Stealing cash payments from customers: Skimming revenue, part three

In the past two columns, we've discussed many methods fraud perpetrators use to steal checks from the organization and then convert them for personal benefit. Employees perpetrate these skimming frauds by removing funds from the organization prior to recording accountability for the transactions in the accounting system. Here we'll discuss some of the methods employees use to skim funds by stealing customer payments made in cash.

How it's done
Skimming currency from customer payments is quite simple. The cashier merely has to talk customers out of a receipt or give them a bogus cash receipt form for any transaction for services rendered by the organization. Either method works if the customer isn't concerned by either of these conditions and if the organization hasn't implemented internal controls over the revenue sources at this location. Business continues normally, and everything is just fine. But is it? I think not.

Case No. 1: Department of transportation ferry division revenue ($118,000 loss from two ticket takers at one terminal over several years)
The State of Washington Department of Transportation operates the largest ferry system in the world, employing almost 200 ticket sellers at 14 terminals. The department observed a problem when conducting market testing at one ferry terminal. A ticket taker collected a fare but failed to enter the cash receipt transaction on the cash register and didn't give the customer a receipt. The department subsequently videotaped the ticket taker on numerous occasions and determined that the individual was regularly skimming revenue. For example, the employee failed to record 70 transactions during one full shift of work. The employee also kept track of the irregular transactions on a piece of paper in the ticket booth and removed currency from the cash register till drawer regularly throughout the business day. The ticket taker admitted misappropriating funds for about 13 years, which was substantiated by the deposit activity in the employee's personal bank account and a change in lifestyle after beginning employment at the terminal. The employee said that other ticket takers were skimming, which was later confirmed by videotapes from surveillance cameras recording another employee. This second ticket taker admitted misappropriating funds for about three years. Both employees began skimming money just to pay for lunch but the schemes grew to include evening and weekend entertainment and outings, expensive vacations, and vehicles and other recreational equipment. Both employees were sentenced to one year in jail. The first paid back $40,000 and the second almost $78,000. Their restitution came from retirement benefits and the selling of residences and vehicles.

To detect this type of fraud, listen to what other cashiers say when they interact with customers. The highest risk question from any cashier is: "Do you need a receipt?" If the customer says "yes," the cashier receipts the transaction and is then accountable for the funds. If the customer says "no," or if the casher gives the customer a bogus cash receipt form, the funds received from these transactions basically represent "free" money, which means no accountability is established.

Cashiers operating cash registers anywhere, such as at restaurants, bars, coffee houses, and retail sales establishments, often operate with an open cash drawer. When customers make payments for purchases, cashiers merely make change. The amount of money received from these sales is simply stolen. This is skimming of currency from customer payments at its best. And it's happening every day of the year in businesses all over the world.

The same thing also happens when a customer makes a payment with a check. Sometimes a cashier will tell a customer to leave the payee area on the check blank because he or she has a rubber stamp with the organization's name. A crooked cashier will write his or her name or the word "cash" on the payee line of the checks and either cash them at a financial institution, or deposit them into his personal bank account. Sometimes the cashier will tell customers that their canceled checks are their receipts or that receipts aren't issued at the facility. When these check transactions aren't receipted, a crooked cashier often substitutes them for cash that has been received and recorded from other transactions on the same business day. The cashier easily removes the currency from the cash register till drawer at any subsequent time during the day and keeps the money for personal use. (See the March/April 2005 column for additional details on skimming checks and related fraud case studies.)

These losses hit the organization's bottom line immediately. Indications of these irregular activities later appear in inventory shortages that are written-off as expenses and then decrease the organization's net income. Rarely do these fraudulent activities force an organization into bankruptcy or put them out of business. But the reduced amount of revenue from operations certainly does hurt the organization's overall financial picture. Also, the government doesn't receive sales tax from these unrecorded transactions. Consumers pay for businesses' theft tax for losses due to skimming, shoplifting by customers, and the stealing of merchandise by employees through higher prices.

Fee for service
The functions and services provided by organizations for fees are legion. Some examples from the government sector include: landfills, ferry and toll roads, marinas and boat launch facilities, parks, zoos, aquariums, theaters, swimming pools, golf courses, parking lots, courts, building permit offices, automobile license offices, utilities, police and fire departments, conservation and educational offices, libraries, and housing offices.

Decentralized locations
Skimming currency from customer payments for services rendered by the organization most often occurs at a decentralized location where there's only one employee on duty so there's no one present to observe how transactions are handled or to independently determine if all transactions have been processed as required.

A customer rarely "sees" the fraud involving their transaction because the process is so relaxed and comfortable. The customer wants the transaction completed quickly with minimal disruption so he or she can resume the daily routine. A crooked cashier knows this and simply smiles while telling the unsuspecting customer to have a nice day. As soon as the customer departs the facility, the cashier steals the funds.

The revenue sources employees choose for skimming include all types of miscellaneous revenue that aren't controlled by accounts receivable systems. Even though managers know this scenario provides an incentive for unscrupulous employees to steal funds, they often don't implement internal controls to protect the revenue sources generated at these decentralized locations. Even some honest employees are tempted and cross over the line.

Case study No. 2: county solid waste landfill ($165,000 one-year loss)
After county officials received complaints from citizens and honest staff members about cash receipting operations at the solid waste landfill, they and the sheriff's department conducted a joint investigation. The sheriff's department videotaped the facility for approximately two weeks and found that at least four cashiers misappropriated funds during this period by not recording all transactions on the computer cash register system. Cashiers would steal currency that customers would use to pay for service fees. After analyzing the historical cash receipting activity of individual landfill cashiers, the county determined that these employees misappropriated $165,000 in one year. Some of the variables included the employees' shifts, the day of the week, and whether the accounting records indicated that the employee was honest or dishonest. There were no losses when two honest cashiers worked a shift. There were some losses when one honest and one dishonest cashier worked a shift. Losses were significant when two dishonest cashiers worked a shift.

In my state, we rarely estimate the amount of the loss in fraud cases. We know that we must repeatedly prove the amount of loss beyond a reasonable doubt to a jury of the fraud perpetrator's peers, one transaction at a time until we reach the total amount. This case was one of those rare exceptions where estimating was used because the methodology was flawless. Each of the four cashiers was sentenced to three months in jail. The insurance bonding company paid the county $125,000 on its loss claim. While the insurance company didn't question the method of estimating the loss in this case, it simply made a reasonable offer no one could refuse. Everyone understood the difficulty in calculating a specific amount of loss in the case.

Case study No. 3: city solid waste landfill ($297,000 two-year loss)
The city began investigating the solid waste transfer station after it had received citizens' complaints about cash receipting operations. All the city's solid waste transfer stations use computer cash registers linked to a central server. If multiple cashiers processed cash receipt transactions throughout the city at about the same time, the system had a buffer which held transactions in suspense until they could be processed. Somehow, perhaps by mistake at first and then by design later, cashiers learned that if they would re-boot their computers (by pressing the ctrl, alt, and delete keys at the same time) the last transaction would be deleted if it was being held in the buffer at the central server. And after coming back online, a computer programming error in the system would cause the computer cash register to issue the same cash receipt number again for any transaction that had been mysteriously deleted from the buffer in the system. Therefore, when crooked cashiers rebooted they found that two customers at one facility could receive the same pre-numbered cash receipt form and the cashiers would simply steal the funds collected from any deleted transaction. However, the computer did leave a trace record of these transactions when cashiers manipulated the system so the city was able to analyze the accounting records and identify the number and amount of the manipulations. Cashiers obviously told each other about this computer weakness because the city determined that five cashiers had manipulated the system for personal gain over two years. I can see the picture now as two cashiers at one location discuss the situation. The first turns to the second and says "watch this" as he or she reboots the computer, eliminates a cash receipt transaction, and removes funds for personal use. The sentencing for these five cashiers ranged from six months to one year in jail.

Central treasury facility
Cashiers at central treasury facilities use the same methods to skim revenue that employees use at decentralized locations. However, because of the number of employees involved at these facilities, managers normally implement internal controls over cash receipts by segregating duties among employees and instituting improved cash receipting systems for all funds received. These funds include payments from customers and all money transmitted to the central treasury facility by decentralized locations. However, even these procedures don't deter an unscrupulous cashier from skimming currency.

Learning objectives
Managers should:
(1) establish realistic expectations for revenue from operations, monitor cash receipting operations to ensure that all transactions are properly recorded, compare actual to estimated revenue on a periodic basis, and promptly investigate significant variances;
(2) specifically monitor miscellaneous revenue sources since these funds are most vulnerable to loss;
(3) routinely observe cashiering activities for open cash drawer operations, and listen for any unusual content in the conversations between cashiers and customers;
(4) establish systems to encourage customer feedback about irregular cash receipting operations and hire independent parties to promptly investigate all complaints;
(5) videotape cashiering operations on a periodic basis or specifically when irregularities have been reported;
(6) hire honest employees, perform background checks on cashiers, pay them well, and provide incentives to keep them happy and loyal to the organization over time; and
(7) establish periodic monitoring procedures as a deterrent to irregular activity at decentralized locations where one person often works alone.

Most common way to detect skimming
The next column discusses the most common method used to detect skimming and what the organization can do to deter this irregular activity by employees. Stay tuned for more information about this major fraud risk from those inside the organization.

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