Cash Larceny, Part Four: Alteration of manual cash receipt forms

Unscrupulous cashiers often alter manual cash receipt forms for customer payments to misappropriate funds from the entity. These manual cash receipt forms usually come in a book with three or more receipts to a page. Each receipt has three copies:

• original (white), which is given to customers as a record of their payment;
• accounting (yellow), which is retained with the daily activity reports for accounting purposes and subsequently used to verify the sequential use of all cash receipts forms issued by each function; and
• file (pink or blue), which is retained and stored permanently as the used book of manual cash receipt forms issued by each function collecting revenue.

Cashiers alter cash receipt forms to commit fraud using two primary methods. In the first method, the cashier removes the original copy of the cash receipt form from the receipt book before completing any of the information. He then completes all data entries on this stand-alone original cash receipt form and gives it to the customer once the payment has been received. The actual amount of the payment is shown on the customer's copy of the cash receipt form.

In the second method, the cashier completes all data entries on the cash receipt form, except for the amount of the transaction while it remains intact in the receipt book. He then removes the original copy of the cash receipt form from the receipt book and completes the amount of the transaction on the stand-alone original cash receipt form. Finally, the cashier gives the receipt to the customer once the payment has been received. Again, the actual amount of the payment is shown on the customer's copy of the cash receipt form.

By processing revenue transactions by either of these two methods, cashiers are able to issue manual cash receipt forms to customers for the correct amounts of the transactions. But after a customer leaves, the cashier completes the remainder of the receipt form in his accounting records for an amount that's less than what the customer actually paid. After he has falsified several transactions for the business day, the total of all cash receipt forms issued will agree with the amount of funds collected and included in the daily bank deposit. The revenue loss to the entity is calculated as the difference between the amount of funds the customer paid and the amount of accountability the cashier actually recorded in the accounting records. Won't the customer find out if funds are misappropriated in this manner? No - miscellaneous revenue of all types is usually involved so the customer won't become delinquent for any payment. However, if accounts receivable revenue is involved, the cashier will write off the remaining account balance by using an unauthorized adjustment transaction that isn't properly approved or supported.

Here's an example. The customer pays $100 for a service provided by the entity. However, the cashier only records $50 of the transaction on the entity's cash receipt form and then includes only that amount in the daily bank deposit. The entity sustains a $50 revenue loss.

Nefarious cashiers use two methods to complete the remaining copies of the cash receipt forms in the receipt book for any altered transaction.

In the first method, cashiers simply complete the remaining copies of the cash receipt forms in the receipt book using a ballpoint pen, which raises a red flag because the yellow accounting form normally should be a carbon copy. (However, honest cashiers sometimes forget to put the carbon paper in the receipt book or put it in backwards and the corrections for these valid transaction errors are recorded in ink.) If you see routine irregular transactions of this type try to confirm, if practical, the number of them and the loss amounts in each case. Obviously, when an entity uses carbonless cash receipt forms and books, cashiers can't claim that these types of recording errors have occurred.

In the second method, cashiers also complete the remaining copies of the cash receipt forms in the receipt book using a ballpoint pen. However, the cashier uses a blank cash receipt form, such as an unused form from the back of the receipt book or a previously voided form, to replace the original cash receipt form. He places this form on top of the other copies in the receipt book to simply align the information on the form so that the reduced amount of funds collected will be shown on the accounting copy in the correct position, and in carbon, just as management expects. If you ever find a cash receipt form in a cashier's work area that has been written over many times, immediately confiscate the document and the cash receipt book. These documents subsequently will provide the needed evidence to prove that the fraud has occurred and will help to document the loss amount.

Preparing false manual cash receipt forms
Unscrupulous cashiers often prepare false manual cash receipt forms to conceal fraud involving turn-ins from decentralized locations within the entity.

Case study No. 1 is a good example of why fraud examiners shouldn't audit at summary level. The original source documents for landfill revenue are the manual cash receipt forms issued by the landfill. The manual cash receipt forms issued by city hall are summary level documents. If a fraud examiner were to have verified the mathematical accuracy of all cash receipt forms issued at city hall he wouldn't have found this fraud. Instead, a fraud examiner would have had to verify the mathematical accuracy of all cash receipt forms issued at the landfill and then make sure this total agrees with the corresponding manual cash receipt forms on file at city hall. The type of manual cash receipt form used for testing purposes is critical to success in detecting the fraud.

An auditor discovered this irregularity late on a Friday afternoon during normal cash receipt testing. Once he detected it, he immediately left the entity to take a short break. He then called his supervisor from a pay telephone at a nearby restaurant to report the fraud and discuss how far to expand cash receipt testing. When the auditor returned to city hall he found that the accounting records were missing. The clerk acted surprised by this turn of events, but other employees said they saw the clerk remove a box of records from city hall and store it in a shed behind the building. The auditor found the missing accounting records in the storage shed and was able to complete the audit. If he hadn't have found the records, the clerk probably would have taken them to the landfill over the weekend.

Using manual cash receipts forms in emergency conditions
The preceding case describes business conditions in which entities use manual cash receipt forms as the primary method to record customer payments. But fraud examiners must remember that manual cash receipt forms are always required for all businesses to operate properly when computer cash register systems are inoperative. During power outages and scheduled and unscheduled cash register equipment maintenance, employees must record customer payments with manual cash receipt forms. Since accountability for funds is always established by the transactions that have been recorded on computer cash register systems, all manual cash receipt forms issued must subsequently be entered on the computer for accountability purposes. In addition, all manual cash receipt transactions should be appropriately cross-referenced to transactions in the computer cash receipting system.

When managers don't monitor the use of manual cash receipt forms properly, unscrupulous employees destroy the manual cash receipt forms and misappropriate the funds from any customer payments. In some cases, the employees even leave copies of the manual cash receipt forms on file at the entity. If fraud examiners review these records they'll find the fraud. In other cases, the employee attaches false computer cash receipt forms to the manual cash receipt forms to make it appear to the casual observer that the transactions have been properly processed. Again, fraud examiners who carefully review these documents will detect this type of fraud.

In case study No. 2 , the investigators discovered that the court administrator had stolen the customers' fines. To conceal these actions, she falsely recorded their penalties as community service in lieu of payments or adjudication transactions which reduced the amount of the fine. She would then take the currency customers had paid the court on these transactions. There were no supporting documents on file for these fictitious adjustment transactions. Fraud examiners quickly detected the invalid transactions and determined the amount of the loss.

But that fraud was tiny in comparison to a second theft. The investigators found that she had misappropriated another $285,000 from payments a collection agency made to the court over 6 1/2 years using the same scheme customer write-offs. The state superior court ordered restitution of the amount of the loss from both crimes plus audit costs and sentenced the court administrator to a state correctional facility for 57 months.

Lessons learned
Be suspicious if a large number of the accounting copies of manual cash receipt forms are written in ink rather than in carbon or if you find a single cash receipt form in the cashier's work area that has been written over many times.

Here are additional red flags possibly indicating fraud:

• An analytical review indicates a decline in a local revenue source from one accounting period to another without any reasonable explanation.
• Revenue projection using alternative records reveals a significant decline in a local revenue source.
• There are no manual cash receipt forms available or used for back-up to record customer payments when computers aren't operational.
• The computer cash register receipt form doesn't agree with the data and accounting information shown on the attached manual cash receipt form.

Alteration OF accounting records
In the next column, we'll deal with frauds involving alterations of accounting records to conceal revenue losses.

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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