Poor Collection Procedures
Poor collection and recording procedures can make it easy for an employee to skim sales or receivables.
A government authority that dealt with public housing was victimised because it failed to itemise daily receipts. This agency received payments from several public housing tenants, but at the end of the day, “money” received from tenants was listed as a whole. Receipt numbers were not used to itemise the payments made by tenants, so there was no way to pinpoint which tenant had paid how much. Consequently, the employee in charge of collecting money from tenants was able to skim a portion of their payments. She simply did not record the receipt of over $10,000. Her actions caused certain accounts receivable to be overstated where tenant payments were not properly recorded.
The previous discussion focused on purely off-book sales—those which are never recorded. Understated sales work differently because the transaction in question is posted to the books, but for a lower amount than what the perpetrator actually collected. (See the “Understated Sales” flowchart that follows.) One way employees commit understated sales schemes is by altering receipts or preparing false receipts that misstate sales amounts.
An employee wrote receipts to customers for their purchases, but she removed the carbon paper backing on the receipts so that they did not produce a company copy. The employee then used a pencil to prepare company copies that showed lower purchase prices. For example, if the customer had paid $100, the company copy might reflect a payment of $80. The employee skimmed the difference between the actual amount of revenue and the amount reflected on the fraudulent receipt.
Understated sales schemes are commonly undertaken by employees who work at the cash register. In a typical scheme, an employee enters a sales total that is lower than the amount actually paid by the customer. The employee skims the difference between the actual purchase price of the item and the sales figure recorded on the register. For instance, if an item is sold for $100, the employee could ring up the sale of an $80 item and skim the excess $20. Rather than reduce the price of an item, an employee might record the sale of fewer items. If 100 units are sold, for instance, an employee might only record the sale of 50 units and skim the excess receipts.
A similar method is used when sales are made on account. The bill to the customer reflects the true amount of the sale, but the receivable is understated in the company books. For instance, a company might be owed $1,000, but the receivable is recorded as $800. (Sales are correspondingly understated by $200.) When the customer makes payment on the account, the employee can skim $200 and post the $800 to the account. The account will appear to have been paid in full.
Flowchart: Understated Sales
Those employees with the authority to grant discounts might use this authority to skim sales and receivables. In a false discount skimming scheme, an employee accepts full payment for an item, but records the transaction as if the customer had been given a discount. The employee skims the amount of the discount. For example, on a $100 purchase, if an employee granted a false discount of 20 percent, he could skim $20 and leave the company’s books in balance.
Theft of Cheques Received Through the Mail
Cheques received through the mail are a frequent target of employees seeking illicit gains. Theft of incoming cheques usually occurs when a single employee is in charge of opening the mail and recording the receipt of payments. This employee simply steals one or more incoming cheques instead of posting them to customer accounts. (See the “Theft of Incoming Cheques” flowchart that follows.) When the task of receiving and recording incoming payments is left to a single person, it is all too easy for that employee to make off with an occasional cheque.
A mailroom employee stole over $2 million in government cheques arriving through the mail. This employee simply identified and removed envelopes delivered from a government agency known to send cheques to the company. Using a group of accomplices acting under the names of fictitious persons and companies, this individual was able to launder the cheques and divide the proceeds with his cronies.
The theft of cheques is not usually complicated, but it is sometimes more difficult to conceal a cheque theft scheme than other forms of skimming. If the stolen cheques were payments on the victim company’s receivables, then these payments were expected. As receivables become past due, the victim company will send notices of nonpayment to its customers. A customer is likely to complain when he receives a second bill for a payment he has already made. In addition, the cashed cheque will serve as evidence that the customer made his payment. The methods used to conceal cheque theft schemes will be discussed later in this section.
Flowchart: Flow of Incoming Cheques
Cheque for Currency Substitutions
A criminal generally prefers to steal currency rather than cheques if given the opportunity. The reasons why are obvious. First, currency is harder to trace than a cheque. A cashed cheque eventually returns to the person who wrote it and might provide evidence of who cashed it or where it was spent. Endorsements, bank stamps, and so forth might indicate the thief’s identity. Currency, on the other hand, disappears into the economy once it is stolen.
The second reason that currency is preferable to a cheque is the difficulty in converting the cheque. When currency is stolen, it can be spent immediately. A cheque, however, must be endorsed and cashed or deposited before the thief can put his hands on the money it represents. To avoid this problem, employees who steal unrecorded cheques will frequently substitute them for receipted currency. If, for example, an employee skims an incoming cheque worth $500, he can add the cheque to the day’s receipts and remove $500 in currency. The total receipts will match the amount of cash on hand, but payments in currency are replaced by the cheque.
An employee responsible for receipting ticket and fine payments on behalf of a municipality abused her position and stole incoming revenues for nearly two years. When payments in currency were received by this individual, she issued receipts, but when cheques were received she did not. The cheque payments were therefore unrecorded revenues—ripe for skimming. These unrecorded cheques were placed in the days’ receipts and an equal amount of cash was removed. The receipts matched the amount of money on hand except that payments in currency had been replaced with cheques.
The cheque for currency substitution is very common. While these substitutions make it easier for a crook to convert stolen payments, the problem of concealing the theft still remains. The fact that the stolen cheques are not posted means that some customers’ accounts are in danger of becoming past due. If this happens, the perpetrator’s scheme is in danger because these customers will almost surely complain about the misapplication of their payments. However, the misapplied payments can be concealed on the books by forcing account totals, stealing customers’ account statements, lapping, and making other fraudulent accounting entries. These concealment techniques will be discussed in more detail in the “Skimming Receivables” section.
Cheque for currency substitutions are especially common when an employee has access to some unexpected source of funds such as a manufacturer’s refund that arrives outside the regular stream of sales and receivables payments. In these cases the cheque can be swapped for cash and there is usually no additional step required to conceal the crime. The refund cheque, an unexpected source of funds, will not be missed by the victim organisation, and the party who issued the cheque expects no goods or services in return.