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«GLOBAL HEADQUARTERS • THE GREGOR BUiLDinG 716 WEST AvE • AUSTin, TX 78701-2727 • USA Cash Schemes V. CASH SCHEMES Introduction Cash is the ...»

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716 WEST AvE • AUSTin, TX 78701-2727 • USA

Cash Schemes



Cash is the focal point of many accounting entries. Cash, both on deposit in banks and petty cash, can

be misappropriated through many different schemes. These schemes can either be on the books or off, depending on the point of occurrence. Generally, cash schemes are smaller than other fraud schemes because companies tend to have comprehensive internal controls over cash, and those internal controls are adhered to strictly. Fraud schemes perpetrated in other areas, such as the misappropriation of other assets or overbilling, are the result of circumvention of the existing internal control system.

Cash receipts schemes fall into two categories, skimming and larceny. The difference in the two types of fraud depends completely on when the cash is stolen. Cash larceny is the theft of money that has already appeared on a victim organization’s books, while skimming is the theft of cash that has not yet been recorded in the accounting system. The way in which an employee extracts the cash might be exactly the same for a cash larceny or skimming scheme.

Cash fraud schemes follow general basic patterns, including:

• Skimming

• Voids/Under-rings

• Swapping checks for cash

• Alteration of cash receipt documentation

• Fictitious refunds and discounts

• Journal entries

• Kiting Skimming Skimming is the process by which cash is removed from a victim entity before the cash is recorded in the accounting system. Employees who skim from their companies steal sales or receivables before they are recorded in the company’s books. This is an off-book scheme; receipt of the cash is never reported to the entity. This aspect of a skimming scheme means they leave no direct audit trail. Because the stolen funds are never recorded, the victim organization might not be aware that the cash was ever received.

Consequently, it might be very difficult to detect that the money has been stolen. This is the prime advantage skimming schemes offer fraudsters.

Skimming is one of the most common forms of occupational fraud. It can occur at any point where cash enters a business, so almost anyone who deals with the process of receiving cash could be in a position to skim money. This includes salespeople, tellers, waitpersons, and others who receive cash directly from customers.

The Corporate Con 63 Cash Schemes In addition, many skimming schemes are perpetrated by employees whose duties include receiving and logging payments made by customers through the mail. These employees slip checks out of the incoming mail instead of posting those checks to the proper revenue or receivables accounts. Those who deal directly with customers or who handle customer payments are the most likely candidates to skim funds.


Employees of a retail business would close out the cash registers early in the day in order to falsify the cash receipts and keep any cash received in the latter part of the day for themselves. If checks were received in the afternoon, the employees would merely exchange the checks for the cash collected the next morning.

The cash receipts were not recorded through a system of consecutively numbered receipts nor on a time sensitive cash register tape. Therefore, it was possible for the employees to close out a cash drawer at any time during the day.

The fraud was discovered when revenue for the current period was compared to the revenue in similar prior periods. There was a substantial decline in the current period’s revenue.

Voids/Under-Rings There are three basic void/under-ring schemes. The first is to record a sale or cash receipt and then void the same sale, thereby removing the cash from the register. The second, and more common, variation is to purchase merchandise at unauthorized discounts. The third, which is a variation of the unauthorized discount, is to sell merchandise to a friend or co-conspirator using the employee’s discount. The coconspirator then returns the merchandise for a full refund, without regard to the original discount.


A manager of a recreational facility directed his staff to alert him anytime a customer came in to pay for the monthly rental of the facility. The facility was rented to the public during the daytime on an hourly basis, and to civic groups on a per-evening basis. The pricing for the per-evening groups was somewhat discretionary, and the manager preferred to take care of these customers himself. The groups who rented the facility in the evenings were charged on a monthly basis and the manager maintained the receipts log for these charges. Typically, these customers would pay on account each evening they used the facility.

The manager would charge the customer the full facility rental price, log the charge for less than the full price, and deposit the difference into an account under his control. The amount represented by the difference between the full price and the discounted price recorded in the log was not expended for the benefit of the facility or returned to the customer.

–  –  –

Although this appears to be a skimming scheme, and in a way it is, in his reports to accounting, the manager was under-ringing the payments from the evening customers.

The fraud scheme was discovered when a customer called, questioning the endorsement on her canceled check. She had made a payment on her civic group’s account to the recreational facility, and yet the endorsement on the check was the manager’s own name and not the name of the recreational facility.

Swapping Checks for Cash One common method employees use to misappropriate cash is to exchange their own checks for cash in the cash register or cash drawer. Periodically, a new check is written to replace the old check. This process can be continued such that, on any given day, there is a current check for the cash removed.

This is a form of unauthorized borrowing from the company. Obviously, if it is company policy that cash drawers or registers are reconciled at the conclusion of each day and turned over to a custodian, then this fraud scheme is less likely to be committed. However, if personnel are allowed to keep their cash drawers and only remit the day’s receipts, then this method of unauthorized borrowing is allowed to continue.

–  –  –

Alteration of Cash Receipts Documentation A lack of segregation of duties can create an opportunity for an employee to misappropriate company funds. For example, if the same person is responsible for both collecting and depositing the cash receipts, then this person has the ability to remove funds from the business for his own personal use and conceal such theft through the deposits. This is often the case in smaller organizations in which there are few personnel among whom to divide the daily operations. A variation of this scheme is to mutilate or destroy the cash receipt documentation such that any attempt to reconcile the cash deposited with the cash receipts is thwarted.

–  –  –

amount submitted to the controller and the amount submitted by the other cashiers. The mutilated tapes were sent to the controller with the deposit. The controller’s office did not compare the deposit with the cash register tapes.

The fraud was detected when one of the cashiers noticed that the transmittal to the controller was small for a comparatively busy day. When questioned about this difference, the perpetrator could not substantiate the difference between the amount transmitted and the cash register tapes. The 23-year-old female, who had been with the company for two-and-a-half years, was terminated but not prosecuted.

Fictitious Refunds and Discounts Fictitious refunds are those in which the employee enters a transaction as if a refund were given;

however, no merchandise is returned, or no discount is approved that substantiates the refund or discount. The employee misappropriates funds equal to the fictitious refund or discount. This scheme is most prevalent in the retail and merchandise industry.

–  –  –

Roger knows that some of the contractors in town have discounts on certain items in the store. On occasion, when a customer other than one of the contractors purchases one of the discount items, Roger will fill out a discount form as if the customer were a contractor. The customer, unaware of the discount, pays the full price for the item, and Roger pockets the difference (the amount of the discount).

Journal Entries Unauthorized journal entries to cash are not as common as the above-mentioned schemes. This type of scheme might be easier to detect because its method of concealment is more obvious. The typical journal entry scheme involves fictitious entries to conceal the theft of cash. If the financial statements are not audited or reviewed, this scheme is relatively easy to employ. However, for larger businesses with limited access to journal entries, this concealment method might be more difficult to use. Generally, fraud schemes that involve journal entries to cash are more likely in financial institutions where there are numerous, daily entries to the cash account.

The Corporate Con Cash Schemes Kiting Kiting is the process whereby cash is recorded in more than one bank account, but in reality, the cash is either nonexistent or is in transit. Kiting schemes can be perpetrated using two or more accounts at the same bank or using several banks and several different accounts. Although banks generally have a daily report that indicates potential kiting schemes, experience has shown that banks are somewhat hesitant to report the scheme until customers’ account balances are zero.

There is one important element to check kiting schemes: All kiting schemes require that banks pay on unfunded deposits. This is not to say that all payments on unfunded deposits are kiting schemes, but rather that all kiting schemes require that payments be made on unfunded deposits. In other words, if a bank allows its customers to withdraw funds on deposits that the bank has not yet collected the cash to cover, kiting schemes are possible. In today’s environment in which customers frequently use wire transfers, kiting schemes can be perpetrated very quickly and in very large numbers.


The first deposit for $100,000 is placed in account X. A check is then written on account X for $100,000 to open account Y. The records do not reflect that the check has been written on account X, and, therefore, the same $100,000 appears in both accounts X and Y. Although this sounds like a simple scheme to detect, if the amounts are large and the accounts are numerous, it is very difficult to trace the kiting transactions. Once the kiting cycle has begun, the amounts shown in the various bank accounts have no relationship to the actual cash on hand.

How a Simple Kiting Scheme Works

Start with no money in Bank A and Bank B, and draw $5,000 in checks on each to deposit in the other:

–  –  –

• Customer complaints

• Altered or missing documentation

• Fictitious refunds or discounts

• Journal entry review

• Review and analyses of decreases in gross sales or increases in returns and allowances

• Analytical review Bank Reconciliations The preparation of bank reconciliations by a person not responsible for handling cash frequently turns up discrepancies. These reconciliations should be prepared on a timely basis. Good reconciliation methods include examining endorsements and dates. When examining the bank reconciliations prepared by company personnel, examine all items that appear to be stale. Obtain satisfactory explanations for the nature of each of the reconciling items.

–  –  –

The misappropriation of funds was detected by comparing the bank deposits with the collection log that was maintained by the accounting clerk. The review of the collection log took place while the accounting clerk was on sick leave. The accounting clerk was responsible for the preparation of the collection log, the daily cash report, and the daily deposits. Due to the lack of segregation of duties, this accounting clerk was able to alter the computerized accounts and misappropriate a total of $23,930. She accomplished this by preparing daily cash reports reflecting less cash receipts than were actually collected. The lesser cash amount was deposited into the city’s bank account.

After discovery of the missing funds, the accounting clerk was terminated and prosecuted. She ultimately pleaded guilty and was sentenced to ten years’ probation. She was 25 years old and had been with the city for three-and-a-half years.

Along with the bank reconciliation, one should prepare a schedule of deposits in transit. This schedule will point out any potential kiting. Deposits in one account should be withdrawals in another account on the same day. There should be no difference between the dates of deposit and the dates of withdrawal.

The Corporate Con 69 Cash Schemes


A cashier was able to misappropriate cash receipts totaling $35,000, and covered the shortage by subsequent receipts. Mail receipts were listed and forwarded to the cashier who prepared the deposits.

However, the listed receipts were not compared to the deposits by an independent person. This scheme was discovered as a result of a staff accountant following up on the clearing of deposits in transit listed on the year-end bank reconciliation.

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