Cash Larceny, Part Ten: Fictitious Void Transactions on Type 1 Cash Registers

During an external audit, an auditor for a port district found that cash register Z tape numbers were missing from a marina, one of the three major port functions. That irregularity didn't result in fraud but the external auditor found that managers weren't even aware of the missing Z tapes. After additional cash receipt testing, the external auditor did find a fraud involving fictitious void transactions on a marina cash register.

The marina staff recorded all cash receipt transactions on what I call a type 1 manual cash register (those that don't permit voids to be recorded during normal transaction processing) except for the sale of regular and diesel gasoline from a fuel facility located on the dock. The port auditor (who was really a bookkeeper) was the only employee who recorded fuel sales on the cash register and then took control of all revenue collected at the marina. The marina collected a significant amount of currency in the course of business, which was all from fuel sales. These funds were definitely at risk. But no one noticed the danger until it was too late.

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Processing fictitious voided transactions is yet another type of cash register manipulation that cashiers use to misappropriate funds from their organizations. From my experience, fraudsters record voided transactions on type 1 cash registers, which I mentioned above, and type 2 cash registers: those that do permit voids to be recorded during normal transaction processing. (We'll discuss type 2 in the May/June column.)

FICTITIOUS VOIDS 

Voids are negative cash transactions because they reduce the accountability for revenue that has been recorded on manual or computerized cash registers. I'll describe fraud risks associated with void transactions only in computerized cash register systems.

Voids must always be considered high-risk transactions because for every valid void, there's also an abuse. Unscrupulous cashiers simply void valid transactions at or near the end of their shifts to reduce the amount of the total accountability of funds for the business day. They then prepare daily activity reports and make bank deposits in those reduced amounts. Finally, they steal funds equal to the amount of fictitious voids that they processed. (Frauds also occur when cashiers similarly process false paid-out and refund transactions.)

Cashiers can perpetrate frauds for long periods of time without detection because managers and auditors might not fully understand the cash registers' operations and functions. Fraud examiners must know the register operations and the types of records or audit trails set by the equipment when each operation is performed.

Look for irregular patterns of void transactions on cash register detail tapes and the volume of void transactions processed by individual cashiers. Unusual trends are cause for alarm and require additional research, monitoring, and perhaps even videotaping of cashier activities to determine the true causes of these irregularities.

TYPE 1 CASH REGISTER 

This type of cash register doesn't permit voids to be recorded during transaction processing. When a cashier makes an error recording a customer's transaction, the entire transaction must be aborted. When the error is noticed, the cashier totals the transaction and prepares a manual form to describe the reason for the void and attaches the customer's copy of the cash register receipt. Some organizations pre-number the manual form but others don't. I prefer that all forms used in the cash receipting process be pre-numbered so that all actions can be controlled and accounted for. A supervisor must approve this manual form and save it with the accountable documents at the end of the business day.

For example, let's say that the initial cash register transaction number is 2000. After the cashier properly documents the voided transaction, she then completes the original transaction for the customer by entering the correct information on a new transaction number -- 2001 -- on the cash register. On this type of cash register, the expected attribute for valid voids is that correction transactions will immediately follow erroneous transactions on the cash register detail tape. At the end of the business day, the total accountability recorded on the cash register Z tape for type 1 includes the total amount for both valid transactions and voided transactions – both the good and the bad. Thus when completing the daily activity report, cashiers must reduce the total accountability for funds shown on the cash register Z tape by the amount of the void transactions to determine the net sales or revenue for the business day and the net accountability for funds to be included in the daily bank deposit. Gross sales, less voids, will equal the total accountability for funds.

CASE STUDY: MARINA FUEL REVENUE GOES UP IN SMOKE 

Let's continue with the marina fraud case we began earlier. (We discussed other aspects of this case in the Nov./ Dec. 2006 column.) Here's how the fraud occurred. At the end of each business day, fuel dock employees turned in all cash receipts and accounting documents to marina staff members who would store them in an office safe. Every few days, the fraudulent port bookkeeper would leave her office at another port division and visit the marina. She would record all fuel sales transactions on the cash register, close the activity for the period, activate the Z tape function on the cash register, count all funds on hand, and prepare the daily activity report. The bookkeeper would record accurately all cash receipting activity before leaving the marina facility.

However, after she returned to her office, the bookkeeper would falsify port records so she could misappropriate some of the currency from marina fuel sales. First, she would alter the cash register Z tape to void one or more large dollar sales amounts. Next, she would falsify the daily activity report to reduce the total amount of fuel sales and total accountability for funds by the amount of the voided transactions. She would then enter the reduced amount of revenue in the port's accounting records. Finally, she would prepare the port's bank deposit to reflect the reduced amount of revenue.

The external auditor detected this fraud during cash receipt testing in a routine audit. Using original source documents such as the marina cash register Z tapes, the auditor determined that accounting records had been falsified to conceal the misappropriation of fuel sales revenue. Though the port was audited every two years, this fraud wasn't detected in several prior audits because the auditors didn't use original source documents in their cash receipt testing. Instead, the auditors used only summary-level documents such as the marina's daily activity report totals to verify that revenue was accurately recorded in the port's accounting records and subsequently reported on its annual financial statements.

The port bookkeeper had an inappropriate segregation of duties and exercised too much control over port revenue and the accounting records. Because the port was a small organization, port managers didn't monitor the work of this trusted employee to ensure she was meeting the organization's expectations. No segregation of duties and small offices -- these two factors are common in almost all types of employee embezzlement fraud cases in the workplace.

The losses were small when the scheme began, but they increased significantly over a seven-year period. Auditors found 75 days in which the port bookkeeper had falsified the accounting records to conceal losses ranging from $50 to $500. (They normally were in round numbers such as $50, $100, and $150.) In each instance, the bookkeeper made handwritten notes on the Z tapes to explain that certain fuel sales transactions had been voided. The tapes then would agree with the reduced revenue shown on the daily activity report. She also drew a line through the voided amount to support this explanation. However, there were no supporting documents on file to explain these transactions, and managers hadn't approved the voids. Then after about two years, the port bookkeeper even stopped making these handwritten alterations on the cash register Z tapes. At that point, it was clear that the amount of revenue recorded on the marina's cash register Z tapes didn't equal the amount of revenue recorded in the port's accounting records.

The port's accounting records were destroyed for one of the seven years investigated so the external auditors used alternative accounting records to establish the amount of the loss for that year. The alternative records included the marina fuel sales log for inventory and sales information in gallons and sales price per gallon and the port's state quarterly combined sales tax returns for conversion of fuel sales log data to dollars. The external auditors determined that these alternative accounting records were accurate and reliable as sources of marina fuel sales information and demonstrated that the port bookkeeper didn't make any attempt to alter the port's sales tax returns to conceal her scheme.

The external auditors then determined the amount of loss by comparing accurate fuel sales from the quarterly combined sales tax returns to the inaccurate fuel revenue recorded in the port's accounting records. The loss for the missing year was the difference between the two amounts.

When this $13,000 loss was detected, the port bookkeeper already had retired and moved to another state. One of the external auditors talked to her by telephone but was unable to obtain any reasonable explanation for the irregularities. After the audit report was issued, the county prosecutor asked the former port bookkeeper if she would prefer to voluntarily return to the state for a vacation or involuntarily in handcuffs accompanied by a law enforcement official. She opted for the vacation. During her three-day stay in the county jail, she admitted to the misappropriation of public funds from the port and entered into a plea bargain agreement with the county prosecuting attorney's office to resolve the case. She was sentenced to time served and agreed to make restitution for the loss amount plus audit costs.

LESSONS LEARNED 

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

• One of the dangers of any cash receipting system is that managers and auditors might not fully understand the operations and functions on the cash registers used by the organization.
• Auditors and fraud examiners should look for irregular patterns for void transactions on cash register detail tapes and analyze the volume of void transactions processed by individual cashiers.
• For a type 1 cash register, the attribute for valid voids is that correction transactions immediately follow erroneous transactions on cash register detail tapes
• Fraud examiners should use only original source documents during transaction testing.
• Employee duties should be segregated so that no one employee totally controls key accounting functions. In small organizations, managers must monitor the work of key employees to ensure that the organization's expectations are being met.
• Organizations should use pre-numbered forms to document and support voided transactions. These forms should be approved by supervisors or managers and be retained on file with the daily activity report. Managers should also monitor voids as high-risk transactions.
• Fraud examiners should use alternative records to prove their cases when original accounting records have been destroyed.
• Auditors and fraud examiners should always follow the money. For example, currency from marina cash receipts didn't reach the port's accounting records or bank deposit in   the fraud case cited in this column.

TYPE 2 CASH REGISTERS 

We'll finish our discussion about void transactions on manual and computerized cash register systems in the next column. We'll discuss frauds committed on what I call the type 2 cash registers – those that do permit voids to be recorded during transaction processing. Stay tuned!

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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