Cash Larceny (Part 11): Fictitious Void Transactions on Type 2 Cash Registers

Sally figured lunch breaks would lead to her big break.

She and her husband had mounting personal debts and escalating fights at home. As the supervisory cashier at a county health clinic, she often would fill in for a primary cashier during lunch periods and breaks. That's when she decided to exploit the organization's inadequate cash register internal controls and embezzle more than $16,000. She did it on cash registers that permit voids to be recorded during normal transaction processing.

Processing fictitious void transactions is a common type of cash register manipulation that cashiers use to misappropriate funds from their organizations. From my experience, cash registers record voided transactions in two ways. I discussed type 1 “ those that don't permit voids to be recorded during transaction processing “ in the March/April column. Here I'll describe the second way: frauds committed on what I call type 2 cash registers “ those that do permit voids to be recorded during normal transaction processing.

Processing fictitious void transactions is a common type of cash register manipulation that cashiers use to misappropriate funds from their organizations. From my experience, cash registers record voided transactions in two ways. I discussed type 1 -- those that don't permit voids to be recorded during transaction processing -- in the March/April column. Here I'll describe the second way: frauds committed on what I call type 2 cash registers -- those that do permit voids to be recorded during normal transaction processing. 

FICTITIOUS VOIDS 

Voids are negative cash transactions because they reduce the accountability for revenue that has been recorded on manual or computerized cash registers. For every valid use of a void transaction there's also an abuse that can occur, so voids must always be considered high-risk transactions.

I'll describe fraud risks associated with void transactions only in computerized cash register systems.

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

TYPE 2 CASH REGISTER 

This type of cash register permits voids to be recorded during transaction processing. When a cashier makes an error recording a customer's transaction, the entire transaction doesn't need to be aborted. Instead, the cashier merely records a void transaction during transaction processing and prior to totaling the sale. This void amount is shown on the customer's copy of the cash register receipt as well as on the cash register detail tape, usually with a minus sign or the word "void” beside the amount.

All cash registers produce two copies of the cash register receipt for each transaction, one for the customer, which the cashier removes from the cash register and gives to the customer, and one for the business, which is retained internally in the cash register and called the detail tape. When the cashier activates the Z tape function at the end of the business day, the cash register automatically records the Z tape information on the detail tape. The entire detail tape is then retained with the accounting records to support the bank deposit. But the total accountability for funds shown on the Z tape for this type of cash register represents the net sales amount at the end of the business day. When cashiers complete the daily activity report, the cash register has already calculated the total accountability for funds (that is, the net sales amount).

As indicated in a prior column on cash register Z tapes, the type of information available on Z tapes varies. Every cash register is different. Ideally, the Z tape 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 (that is, cash, check, credit and debit cards, etc.), the number and amount of certain types of negative cash or high-risk transactions (that is, voids, refunds, adjustments, paid-out transactions, etc.), and the total of any training activity recorded by cashiers.

For this type of cash register, the information recorded on the cash register Z tape should also include the number and amount of all voided transactions. This alerts supervisors, managers, and auditors to the existence of any voids the cashier processed during the business day. Supervisors and managers should also review and monitor the volume of void transactions for undesirable trends by cashiers. This attribute just might be cause for concern about an employee's performance.

But, in many cases, the information recorded on the cash register Z tape doesn't include the number or amount of voided transactions. Under these circumstances, supervisors, managers, and auditors wouldn't necessarily be aware of the existence of voids during the business day unless they scanned the cash register detail tape manually to search for any minus signs or the word "void” next to transaction amounts. In these cases, I believe that a review of the cash register detail tape is mandatory because cashiers might potentially use voids to manipulate the amount of accountability for funds.

For example, cashiers might abuse the subtotal function when informing customers about the total amount of their sales. When customers make payments under these circumstances, cashiers operate with an open cash drawer and simply make change for them. After the customer departs, the cashier then uses false voids to reduce the total amount of the transaction. They then steal an amount of funds equal to the amount of fictitious voids that were processed in this manner. Fraud examiners would be alerted to this problem when scanning the cash register detail tape for irregular voiding activity. The attribute for fraud would normally be fictitious voids recorded after a subtotal during transaction processing and prior to the final total for the transaction. This pattern of irregular behavior by cashiers should be obvious.

CASE STUDY: COUNTY HEALTH CLINIC REVENUE DIES FROM UNNATURAL CAUSES 

Let's pick up the case we began at the start of the column. The county health clinic provided health services to low-income families in the community. Patients made appointments with physicians and other professional staff and then completed personal history forms and other documents at the clinic. After patients received medical services, the staff would complete a pre-numbered health service form describing the procedures performed and expected fees, if any. The patients then would return the health service forms to the appointment desk and pay the cashier for any charges due to the clinic.

One full-time cashier normally worked at the clinic. When patients made payments, this primary cashier accurately recorded all transactions on a manual cash register during each business day. A supervisory cashier performed relief duties for the full-time cashier during lunch periods and for mid-morning and mid-afternoon breaks.
During these relief periods, the supervisory cashier inappropriately voided valid customer payments on the clinic's cash register, misappropriated an amount of funds equal to the reduction in revenue for the day, and then destroyed the original pre-numbered health service forms for these inappropriately voided transactions so that the primary cashier wouldn't notice the manipulation.

At the end of the business day, the primary cashier counted and balanced all cash collections with the cash register Z tape and prepared the daily activity report. She then turned in all funds and health service forms to the supervisory cashier who subsequently prepared and made the daily bank deposit. The supervisory cashier should have verified that all pre-numbered health service forms were properly accounted for and controlled each business day.

Because this individual already knew that some health service forms were missing, performing this function would have alerted managers to the fraud. So she omitted this step. The clinic used a type 2 cash register voiding system, which didn't list the number or amount of any void transactions processed during each business day.

If you remember, Sally, the supervisory cashier, was having personal money problems, so she began an embezzlement scheme that exploited the organization's poor internal controls. Her department didn't properly segregate duties and Sally exercised too much control over the clinic's revenue and bank deposits.

Because this was a small organization, managers didn't independently monitor the work of this trusted employee to ensure that the organization's expectations were being met. (These two factors are common attributes in almost all types of employee embezzlement fraud cases in the workplace.)

When the primary cashier went to lunch and took breaks, Sally, the supervisory cashier, took control of the cashier function. During these times it was normally quiet in the office so she had her privacy. (After all, committing fraud requires concentration.) Sally would randomly select some customer payment transactions, record voided transactions on the cash register in an amount equal to the customer payments, destroy the applicable health service forms, and then take an amount of currency equal to the transactions that she had eliminated from the system. However, there were no supporting documents on file to explain these voided transactions, and managers didn't independently approve them. After she had completed these irregular actions, normal cash receipting activities would resume. The full-time cashiers didn't notice the missing documents or the inappropriately voided transactions on the cash register detail tape because this wasn't part of her assigned duties and responsibilities.

In the cash register tape example shown in the sidebar at right, note that Sally, the supervisory cashier, processed a void transaction representing a withdrawal of currency from two customer payments -- one made by cash and one made by check. This variance in the mode of payment also destroyed the intactness of the daily deposit because the composition of the payments and the void didn't agree.

Sally left the patient's check in the cash drawer and removed an equivalent amount of currency that had been received from customers on other cash receipt transactions processed that day. After she stole the money, the check and cash composition of the daily bank deposit wouldn't agree with the mode of payment of the cash receipt transactions for the business day.

During end-of-day processing, Sally was responsible for performing critical functions to ensure that the staff properly performed all cashiering activities. This included ensuring that all pre-numbered health service forms were properly accounted for and controlled; determining that all voided transactions were appropriate, approved, and properly supported and verifying that the check and cash composition of the bank deposit agreed with the mode of payment reflected on the cash register Z tape.

Because managers didn't independently monitor her work, Sally simply didn't perform these critical functions. If she did, she would have simply detected her own fraud, and what was the point in doing that? This is why it's so important for auditors and fraud examiners to review and verify the accuracy of these key controls during cash receipt testing in audits and investigations.

In the meantime, Sally and her husband weren't getting along so they filed for divorce. During a subsequent squabble over finances, the husband reported his wife's embezzlement scheme to the clinic. External auditors reviewed the accounting records and confirmed the allegations.

Sally had misappropriated more than $16,400 over two years. It was obvious that the only person who could have perpetrated this fraud was the supervisory cashier. During negotiations with the county prosecuting attorney's office, Sally admitted that she had misappropriated public funds from the clinic and entered into a plea bargain agreement to resolve the case. The court sentenced Sally to a nominal period in jail and restitution of the amount of the loss plus audit costs.

The clinic continued using a type 2 cash register after this audit. However, it revised its monitoring procedures to correct all the critical internal control weaknesses highlighted in this case. All funds collected from customers are now properly deposited in the bank.

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 cash registers used by the organization.
• For a type 2 cash register, the information recorded on the cash register Z tape should include the number and amount of voided transactions.
• For a type 2 cash register, cashiers might operate with an open cash drawer and abuse the subtotal function to inform the customer about the total amount of the sale. The attribute for fraud would be fictitious voids recorded after a subtotal during transaction processing and prior to the final total for the transaction. This pattern of cashiers' irregular behavior should be obvious when reviewing the cash register detail tapes during cash receipt testing.
• 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 independently monitor the work of key employees to ensure that the organization's expectations are being met. This would include reviews of the sequence of pre-numbered cash receipt forms, the appropriateness of all voided transactions, and the check and cash composition of daily bank deposits.
• Organizations should use pre-numbered forms to document and support voided transactions. Supervisors or managers should approve these forms and retain them on file with the daily activity report. Managers should also independently monitor voids as high-risk transactions.
• Fraud examiners should remember that the internal control system self-destructs at lunch and on breaks when individuals who have incompatible duties perform relief cashier duties. These individuals include record keepers and supervisory cashiers. Record keepers in accounts receivable systems subsequently writeoff account balances for the affected customers when they steal cash collected. Supervisory cashiers in non-accounts receivable systems merely ignore these irregularities when they steal cash collected. 
• The next column is the finale summarizing key learning objectives from our two-year study about this type of cash larceny -- on-book frauds in which employees steal the organization's revenue after accountability for the funds has been recorded in the accounting records. I'll also provide a checklist of the fraud's finer points in the internal control system over cash receipts. Get ready!

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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