Schemes Fraudulent Report
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Fraudulent Schemes Report
Brandi Murobayashi
ACT 375
Joseph Kronewitter
March 14, 2011
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Fraudulent Schemes Report
According to the Association of Certified Fraud Examiners, organizations loose about
five percent of its annual revenue to fraud. If you apply that to the estimated Gross World
Product, five percent of revenue equals more than $2.9 trillion of global fraud loss (2011).
Fraudulent behavior is a growing concern among organizations both big and small. This paper
will give a brief overview of the most common types of fraud and give recommendations on
developing effective controls that can help to detect and mitigate fraud.
Skimming
Skimming is the theft of cash from a victim entity prior to its entry in an accounting
system (Wells, 2008, p. 53). Skimming schemes are known as off-book frauds because cash
is stolen before it is recorded in a companys books. Skimming is difficult to detect because the
money is never recorded therefore leaving no audit trail. Skimming occurs where money enters
the business, any one who deals with the receiving of cash is able to skim money. Skimming
schemes can be divided into two categories based on whether they aim at sales or receivables
(Wells, 2008).
Sales Skimming
Sales skimming occurs when an employee makes a sale, takes the customers money,
and does not record the transaction. Sales skimming techniques include cash register
manipulation, after-hour sales, understating sales, check-for-currency substitutions, and theft in
the mailroom (Wells, 2008). The biggest factor in preventing sales skimming is to maintain an
oversight presence wherever cash enters the organization. Employees are less likely to steal
when there is an oversight presence because of the fear of getting caught (Wells, 2008).
Receivables Skimming
Receivable skimming occurs when an employee steals money that the victim
organization is expecting or has already billed a customer for. Since the organization is
expecting the receivable, receivable skimming is difficult to conceal. When payments are not
recorded, customer accounts become overdue and customers are notified of their past due
balances. Some techniques that are used to conceal receivable skimming are lapping, force
balancing, stolen statements, fraudulent write-offs or discounts, debiting wrong accounts, or
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document destruction (Wells, 2008).
Cash Larceny
Cash larceny is the intentional taking away of an employers cash without the consent
and against the will of the employer (Wells, 2008, p. 77). Cash larceny occurs when an
employee steals money after it has been recorded into the companys books. Most cash larceny
schemes occur at the point of sale, from incoming receivables, or from the victim organizations
bank deposits (Wells, 2008, p. 78).
Point of Sale
Most cash larceny schemes occur at the point of sale because it is the most common place
of cash access for most employees. Several techniques that are used to conceal cash larceny at
the point of sale are theft from other registers, stealing small amounts over extended periods,
reversing transactions, altering cash counts, altering register tapes, or destroying register tapes.
Receivables
Cash larceny of receivables occurs when an employee steals money after the receivable
has been recorded. Some techniques used to cover larceny of receivables are force balancing,
reversing entries, or destruction of records (Wells, 2008, p. 82).
Deposits
Cash larceny from the deposit occurs when an employee steals money from the
companys deposits before taking it to the bank. Some techniques used to conceal larceny of
deposits are deposit lapping and conveying stolen money as deposits in transit.
Billing Schemes
Billing schemes are some of the most costly and common forms of fraud. Billing
schemes can be defined as schemes in which a fraudster causes the victim organization to issue
a fraudulent by payment submitting invoices for fictitious goods or services, inflated invoices, or
invoices for personal purchases (Wells, 2008, p. 96). Billing schemes can be broken into three
general categories; shell company schemes, non-accomplice vendor schemes, and personal
purchase schemes. Fraudsters may use any of these techniques to con their employers into
issuing bogus checks.
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Example
I used to work for a company called Hawaiian Quilt Collection. They had numerous
problems with cash larceny from deposits. At the end of the shift, employees would prepare
deposit slips and put them into the deposit box, the next day, managers would verify the deposit
slips. On numerous occasions, the deposit slips would not match the cash. The main office
could not point fingers because it could have been the employee or one of the managers. To
mitigate the missing money from the deposits, they implemented a new control. Two employees
needed to verify deposits going into the deposit box and only one person had access to the box.
This simple control drastically reduced employee theft because of the separation of duties and
the oversight presence.
Recommendations
Preventing sales skimming:
Install video cameras where cash enters the organization.
Cluster cash registers in one area instead of spread out throughout the store.
Offer discounts to customers who do not receive receipts.
Implement log-in and log-out times on cash registers.
Have two people opening mail and logging payments.
Preventing receivables skimming:
Implementing proper controls and separation of duties.
Reconcile cash accounts regularly and thoroughly.
Assign an employee to verify that deposits match accounts receivables postings.
Assign an employee to verify that receivables are posted to the correct account.
Rotate employee job duties and make sure employees take vacation every year.
Preventing cash larceny:
Enforce separation of duties.
Have two employees verify cash drawers with register tape.
Periodically run reports that shows discounts, returns, adjustments and write-offs.
Itemize deposit slips by listing each check and currency receipts.
Reconcile deposit slips with the banks deposit slip.
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Preventing billing schemes:
Research large budget overages and departments that regularly exceed their budget.
Analyze expense trends regularly.
Maintain an updated approved vendor list that includes contact and mailing information.
Implement a duplicate checking system so invoices cannot be paid twice.
Thoroughly review and reconcile company credit card statements.
Establish credit card limits for credit card users.
Monitor unexplained increases in purchasing levels.
In conclusion, fraudulent schemes can cost organizations tremendous amounts of money.
On average about five percent of revenue is lost to fraud (Association of Certified Fraud
Examiners, 2011). As covered in this paper there are many steps organizations can take to
mitigate fraud. Some of the most cost effective fraud mitigation techniques include separation of
duties and effective internal controls.
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References
Association of Certified Fraud Examiners. (2011). 2010 Report to the Nations Key Findings
and Highlights. Retrieved from http://www.acfe.com/rttn/2010-highlights.asp
Hartman, L. P. (2005). Perspectives in Business Ethics (3rd ed.). New York: McGraw-Hill.
Retrieved from University of Phoenix eBook Collection database.
Louwers, T., Ramsay, R., Sinason, D., & Strawser, J. (2008). Auditing & Assurance Services: A
Look Beneath the Surface (3rd ed.). New York: McGraw Hill Irwin. Retrieved from
University of Phoenix eBook Collection database.
Wells, J. T. (2008). Principles of fraud examination (2nd ed). Hoboken, NJ: John Wiley & Sons.
Retrieved from University of Phoenix eBook Collection database.