Cash Larceny (Part 9)

We'll discuss ways to calculate the amount of loss from missing cash register Z tapes (which record total accountability), as well as two additional cash register manipulation schemes that cashiers use to misappropriate funds from the organization.

MISSING CASH REGISTER Z TAPES
One of the most basic cash register frauds involves losses of revenue associated with missing Z tape numbers. As we explained in the November/December issue, 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 the ways the organization uses its cash registers).

Every organization must ensure that the cash register Z tape number from each business day is recorded on a daily activity report. Once recorded, managers must then monitor the sequential use of all Z tape numbers to ensure that the universe of all transactions has been turned in from each cash register. Fraud occurs when cashiers fail to turn in all Z tapes and misappropriate the revenue from all transactions recorded on the missing Z tape number. Cashiers can use one of two methods: beginning of the business day and end of the business day.

Beginning of the Business Day 
A fraudulent cashier activates the Z tape function after recording cash receipt transactions for the beginning part of a business day. Next, she begins collecting funds on a second Z tape number for the remainder of the day. She then gives to the manager the second fraudulent Z tape containing a false daily activity report, which now shows an inaccurate amount of total accountable revenue for all funds collected during the entire business day. She misappropriates all funds collected on the first Z tape number.

While the transactions included with the first Z tape will typically represent all cash payments from customers, this isn't always the case. When check payments have been included on the first Z tape, cashiers subsequently substitute them for currency from transactions that have been recorded on the second Z tape. Besides looking for the missing Z tape number, fraud examiners also can detect this irregularity by comparing the check and cash composition of the daily bank deposit with the mode of payment information for the transactions that were recorded on the second Z tape.

End of the Business Day
A fraudulent cashier records all cash receipt transactions on the cash register throughout the business day. But near the end of the day, he prepares a Z tape for accountability purposes. He records this Z tape number on the daily activity report and gives the collected money to the manager. Then he begins recording additional transactions on the cash register. Once finished, he prepares another Z tape. The cashier then destroys the second Z tape and misappropriates the funds from all customer payments that have been recorded on the second Z tape.

The ultimate question in these examples is whether the organization will notice the missing Z tape numbers from its cash registers. If the organization monitors Z tape numbers of all cash registers as accountable documents on its daily activity reports, it will undoubtedly promptly detect these frauds. External auditors verifying the sequential use of all Z tape numbers from all cash registers in the fixed asset inventory will similarly detect these frauds in a timely manner. If the organization or the auditors don't monitor and test these accountable documents for completeness, they might not detect these frauds and associated lost revenue for long periods of time.

CASE STUDY NO. 1: PORT MARINA REVENUE SINKS TO THE OCEAN FLOOR
During cash receipt testing in a routine audit, external auditors determined that a number of port marina cash register Z tape numbers were missing. The port didn't monitor the sequential use of Z tape numbers from the marina and wasn't aware of the potential revenue loss that could occur from this scheme. The auditors first obtained an explanation from the marina managers of how the cash register actually worked. Cashiers would enter the change fund information into the cash register at the beginning of the business day. (This is the only cash register system I've ever seen that requires this procedure for normal operations.) Once the auditors analyzed the change fund amount that should have been recorded on the missing Z tapes, they found that the staff occasionally made errors while entering this information on the cash register at the beginning of the business day. When this occurred, the staff simply destroyed the Z tape that included the error. No one at the port ever noticed this irregularity because Z tape numbers weren't tracked on its daily activity reports. The good news is that they didn't lose any funds associated with these missing Z tapes. So the port was lucky. What's important is that the external auditors detected the irregularity of the missing Z tape numbers and were then able to make recommendations to improve marina internal controls and safeguard marina revenue from loss.

However, while investigating this condition during its cash receipt testing, the external auditors did find a fraud involving fictitious voids. (We'll discuss this case in a subsequent column.) As a result of this case, I developed the training example in the next section ("DETERMINATION OF LOSS WHEN Z TAPES ARE MISSING") to demonstrate how managers, auditors, and fraud examiners can determine the amount of funds cashiers have misappropriated from the organization when Z tape numbers are missing.

DETERMINATION OF LOSS WHEN Z TAPES ARE MISSING
When you find missing Z tape numbers from manual and computer cash register systems, use the following procedures to compute the total amount of accountability that's been recorded on the missing Z tape. In this example, Z tape number 50 is missing.

Step No. 1 Subtract the cumulative life-to-date sales total on Z tape number 49 from the cumulative life-to-date sales total on Z tape number 51.

Step No. 2 Subtract the current daily sales activity shown on Z tape number 51 from the result shown above in step number 1. These valid sales amounts are included in the cumulative sales shown on Z tape number 51 and must be eliminated from the computation to obtain the loss amount.

Step No. 3 The result of the computation shown in step number 2 will be the amount of cash accountability that was actually recorded on missing Z tape number 50.

Step No. 4 Repeat the above process for each missing Z tape number noted during audit testing. The total loss in the case represents a summary of the individual revenue losses associated with each missing Z tape number.

Because the equipment manufacturer or a knowledgeable fraud examiner can demonstrate the inner workings of the cash register, this information can be used easily in court to document the amount of loss in any fraud case.

Example of Computation of Loss Amount on Missing Z Tape Number 50
In this example, let's use the following additional information:

Z tape number 51: cumulative life-to-date sales total ($104,000); daily sales activity ($4,000)
Z tape number 49: cumulative life-to-date sales total ($95,000); daily sales activity ($6,000)

The computation of the loss is as follows:

Z tape number 51 cumulative life-to-date sales total  $104,000 
Less: Z tape number 49 cumulative life-to-date sales total  (95,000) 
Subtotal  $9,000 
Less: Z tape number 51 daily sales activity  (4,000) 
Daily sales activity on missing Z tape number 50  $5,000 

In this example, there's $5,000 in sales accountability on missing Z tape number 50. And this is the amount of lost revenue in this case.

CASH REGISTER TRAINING FUNCTION
Now let's discuss another type of manipulation involving the cash register training function. New cashiers use this function while they're being trained to operate the equipment. Similar to the key granting access to the Z tape function, only managers or supervisory cashiers should have access to and control the key that activates the training function.

When the training function is activated, cashiers are able to practice processing transactions on the cash register during the business day without establishing any accountability for the amount of sales recorded. Gaining experience in this way reduces the amount of operating mistakes cashiers might make after they begin cashiering duties and interacting with customers. These training transactions aren't included in the financial activity for the day because they don't represent any actual revenue. While there's no formal accountability established for these transactions, a summary of the activity processed on the training function should be listed on the Z tape produced by the cash register at the end of the business day. This is a key internal control issue.

Cashiers should access the Z tape and training functions only when a supervisor is present or has authorized this activity. But this isn't always the case when the number of cashiers is limited or otherwise restricted for operational reasons. The most common weakness I've seen over the years is that managers and supervisory cashiers don't realize the importance of this procedure. They leave the key that activates these functions inserted in the cash register at all times. I cringe every time I walk into a retail store and see this.

Newly hired crooked cashiers can activate the training function on the cash register when no one is watching them, record valid cash receipt transactions on the cash register and then return the cash register to the normal setting some time before the end of the business day. They then misappropriate all funds collected from transactions that were recorded when they used the training function. Customers, and many managers, don't notice this irregularity. (See case study below.)

CASE STUDY NO. 2: CASHIER GETS A FREE LUNCH
A school district lunchroom cashier used the training function to record valid sales transactions during the business day. But managers detected this irregular activity when this fraud was in its first year so the loss amount was relatively low: $8,000. The amount was determined by summarizing the amount of all irregular transactions the cashier recorded on the cash register during unauthorized training sessions. The court sentenced the cashier to a nominal period in jail.

REPEAT TRANSACTION FUNCTION FOR CASH REGISTER RECEIPTS
The repeat transaction function allows cashiers to repetitively issue the same cash receipt number to customers for funds collected. Though many organizations continue to have this procedure, I consider this a significant system weakness if there's no record made on the cash register to indicate that cashiers have used it. When fraudulent cashiers abuse this function, they normally select two transactions with the same dollar amount. While the duplicate receipt represents a different cash receipt transaction, the cashier doesn't record revenue on the cash register for this second transaction. The cashier is then able to collect funds from two customers while recording accountability on the cash register for the funds from only one transaction and, in the process, misappropriate the funds collected from the second customer. In some situations, for instance, when funds are received as accounts receivables, cashiers must also falsify customer account balances to eliminate accountability for the payment made by the second customer. We discussed this in a previous series of articles on accounts receivable. (See case studies Nos. 3 and 4 below.)

CASE STUDIES NOS. 3 & 4: MUNICIPAL COURT CLERKS NEGATE GOOD POLICE WORK
In two separate cases in different cities, two municipal court clerks abused the repeat transaction function on cash registers to misappropriate funds from their organizations when two consecutive customers in each case paid the same amount for traffic citation fines. Each clerk recorded the cash receipt transaction for the first customer and then used the repeat function to produce a duplicate receipt for the second customer. Each clerk then misappropriated funds from the second customer. Because traffic citation fines are managed in an accounts receivable system, the clerks concealed the theft of these funds by using fictitious adjustment transactions to write off the balances due on the traffic citation for the second customer (such as adjudication of the fine amount, performance of community service, credit for jail time served, etc.). Managers detected these two fraud cases in their first few years of operation so the amount of these losses were relatively low: $8,500 and $5,000. The loss amount at each municipal court was determined by summarizing the amount of all fictitious non-cash credit transactions these cashiers recorded in the accounts receivable records for traffic citations. Each employee served a nominal period in jail.

LESSONS LEARNED
Let's review some of the finer points of fraud:

• Fraud examiners should always remember that the Z tape number must be accounted for and controlled similar to other pre-numbered cash receipt forms. Managers should monitor Z tape numbers from all cash registers in the fixed asset inventory.
• Organizations should require the Z tape number to be recorded on a daily activity report. Managers should monitor the sequential use of Z tape numbers to ensure that the universe of all transactions has been properly accounted for and controlled. Missing Z tape numbers is a common attribute associated with revenue losses from the abuse of both manual and computer cash registers.
• Only managers or supervisory cashiers should have access to, and control of, the key that activates the Z tape and training functions.
• During unannounced cash counts and cash receipt testing, fraud examiners should carefully review the retained copies of all cash receipt forms to ensure that cashiers haven't abused the repeat transaction function to misappropriate funds.

The next two columns on fictitious void transactions will conclude our discussion about frauds associated with manual and computer cash register systems. Stay tuned for more excitement!

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

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