Skimming revenue, part four: Stealing cash payments from customers

In the past three columns, we've discussed many ways fraud perpetrators steal currency and checks from organizations before accountability for the transactions has been recorded in the accounting system.  

This column concludes this brief coverage of skimming cash payments from customers. 

Fraud detection
Skimming cash is probably one of the most common frauds employees perpetrate against their employers. The temptation of all that cash staring them in the face every working day is often overwhelming for many cashiers. They eventually succumb to the lure of easy money and simply take the currency. They think they're invisible and bulletproof and no one can see them. The good news about these frauds is that most involve relatively small losses. The bad news is that many of these frauds are never detected primarily because of the lack of an audit trail. It's difficult to prove losses when there are no records. That's why it's so important for organizations to enlist the help of customers and citizens to provide tips about irregular cash receipting activities by employees. These tips are the most common methods of fraud detection for skimming schemes.

Case No. 1: Public Market
($174,000 three-year loss)
An employee preparing the annual budget properly followed-up on a decline in revenue and detected this fraud. Another employee collecting stall rental fees from vendors misappropriated funds for many years without detection. The employee maintained two sets of cash receipt forms. He deposited cash receipts from one set of records in the bank and kept personal cash receipts from the other set. The employee was sentenced to two years in a state correctional facility. 

Case No. 2: University Department
($44,000 six-year loss)
A student dunned to pay an outstanding bill produced canceled checks proving the payee had been altered from the university to the name of a department cashier. The student properly reported this irregularity to an independent department official which led to the detection of this fraud. The department cashier misappropriated funds from revenue produced at decentralized locations. He skimmed cash from a variety of activities including apartment rentals, animal stall rentals, and meat slaughtering operations. Internal controls at decentralized locations were nonexistent, and poor cash transmittal systems for funds sent to the department cashier made it possible for him to misappropriate funds without detection for years. The cashier falsified the department's cash receipting records to conceal these irregular activities. 

The investigation
When an organization determines that cash receipting irregularities have occurred - either by monitoring its internal operations or by receiving tips from citizens and customers - the first question is, what should be done next? The answer, obviously, is to conduct an investigation or audit to determine what's really happening. Video surveillance is the most common method used to confirm the suspicions of management in this type of fraud or to determine the best approach to take during the investigation or audit. My office doesn't conduct any video surveillance during fraud audits. But when we feel this is the only practical method to obtain the necessary evidence in the case, we ask the organization to arrange for the surreptitious video to be shot. Sometimes law enforcement agencies perform this service for the government. But in other cases, the organization must contract with an investigative firm.

We've had a lot of success with video surveillance at decentralized locations in my state. But there's good news and bad news when using video. Installing videotaping equipment is relatively cheap and easy to do in government offices. The equipment is usually placed in the ceiling above an individual's work station to observe activity. In the field, such as at solid waste landfills, the investigative agency must stake out the facility and acquire a sufficient amount of cover to secretly videotape cash receipting activities. This is easily done in Western Washington where we can hide behind trees. But it's not quite as easy to do this in Eastern Washington because there are few trees in the desert!

Case No. 3: County solid waste landfill (no loss established)
Analytical procedures determined that revenue at the county's solid waste landfill had an undesirable downward trend contrary to management's expectations based upon increased facility use. As a result, the county hired a private investigator to videotape the landfill's cash receipting activity. The investigator parked a van on the top of a hill near the landfill and began filming operations right out in the open because there was nothing besides grass and assorted desert flora growing in the vicinity. About eight minutes into the tape, a landfill employee approached the investigator and asked what he was doing. The investigator, using a prearranged cover story, said he was planning to purchase the adjoining property and wanted to find out if his business was compatible with the landfill operation. But after this encounter, the surprise element was lost. The videotape captured nothing but normal activity that day because landfill employees were suspicious of the stranger at the top of the hill! 

Though we were unable to document skimming activities at the landfill, we were able to make significant recommendations to the county about how to improve internal controls and monitor its revenues by doing some or all of the following:

• Install traffic counting equipment at the scale house and compare the results to daily cash receipt logs of the number of customers for reasonableness.
• Require cash receipts to be issued to all customers. Install a sign that informs customers that they should receive a receipt for every transaction and also provides a point of contact for them to report any irregularities.
• Establish a separate bank account to allow scale-house employees to make deposits in a night drop box at the bank.
• Conduct periodic videotaping of cashiering operations, particularly when customers complain.
• Closely monitor commercial customer charge accounts for unusual activity such as inconsistent charges, large fluctuations in revenues, or alterations of actual scale-house weights.
• To ensure that actual weights aren't being altered, require employees to use the actual scale weights, to not manually input the scale readings, and to periodically review the weight system detail for all manual transaction input. (During our review, we determined that the staff had the ability to enter manual weights at the scale house - a serious compromise of the county's cash receipting controls.)
• Eliminate a computer weakness that allowed the staff to print duplicate receipts.
• Monitor over time the reasonableness of cashiers' voided transactions and ensure that all transactions are properly approved and supported.
• Update its policies and procedures to document newly established internal controls.

The ultimate question
What should organizations do to deter employees from skimming?

Use the customer
To the extent possible, an organization should always use the customer as a part of its system of internal control. For example, as in the recommendations to the county above, signs should be posted prominently in the cashier area informing each customer to obtain a receipt for every transaction. Some organizations offer incentives to customers by providing gifts or rewards if their cash receipts have gold stars on them. (Some states or municipalities may prohibit this procedure because they might perceive it as a quasi-lottery game, which might violate a no-gift rule in the constitution. My state, Washington, is one of them.)

Other organizations periodically ask customers who have entered their facilities - such as parks, zoos, aquariums, and golf courses - to produce a copy of the cash receipts issued to them by the cashier or a valid annual admittance pass. Most organizations ask their customers for their receipts at a location that is out of the line of sight from the cashier facility but before the first trash receptacle that customers reach.

In my fraud training classes, I always ask participants to be the eyes and ears of every governmental entity when they're conducting business with its employees. If they observe suspicious conditions, I ask each participant to contact the appropriate audit team in our agency that has jurisdiction over the organization involved, explain the circumstances of the encounter, and then be prepared to provide copies of any documents. This information will be used to determine if the cashier properly handled the transaction.

Case No. 4: county parking meter revenue
($20,000 one-year loss)
Fellow employees witnessed a parking enforcement officer loading money bags into his personal vehicle. This suspicious activity was immediately reported to the police who arrested him at work the same day. The parking enforcement officer misappropriated funds from the county's parking meters. He stole an extra parking meter key from the office and then secretly used it to open the parking meters on days when county parking meter collections weren't scheduled to be made. 

Case No. 5: parks and recreation district
($11,000 one-year loss)
Customers using the district's athletic fields found that the payees on their canceled checks were altered from the district to the name of the parks director who scheduled the athletic events. The customers properly reported this case to an independent party in the district, which led to the detection of this case. The employee misappropriated funds from athletic tournament and league fees after team representatives paid to use the district's athletic fields. He concealed this activity by failing to report all athletic field use. 

Unannounced cash counts
Managers should periodically conduct unannounced cash counts at all cash receipting locations in the organization. During cash counts, managers should determine that the cashier has possession of the appropriate change fund and that the total accountability for funds, according to the cash receipting system in use, agrees with the amount of funds on hand. The check and cash composition of the funds on hand should also agree with the mode of payment for all transactions recorded during the business day. To be most effective, this unannounced cash count should be performed at the end of the day after the bank deposit has been prepared but before it has been taken to the bank. Any manipulation of the contents of the deposit should be carefully analyzed to determine if fraud is present.

Case No. 6: water district ($11,000 one-year loss)
An unannounced cash count by a state auditor found that the funds from customer payments made in currency were missing not only on the day of the count but also during the year. The office manager misappropriated collections from customer payments and security deposits, hydrant services provided for property developers, and other miscellaneous revenue sources. The district didn't properly monitor this employee's work to ensure its expectations were met. 

Determine alternative records
Managers should determine the available types of alternative records - accounting documents or other statistics - that drive specific revenue sources at all cash receipting locations and relate this information to the number and value of transactions processed. These records should be used to determine if the amount of revenue recorded by cashiers is reasonable.

Managers may also use some of these records to establish estimates for future revenue sources in annual budgets. These documents, for example, could include: pre-numbered tickets or forms; cash register "Z" tapes; numerical counters from admittance turnstiles or traffic counters to establish numbers of transactions; entrance and exit scales for conditions in which weights enter into fee calculations such as at landfills; physical attendance counts of people and vehicles on ferry runs; the number of events from facility rental or use contracts; occupancy records for parking situations such as at parks and other recreational facilities; inventory records for sales of merchandise such as soft drinks, candy bars, and tee-shirts; and pre-numbered forms for pre-paid cards for certain activities such as buckets of golf balls to be used at a driving range. The list is endless. Managers need to study each operation to determine the available documents and how they can be used to verify the amount of revenue that should be generated from each revenue source. Additionally, there's no substitute for the fraud examiner's personal knowledge about each revenue source.

Case No. 7: county housing authority
($31,000 one-year loss)
After receiving complaints from several tenants, the housing authority compared electric utility meter use with apartment rentals and found that vacant apartments were using electricity. A property management employee misappropriated tenant payments for deposits, rental fees, and utility charges at two mobile home parks owned by the housing authority. The employee concealed the missing tenant payments by failing to report funds received from new rentals and by falsely reporting occupied units as vacant. 

Case No. 8: school district food service department
($12,000 one-year loss)
After receiving complaints from several parents, the district compared free and reduced lunch authorization documents with lunchroom cash register activity and found that the cashier had recorded more free and reduced meals than the number of children who were participating in the program. A lunchroom cashier falsified the number of free and reduced lunches consumed each day to eliminate accountability for funds received from students who paid the full price for meals. The difference was misappropriated. 

In the cases discussed in this column, each organization failed to monitor its revenue sources to ensure that all funds due were properly collected and deposited in the bank. Losses can occur at any time when this condition exists. Also note that the amount of loss isn't significant for cases in which skimming activities are detected promptly. Employees also received nominal sentencing in these schemes except where otherwise indicated.

Learning objectives  

• To the extent possible, use the customer as a part of the organization's system of internal control. Post signs asking for customer input about any irregularities noted. An independent party should promptly investigate all complaints.
• Videotape cashiering operations periodically or specifically when irregularities have been reported.
• Periodically conduct unannounced cash counts at all cash receipting locations in the organization. This includes the central treasury facility as well as all decentralized locations.
• Determine the types of available alternative records that drive specific revenue sources at all cash receipting locations, and use them to establish the revenue expectations for the organization's annual budget.
• Establish periodic monitoring procedures as a deterrent to irregular activity at decentralized locations where one person often works alone.

All good things ...
(but on to cash larceny)
This column concludes a brief overview of skimming operations in which employees misappropriate funds from the organization before transactions are recorded in the accounting system. We're going to change the focus slightly in the next column and examine cash larceny cases - instances in which employees misappropriate funds from the organization after accountability for the transactions has been established.

Regent Emeritus Joseph R. Dervaes, CFE, CIA, ACFE Fellow, is audit manager for special investigations for the Washington State Auditor's Office.

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