Cash Larceny, Part Eight: Cashier manipulations of manual and computer cash register systems

As we continue our discussion of cash larceny frauds, we begin to look at manual and computer cash register manipulations that cashiers use to misappropriate funds from the organization.

BASIC CASH REGISTER OPERATIONS
All manual and computer cash registers include three functions that act as controls: the subtotal (periodic readings through the business day), the total (at the end of the business day), and a cumulative life-to-date sales total. The subtotal is generally called an "X" tape reading, while the total is called the "Z" tape reading. Cashiers are able to use the "X" tape reading. But only supervisors or managers should be able to use the "Z" tape reading. All three cash register functions are numerical counters inside the equipment that the organization or its employees can't access. Only the equipment manufacturer can do this.

When employees and cashiers activate the X or Z tape readings with any of these functions, a cash register tape is printed, which shows a variety of information used by managers. The type of information available varies because each cash register is different. Ideally, the X and Z tapes should include the name of the organization, the business date, totals for the amount of funds collected for each type of revenue or source of funds, the composition of all revenue collected (such as cash, check, credit and debit cards, etc.), the number and amount of certain types of negative cash or high-risk transactions (such as voids, refunds, adjustments, and paid-out transactions, etc.), and the total of any training activity recorded by the cashier.

X tape reading
The X tape reading is a sub-total function that managers expect cashiers to periodically use throughout the day to determine the status of financial activity at any given point. This is especially important during shift changes when a cashier transfers the funds accountability (or "pre-balances") to his replacement. When this happens, total cash collections for all cashiers then will be included on one daily activity report and included in one bank deposit at the end of the business day.

Some organizations require cashiers to be personally responsible for all cash overages and shortages. But this policy can encourage employees to become petty thieves. A cashier might be tempted to falsify cash receipt transactions after the manager has read the X tape to eliminate cash shortages found during pre-balancing. For example, he might purposely record all subsequent transactions inaccurately between the X tape reading and the Z tape reading at the end of his shift to conceal the cash shortage. The cashier will often just make change for customers who make legitimate payments during this period of time without recording accountability for the transactions. Or the cashier might simply under-record the amount of funds he receives from customers. Both irregular actions represent "skimming" schemes. (I described current skimming schemes in the May/June 2005 issue of Fraud Magazine.) He'll then use these funds to make up the cash shortage in the till drawer before the end of his shift. In most cases, the lost revenue from these irregular activities is relatively small. But this isn't always the case.

A cashier might manipulate the funds just to avoid a cash overage or shortage but then he might begin sliding down a slippery slope toward greater transgressions.

Alternatively, an organization could account for cash overages and shortages on the daily activity report and then record them as miscellaneous income and expenses, respectively, in the accounting records. The organization then, not the employees, is held responsible for these normal variances from cashiering activities. However, the organization should maintain each employee's record of overage and shortage transactions to determine those cashiers who need additional training and those who shouldn't be allowed to perform cashier duties in the future.

Z tape reading
The Z tape reading is a function for recording the total accountability of all funds collected by cashiers at the close of the business day (or a portion of it, depending on how the organization uses its cash registers). But some organizations require all cashiers to take a Z tape reading at the end of their shifts. Regardless of the procedure used, the organization must account for all Z tapes from all cashiers at the end of the business day. This information is then listed on the daily activity report. The total accountability for the day then either agrees with or reconciles to the total amount of funds deposited in the bank. Only managers or supervisory cashiers should possess the key that activates the cash register's Z tape reading function.

Each time the Z tape function is activated, a numerical counter adds a sequential number to each day's balance maintained inside the cash register - for example, number 20 yesterday, and number 21 today. That number is printed on a Z tape with all pertinent control totals from the machine for each business day. Thus, Z tapes are pre-numbered, accountable forms that managers must list on daily activity reports. They then must monitor these tape numbers to ensure that their organizations sequentially account for and control the universe of all Z tapes plus records all revenue collections in the accounting records, as well as deposit all funds collected in the bank.

Cumulative life-to-date sales total
Each time a Z tape function is activated, the total of all sales transactions for the business day is also added to another numerical counter inside a cash register that contains the life-to-date total for all sales that have ever been recorded on that machine. This amount is also included in the control totals printed on the daily Z tape produced by the cash register. Fraud examiners use this number to determine the value of all transactions recorded on any missing Z tape. (We'll discuss that in the next column.)

CASE: WATER PAYMENTS DOWN THE DRAIN
A small town used a stand-alone computer cash register that wasn't linked to the town's general cash receipting and accounting system to record all transactions for its water utility department. One person was solely responsible for all aspects of the utility accounting system - including billing, cash receipting, adjustments, etc. - and managers didn't promptly monitor the employee's work to ensure that the town's revenue expectations were being met. (These two attributes are common in almost all types of employee embezzlement fraud cases in the workplace.) Customers normally paid their bills by check, via mail, or at a locked drop-box container in front of the building. However, many other customers paid in currency at the utility clerk's office. The utility clerk didn't issue cash receipt forms for any of these transactions. Instead, when a customer would request a receipt for the transaction, the utility clerk would stamp the customer's portion of the two-part utility bill "paid" and record it with her date and initials on the document.

After all payments had been received for the day, the utility clerk would enter all customer payments made by check into the computer cash register. She then used the X tape function reading to prepare a subtotal report, which would support the amount of the funds she would give to the treasurer for subsequent deposit in the town's bank account. The utility clerk would then enter all customer cash payments made in cash into the computer cash register and use the Z tape function reading to prepare a total report for all collections made each business day. By doing this, all customer accounts were marked "paid" in the town's utility accounting system even though all the funds hadn't been transferred to the town treasurer for deposit in the bank. The utility clerk would then destroy the total report, retain the subtotal report on file for review and audit, and misappropriate all customer payments that she had been in cash.

The town eventually hired a consultant to determine the reasons it was receiving less water utility revenue than it had expected. The consultant confirmed that the town was receiving a reduced amount of revenue but couldn't find the true cause of this condition (such as a misappropriation of public funds). One day when the town treasurer was out of the office, the utility clerk received a transmittal of funds from the town's municipal court at another decentralized location within the town. The utility clerk misappropriated these funds instead of transferring them to the town treasurer. The municipal court decentralized location monitored its monthly accounting reports and reported this shortage to town officials at the end of the month. This report and a subsequent investigation led to the detection of the misappropriation of $3,900 from the municipal court and the utility clerk's admission of the irregularity.

The external auditors followed up and confirmed the amount of the loss from the municipal court for this isolated event. However, they also determined that the town had lost $16,900 to $20,000 in utility revenue during the previous two years. During an interview, the auditors presented this information to the utility clerk and her attorney. However, the attorney halted the discussion when she realized that this case was much more serious than she had originally thought. The good news is that the utility clerk subsequently entered into a plea bargaining agreement with the county prosecuting attorney's office to resolve the case. The court ordered restitution of the misappropriated $20,800 loss amount plus and audit costs, and sentenced the utility clerk to a nominal period in jail.

CASE: FUNDS FLOAT AWAY AT THE BOAT FACILITY
During cash-receipt testing in a routine audit, external auditors determined that a Z tape from the cash register at the city's boat facility was missing. The city hadn't monitored the sequential use of Z tapes from this decentralized location, hadn't made deposits on a daily basis, and wasn't aware of the potential revenue loss that could occur when Z tape numbers were missing. The city lost $1,225. But because they hadn't discovered the scheme until a year after the event occurred (due to weak internal controls), they couldn't find or prosecute any employees.

CASE: MANAGER STEALS THE LETTUCE FROM GROCERY STORE
The several permanent cashier stations and cash registers inside the entrance at a retail grocery store were included in the fixed asset inventory at the store and were used routinely during each business day. The organization tracked the sequential use of the Z tape numbers in these cash registers, but the manager actually kept a spare cash register mounted on a table with wheels in the back of the store. The manager used this extra cash register to record sales transactions when customer traffic was heavy during peak periods at the store. This additional check-out stand could be used only by customers who paid in currency. Because this cash register wasn't included in the fixed asset inventory at the store, the Z tape numbers from daily sales weren't included on the store's daily activity report. Thus, the manager was able to misappropriate the amount of funds from the transactions recorded on this cash register. This is a 40-year-old case, but as I recall, the amount of loss was several hundred thousand dollars, and the court sentenced the manager to significant jail time.

LESSONS LEARNED
So let's review.

• The organization shouldn't hold employees personally responsible for all cash overages and shortages because it encourages them to become petty crooks. Instead, it should record overages and shortages as miscellaneous income and expense, respectively, in the accounting system and monitor trends for these variances by cashier.
• Because most cashier manipulations of manual and computer cash registers occur just prior to closing, fraud examiners should carefully analyze the transactions between X tape readings and Z tape readings for any irregularities.
• Fraud examiners should always remember that the Z tape reading must be accounted for and controlled similar to any other pre-numbered cash receipting forms.
• Managers should ensure that the universe of all transactions are properly accounted for and controlled by recording each Z tape number on the daily activity report and then monitoring the sequential use of all numbers shown on these reports. A missing Z tape number is one of the primary attributes associated with revenue losses from the abuse of manual and computer cash registers by employees.
• The most common attributes (in almost all employee embezzlement fraud cases) are that one person is solely responsible for every aspect of a particular transaction type, and managers don't monitor the work of key employees to ensure that the organization's expectations are being met.
• Managers should monitor the Z tape numbers from all cash registers in the fixed asset inventory.
• Managers should identify all revenue sources, include estimates of them in the organization's budget, monitor actual versus estimated revenue from all revenue sources, and periodically investigate significant variances from the organization's revenue expectations.

COMING UP: MORE ON Z TAPES!
We'll complete our discussion about basic cash register operations in the next column. It will include a common method of determining the amount of loss when Z tapes are missing and a discussion about some additional ways cashiers manipulate manual and computer cash registers to misappropriate funds from the organization.

Regent Emeritus Joseph R. Dervaes, CFE, ACFE Fellow, CIA, has retired after more than 42 years of government service. He remains the vice chair of the ACFE Foundation Board of Directors.