Cash Larceny, Part 12

"Lucille,” a central office bookkeeper at a school district, was a smart woman. Unfortunately, she was also needy. Lucille needed a lot of money to pay for continuing medical expenses and care for her husband who was incapacitated after life-threatening heart surgery.

So she began a sophisticated lapping scheme by taking currency from funds transmitted to her office by many decentralized locations throughout the district.

But she didn’t stop there. Because the function was totally under her control, she began stealing from accounts receivables in other districts. Lucille would bill these districts for services performed on their behalf, receive payments on these accounts, and then steal the revenue instead of depositing the money in the bank.

There’s more. Lucille stole cash receipts from miscellaneous revenue sources and falsified accounting records to try to conceal these losses from managers. Finally, the district discovered two of these checks in her office that hadn’t been promptly deposited in the bank and questioned her about them.

She was able to satisfy her supervisor’s initial inquiry about these transactions and corrected the situation by including them in the bank deposit she was preparing. Lucille then left work to take her husband to a scheduled medical appointment. Her supervisor inspected Lucille’s office and found nine additional checks in her in-basket totaling almost $600.

Additional research determined that these checks represented only a portion of the revenue a day-care facility had transmitted to Lucille that day. Instead of giving credit to the facility, Lucille credited several other district functions with these funds to conceal that she had previously stolen money from them in a lapping scheme. The nine remaining checks her supervisor discovered weren’t needed to complete processing on this day. However, I’m certain they would have been used to continue lapping other transactions on subsequent business days. But Lucille never got the chance to do this. When she returned to work the next day, she was trapped; she couldn't respond truthfully to her supervisor’s questions.

During an interview with external auditors, she said she pulled off the initial lapping scheme by making the cash receipting locations whole by depositing an equal amount of the missing funds into the accounts. The auditors knew this wasn’t true; they had seen the day-care checks. Finally, she admitted misappropriating funds from her employer and resigned.

In the end, the district found that Lucille had stolen $143,150 in seven years. The insurance bonding company reimbursed the district for its loss plus audit costs. Lucille got a plea bargain deal with the county prosecuting attorney’s office but she still paid dearly; the court ordered her to pay back all the money and sentenced her to 13 months in the state penitentiary.

This column summarizes key points from our two-year study about cash larceny such as the crimes committed by Lucille, the ambitious central office bookkeeper.

In these types of frauds, employees steal revenue after they’ve recorded accountability for the underlying cash receipt transactions in the organization’s accounting records. As a fraud examiner, you can learn to detect these schemes if you understand the basic mechanics of cash receipting systems within an organization and use only original source documents when you perform audit tests. The cliché is true: follow the money. In my practice, I’ve found that employees who commit these crimes often make little or no effort to conceal the irregularities that eventually lead to their demise. They make our jobs a lot easier!

OVERARCHING INTERNAL CONTROL CONCEPTS ABOUT CASH RECEIPTING 

The amount of fraud in your organization will be determined by how much you segregate duties so that no single employee totally controls key cashier or accounting functions and if you independently monitor the work of key employees. (Though this isn’t always possible in small organizations.)

A related danger is that managers and fraud examiners might not fully understand the operations and functions on manual or computer cash registers used within an organization. Also, fraud examiners must always remember that the internal control system self-destructs at lunch and on breaks when employees who have incompatible duties perform relief cashier duties such as record keepers and supervisory cashiers. They are the most likely candidates to commit cash larceny frauds. Record keepers in accounts receivable systems subsequently write off account balances for the customers whose payments have been stolen. Supervisory cashiers merely ignore irregularities and commit check-for-cash substitution schemes.

These frauds often last for long periods because managers don’t properly review key internal controls over these functions. To detect these frauds, managers should review exception reports for all accounts receivable balance write-off transactions and compare the mode of payment of all cash receipt transactions with the check and cash composition of the daily bank deposit.
Fraud examiners should deal with these critical conditions during cash receipt testing by using this checklist for the finer points of cash larceny frauds:

General cash receipting 

• When funds are stolen, every organization should protect its employees from false accusations by fixing responsibility for money to a particular employee at a particular point in time. Don’t segregate employee duties as an internal control measure if you destroy fixed responsibility for funds in the process.
• Organizations shouldn’t hold employees personally responsible for cash overages and shortages because it encourages them to become petty crooks. Instead, record these daily variances as miscellaneous income (for cash overages) and expense (for shortages) in the accounting system and monitor each cashier for undesirable trends.
• Organizations shouldn’t allow multiple cashiers to operate from one cash or till drawer or commingle cash collections into one container.
• Each employee should sign some type of transmittal or turn-in document when he or she transfers funds to another employee.
• Every cashier should have a separate locking container for funds stored overnight in any safe or vault.
• Change safe and vault combinations and computer cash register passwords periodically and when employees terminate. Require employees not to share the combinations and passwords with anyone and to never record them anywhere in the office.
• Every organization must know where money enters its doors, act responsibly to capture accountability immediately for all customer payments after receipt at each location, and ensure that all checks are restrictively endorsed “for deposit only” immediately upon receipt.

Decentralized location cash receipting 

• Decentralized locations should obtain a receipt for all funds delivered directly to the central treasury function or transferred to a courier for deposit in the bank.
• An independent party should promptly reconcile the record of decentralized location bank deposits with the monthly bank statement and daily activity reports, track the universe of operating days for each decentralized location, and ensure that all funds are turned in for deposit in the bank on a regular basis.
• At both decentralized locations and central treasury functions, an independent party should verify that all funds collected are deposited in the bank by ensuring that the check and cash composition of the daily bank deposit agrees with the mode of payment of all cash receipt transactions.
• Decentralized locations must review monthly accounting reports to ensure that they received proper credit for all funds deposited at the central treasury function.
• When conducting unannounced cash counts, look around the cashier’s work area to determine if the cashier is using two sets of books of manual cash receipt forms. Perform unannounced cash counts during the business day so that at least some cash receipt transactions are included in the review. When computer cash registers aren’t working, employees must use manual cash receipt forms for backup to record customer payments.
• Be suspicious if a large number of the duplicate 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. All cash receipt forms should be completed in ink, never in pencil.
• An independent party should review the sequential use of manual cash receipt forms issued each business day at each cash receipting location and verify that all form numbers from completed receipt books have been accounted for and controlled.
• When inspecting the cash receipt transactions from manual cash receipting operations to computer cash register systems, remember that the receipt form created by the computer cash register must always agree with the data and accounting information shown on the underlying manual cash receipt form.
• Each organization should identify all existing revenue sources, use analytical procedures to estimate the amount of revenue from each source and then include this information in its annual budget. Subsequently, the entity must compare actual revenue with budget projections to determine if its expectations are being met. An independent party should investigate significant variations. A significant decline in the amount of a local revenue source from one accounting period to another might warrant an investigation to determine the cause. Use alternative or non-financial accounting records to verify the reasonableness of all local revenue sources or estimate revenue when any original accounting records have been destroyed.

Bank accounts 

• An independent party, not the bank account custodian, should receive the unopened monthly bank statement directly from the bank and reconcile it promptly with all of the supporting documents present.
  When a custodian of a bank account is changed, it’s never necessary to close the bank account and open a new one.

Imprest fund accounts 

• The authorized imprest fund amount for advance travel fund and petty cash fund accounts should always equal the amount of all temporary outstanding advances plus the amount of funds on hand and in the bank.
• Reimbursements transactions should never exceed the total authorized amount of these funds.
• Even though the client organization might request bank account information from the bank for use during audits, always ensure that the bank will send this financial data directly to them to preclude employees from compromising the data.
• Ensure that all disbursement documents, including petty cash reimbursement requests, are properly supported and contain the original signatures of the members of the governing or approval body.
• Confirm unusual cash receipt documents with vendors to determine authenticity. Documents without a printed store name shown on the form should be considered suspicious.
• Review types of invoices that are similar to each other such as restaurant receipt stubs that are on file for successive advance travel fund and petty cash fund reimbursements to determine if the documents are being used sequentially.
• If the receipts for petty cash expenses don’t contain current dates (such as dates prior to the last reimbursement request), review the supporting documents for previous petty cash reimbursement requests to determine if the expense was paid again in a prior period. All petty cash expense documents should be marked “paid” to preclude their reuse on subsequent reimbursement transactions.

Cash registers 

• Because most cashier manipulations on manual and computer cash registers occur just prior to closing, carefully analyze the transactions between X tape readings and Z tape readings for irregularities.
• Remember that the Z tape reading must be accounted for and controlled similar to any other pre-numbered cash receipting form.
• Managers should ensure that the universe of all transactions is properly accounted for and controlled by recording each Z tape number on the daily activity report and then monitor the sequential use of all numbers shown on these reports including all active and inactive cash registers in the fixed asset inventory, to detect missing Z tape numbers.
• Only managers or supervisory cashiers should have access to, and control of, the key that activates the Z tape and training functions on manual or computer cash registers.
• Carefully review the retained copies of all cash receipt forms to ensure that cashiers haven’t abused the repeat transaction function on any cash register.

Voided transactions 

• Look for irregular patterns for voided transaction on cash register detail tapes and analyze the number of void transactions processed by each cashier.
• For a type 1 cash register that doesn’t permit voids to be recorded during normal transaction processing, the attribute for valid voids is that correction transactions immediately follow erroneous transactions on cash register detail tapes.
• Organizations should use pre-numbered forms to document and support all void transactions. Supervisors or managers should approve these forms and retain them on file with the daily activity report. They should also monitor voids as high-risk transactions.
• For a type 2 cash register that does permit voids to be recorded during normal transaction processing, the information recorded on the cash register Z tape should include the number and amount of all voided transactions.
• For a type 2 cash register, cashiers may operate with an open cash drawer and abuse the sub-total function to inform the customer about the total amount of sale. The attribute for fraud shown on the cash register detail tape would be fictitious voids recorded after a sub-total during transaction processing and prior to the final total for the transaction.

AND IN CONCLUSION ... 

This column concludes our discussion about cash larceny frauds. In the next column, we’ll switch gears to begin a series on disbursement fraud. Frauds in cash receipts and disbursements require fraud examiners to think differently, primarily because most cash receipts involve unrecorded transactions, while all cash disbursement frauds involve recorded transactions. Each type of fraud requires a different mind-set. Fraud examiners have a greater business risk when it comes to the public's expectation about who's responsible for detecting cash disbursement fraud because the fraudulent transactions are present in the accounting records. So put on your thinking caps!  

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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