Day 2’s cash receipts to make the previous Day’s deposit.  In this case the store manager may very well have intended to repay what he “borrowed,” as he made no effort to permanently conceal the theft.

What follows though are – no question – examples of intentional theft.

You’ve probably seen retail stores or restaurants that post signs at the cash register that say something like, “If we fail to give you a receipt, your purchase is free.”  Ever wondered why?

There is a method to that message.  For most owners or store managers these displays are an attempt to prevent employees from “skimming.”  Skimming occurs when a customer pays for his or her purchase, but the cashier doesn’t record it in the cash register or Point of Sale (POS) system.  Then at an opportune time, the cashier steals the cash from the cash drawer.  At the end of the day his cash drawer balances even though he took the cash since he never recorded the sale.

This is a tough theft to detect.  It typically isn’t noticed until the amount of physical inventory on hand is significantly less than the store’s inventory records.  Simply put, the customer purchased the product but the sale was never recorded.  So what do you do?

Cashiers will usually keep cash received from customers in the cash drawer until a more opportune time.  Therefore, random cash drawer audits during regular shifts can set the tone that the owner is paying attention.  Cash overages should be viewed as seriously, and employees disciplined in the same manner, as when cash shortages occur.

A variation of the skimming fraud scheme happens when an employee records sales as he should, provides sales receipts to customers as he should, but then later voids the sale or records a return.  Whether it’s fraudulently recorded as a void or return the result is the same:  a customer has legitimately paid for a product purchased.  The employee has stolen the cash, and now the company’s inventory records show that there’s more on-hand than what’s actually on the shelf.

In all cases, voiding transactions should always require the approval by a manager or owner.  While you don’t want to inconvenience customers making legitimate returns, an approval process for returns will mitigate the risk of this type of fraud.

Before you dismiss this as not a “business-to-business” issue, consider this:   Customer payments can be stolen when “mailed” to your business.  This actually happens quite easily, especially if you have only one bookkeeper responsible for all aspects of your finances.   A dishonest bookkeeper who has access to everything and knows your system can rob you blind.  They also know how to cover his or her tracks.

Here’s an example of how this could happen:   When a check arrives in the mail, the bookkeeper writes-off the receivables in your accounts receivable system.  To avoid detection the bookkeeper may spread the expense of the write-off between several expense accounts other than “Bad Debt Expense.”  The result is that your records show that the customer no longer owes you the money (preventing a red flag being raised to your customer) but the cash goes in your bookkeeper’s bank account instead of yours.  Instead of writing-off the receivable to bad debt, the bookkeeper may issue a credit to the customer’s account which would actually reduce sales revenue instead of increasing expenses.

In many respects a dishonest bookkeeper with broad access to your system can embezzle from you easier and for much more money, than even the worst front-line cashier.  A dishonest bookkeeper also knows how to hide his or her tracks.

Business owners, especially small business owners, must take practical steps to mitigate the risk of fraud.    One popular solution is to outsource the bookkeeping function.  Outsourced bookkeeping services by reputable firms offer the proper processes and controls to significantly diminish your risk of fraud.

I once knew a B2B company with a single owner and about ten employees.* The bookkeeper – let’s call him Bradley – had been with the company for over twenty years, and the owner – Michael – treated him like family.   Michael entrusted Bradley with complete access and control over the company’s computer system, accounting functions, and banking activities.  Over the years Michael couldn’t understand why the company’s cash flow got worse and worse, even though sales were up, and gross profit margins were up. Michael’s expenses were being managed.  He just didn’t look at his financial statements that closely.  Truth was, his bookkeeper had been stealing customer payments at an increasing rate for more than 17 years.   When it was all said and done, Michael estimated Bradley had embezzled a total of over $2,000,000 during his time employed.  This was not only a theft the crime was a serious abuse of trust.

Before you find yourself being “skimmed,” consider a few things that could mitigate the risk of fraud in your business to include:

  1. Segregate duties of your bookkeeper
  2. Restrict what your bookkeeper can access in your company’s computer system
  3. Outsource some or all of the bookkeeping function
  4. Make sure you understand your financial statements and ask questions
  5. Stay engaged with the accounting function of your company


NEXT ISSUE:     “Vapor Vendors.”   You probably purchase product or services from dozens, if not hundreds of vendors.  This is an opportunity ripe for fraud.  A dishonest bookkeeper comes up with a fictitious vendor name that wouldn’t raise a red flag, perhaps a name that’s very similar to a legitimate vendor’s name.  The rest might be history.   More in our next e:countable post.  Want to know now?  Contact us at:  (757) 962-1080

Mark Palmer:  Bio


*The specifics of each case are purposefully discussed only in ways that keep any individuals and companies involved confidential.