Cash is an obvious target for dishonest employees bent on fraud. In addition to stealing cash on hand directly, dishonest employees may resort to thefts of cash receipts, such as skimming. This article explains how skimming works and how to prevent and detect it.
In the latest Report to the Nations on Occupational Fraud and Abuse, the Association of Certified Fraud Examiners (ACFE) draws a line between thefts of cash on hand and thefts of cash receipts, such as skimming. To help protect against this common scheme, you need to understand how skimming works.
Understand the Basics
Skimming occurs when an incoming payment is stolen before it’s recorded on the books. In the most basic skimming scheme, an employee sells goods or services to a customer, collects payment and pockets the money without recording the sale. If the customer receives goods but no sale is recorded, skimming will cause a discrepancy between physical inventory counts and what’s reported in the company’s inventory ledger.
Perpetrators can also skim receivables. This generally is harder to pull off, because overdue accounts appear on the accounts receivable aging schedule. Employees may try to cover their thefts by “lapping,” or borrowing money from one account to make up for a shortage in another.
Detect Theft Early
Skimming can be difficult to detect. Potential red flags include:
- Infrequent bank deposits,
- Frequent shortages of cash on hand, and
- Consistent fluctuations in bank balances.
If skimming is suspected, consider hiring a fraud investigator to perform physical inventory counts to check if inventory levels match up with recorded sales. This expert may also review journal entries for false credits to inventory; write-offs of lost, stolen or obsolete inventory; write-offs of receivables; and irregular entries to cash accounts. Lapping can be uncovered by comparing the dates of customers’ payments with the dates the payments were posted.
Prevent Skimming in the First Place
A critical step toward prevention is segregation of duties. An employee should never be responsible for collecting, recording, reconciling and depositing cash receipts — split up those duties among multiple employees. In addition, employers might consider monitoring spaces where employees handle cash with visible video cameras and regularly reconciling inventory records to look for shrinkage.
Other preventive measures include: 1) requiring daily bank deposits, 2) investigating no-sale and voided transactions, 3) reconciling cash deposits to all cash and checks received, and 4) providing an anonymous tip hotline for employees, customers and vendors who’d like to report suspected misconduct. These practices may deter dishonest employees who might be tempted to skim or engage in other fraudulent activity.
Help Clients Help Themselves
No business is ever completely immune to occupational fraud. With your help and the help of trained fraud investigators, your clients can reduce the likelihood and severity of skimming and other schemes.