By Craig L. Greene, CPA/CFF, CFE, MCJ

In this month's article, part of a series written on employee frauds, I examine typical cash fraud schemes. Cash is the focal point of most businesses and their accounting systems. A Company's petty cash fund, as well as, its cash held in banks can be misappropriated through many different schemes. Lower level employees in an organization often perform the commission of cash frauds.

The most common cash fraud scheme is skimming. Skimming is the process by which cash is removed from the company before it enters its accounting system. Retail establishments and particularly fast food restaurants where credit card or check payments are seldom received are vulnerable to this type of scheme. Unfortunately, they are not the only businesses affected by this type of employee fraud. Several years ago, the Chicago Transit Authority (CTA) concluded an investigation of misappropriation of fare revenues by station cashiers. Following the announcement of the investigation, weekly fare revenues increased almost 10% compared to similar periods. It was estimated that the CTA had $6.5 million in fare "shrinkage" due primarily to employee theft.

A related type of scheme is to ring up a sale for less than the actual amount. The fraudster then pockets the difference between the actual sale and the amount on the register tape. Employees may also ring up a sale and then void the same sale, thereby pocketing the cash from the register. A final variation of the above schemes is to sell merchandise to a friend at a discount, who then returns the merchandise for a full refund (without applying the discount, of course).

If an employee collects the cash and also makes the bank deposit, they have an excellent opportunity to misappropriate company funds. For example, an employee in the food services industry received the daily receipts from the cashiers, along with the cash register tapes. The employee would then mutilate the register tapes so they could not be read. With the evidence now destroyed, the employee would pocket a portion of the day's receipts and deposit the balance. Unfortunately, the company's accounting department never compared the daily deposit amounts with the cash register tapes.

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 to authorize the refund or discount. The employee then pockets the cash equal to the fictitious refund or discount. Let's say that Roger works in a plumbing supply store as a cashier. Now Roger knows that some local contractors are given discounts on certain items in the store. On occasion, when a customer other than one of these contractors purchases one of the discount items, Roger will fill out a discount form as if the customer was a contractor. The customer, unaware of the discount, pays full price with Roger pocketing the difference.

Checks can also be the instrument of fraud. Employees with signature authority can make checks payable to cash or to themselves personally. A grandmother in Omaha Nebraska was the sole bookkeeper for an electrical supply company. During a five-year period she stole $416,000 from the company, which she spent on herself and her family. She simply wrote the check to herself, marked the check as being void in the company's check register and then inflated the amount of another check written to a company supplier for inventory. When she received the bank statement she would remove her checks and destroy them.

Kiting is the process whereby cash is recorded in more than one bank account, but in reality, the cash is nonexistent or is in transit. Kiting schemes are generally perpetrated between several banks and several accounts. There is an essential element to check kiting schemes: all kiting schemes require banks to pay 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, then kiting schemes are possible. Kiting can be perpetrated very quickly and in greater amounts in today's environment due to wire transfers. A pharmacist and his son admitted to participating in a kiting scheme that bilked the Bank of Boston. The pair used another small business owner to make an exchange of checks daily until the owner's bank caught on to the float scheme and froze the account. Lacking the infusion of "cash" the pair's account was left overdrawn by $907,000.

Businesses may obtain protection from cash thefts by purchasing fidelity bonds and employee dishonesty insurance. Businesses should thoroughly review these policies and their provisions with their agents. There are numerous methods to detect cash frauds so if a business finds itself a victim of a cash fraud, it should consult its legal counsel, accountant and a competent fraud examiner.