Chapter 3: Skimming

1. Chapter 3: Skimming

2. Skimming Schemes • Skimming makes up approximately 29% of cash frauds. • 316 cases of skimming were reported, with a median loss of $50,000.

3. What is Skimming? • Definition: theft of cash from victim organization before the cash hits the accounting system • Off-book fraud • No direct audit trail • Books stay balanced • Most common form of cash fraud

4. Deterrence Steps for Skimming • Identify all revenue sources • Determine where they enter the organization • Record accountability immediately • Restrictively endorse all checks “For Deposit Only” immediately • Include revenue sources in organization’s budget • Review budget versus actual revenue • Identify and investigate significant variances

5. Common Skimming Schemes • Sales skimming • Receivables skimming • Refunds and other skimming schemes

6. Skimming Schemes – Breakdown of Cases • Of 316 skimming schemes that were studied, 203 involved the theft of sales, as opposed to receivables. • Sales skimming is easier to conceal because payments are not expected.

7. Skimming Schemes -Median Losses

8. Sales Skimming • Unrecorded sales • Perp makes a sale • Pockets money • Never records sale • Understated sales • Perp pockets a portion of a sale • Either records sale at lower price or smaller quantity of goods sold

9. Sales Skimming • Register manipulations • Cash register clerk rings “no sale” • Pockets money • Looks like transaction was recorded • Skimming during off-hours • Perps sell company merchandise on weekends or after hours

10. Sales Skimming -Countermeasures • Surveillance of employees at point of sale • Maintain secure area for employees to store coats, purses, etc. • Look for coded markers near registers (e.g., employee who has stolen $500 from register keeps nickel by register to remind himself of the amount taken) • Investigate gaps in transaction sequence/pre-numbered receipts

11. Sales Skimming - Countermeasures • Look for excessive non-sale transactions (voids, refunds) at cash registers • Encourage customers to request receipts (forces employees to ring up sales) • Rotate employee schedules, measure variances in revenue based on employee • Use a secret shopper service

12. Skimming Off-Site Sales • Remote salespersons largely unsupervised • Common with insurance salespersons: • Sell a policy, policy never filed • Property managers: • Lease a property, list it as vacant • Pocket rents

13. Skimming Off-Site Sales – Countermeasures • Require external sales staff to maintain activity logs • Spot-check activity log entries by independent personnel • Monitor customer complaints independent of sales staff • Conduct sales trend analysis on external salespersons

14. Theft in the Mailroom • Mailroom employees steal incoming checks • Checks never logged • Usually occurs when one employee opens mail unsupervised

15. Theft in the Mailroom - Countermeasures • Open mail in visible area with supervisory presence or video cameras • Use two employees to open mail • No purses or briefcases where mail is opened • Have incoming payments sent to lockbox • Mail marked checks to company, verify that they are logged

16. Receivables Skimming • More difficult to conceal than sales skimming • Incoming payments “expected” • Can result in delinquent customer accounts • Perp must take steps to conceal the fraud

17. Concealing Skimming • Destroy or alter transaction records • Lapping • Steal customer statements • False account entries • Inventory padding

18. Destroying/Altering Transaction Records • Salesperson discards records of stolen sale • Alter records to reflect lower sales price • Missing records can signal fraud

19. Lapping • Steal customer A’s payment • Apply customer B’s payment to A’s account, etc. • Most common concealment technique • Perp may keep 2nd set of books to track misapplications

20. Lapping – Countermeasures • Watch for employees who put in a lot of time after-hours and on weekends (lapping schemes take a lot of work) • Enforce mandatory vacations • Spot-check daily deposits to accounts receivable, verify names on checks match postings • Compare a/r postings to dates payments were mailed by customers

21. Stealing Customer Statements • This is done when skimming causes a customer account to become delinquent • Usually change customer address in billing system • Replace real statements with counterfeits showing account current • Keeps customer from alerting company

22. Stealing Customer Statements - Countermeasures • Independent confirmations of aging a/r with customers • Separate collections department from sales, accounts receivable • Separate mail function from accounts receivable

23. False Account Entries • Debit expense account instead of cash • Debit aging receivables or very large accounts • Write off accounts as bad debts • Create fraudulent “discounts” • Force account balances (add wrong)

24. False Account Entries – Countermeasures • Separate duties of receiving cash, posting payments, and reconciling accounts • Match deposit totals to a/r postings • Investigate shortages in cash account • Require supervisory approval for write-offs • Look for rising trend in write-offs, discounts • Look for large number of aging accounts

25. Inventory Padding • Unrecorded sales cause inventory shrinkage • Common concealment techniques: • Forced reconciliation of perpetual & physical inventory • False credits to inventory • Write off as lost, stolen, obsolete

26. Skimming Controls • Segregate all cash receipting functions • Supervise employees at all cash collection points • Supervise employees who open mail • Place restrictive endorsements on all checks received • Enforce mandatory vacations • Conduct surprise audits/cash counts

27. Skimming Controls • Supervisory authority for all price modifications and write-offs • Independently confirm delinquent customer accts. • Random customer satisfaction surveys • Follow up on customer complaints