Instructor's Manual for

PRINCIPLES OF FRAUD EXAMINATION

CHAPTER TWO – SKIMMING

LECTURE OUTLINE

I.Skimming – An "off-book" fraud scheme that is manifested by the theft of cash from a victim entity before it is entered into the accounting records. Various types of sales skimming schemes include:

  1. Sales Skimming

1.This entails:

aa sale of goods or services to a customer

  1. an employee collects the customer's payment at the point of sale, and
  2. the employee makes no record of the transaction
  1. Concealment issues – It is possible that the illegal conduct may be detected by:

a.a customer

b.a manager

c.a fellow employee, or

d.a surveillance camera

B.Cash Register Manipulation

1.This might entail:

a.ringing a "no sale" or other non-cash transaction, or

  1. rigging the cash register so that sales are not printed on the register tapes

2.Concealment issues –

  1. too many "no sale" or other non-cash transactions on the register tape might be a red flag
  2. if the transactions on a register are pre-numbered, a break in the sequence would raise questions
  1. After-Hours Sales

1.This would entail:

  1. conducting sales during non-business hours, and

b.not ringing up the sale on the register, or

c.removing the register tape and replacing it with a new one.

2.Concealment issues –

a.the same as A.2.

  1. some of the "newer technology" cash registers have a memory function for daily totals
  1. Skimming by Off-Site Employees

1.This involves:

a.employees who work at remote locations, or

b.employees who have a high level of autonomy in their jobs

c.not reporting sales

2.Concealment issues –

  1. For the property rental industry: physical inspection of properties would detect unreported sales (i.e. rentals)
  2. Undercover surveillance or investigation could uncover this type of scheme.
  1. Poor Collection Procedures
  1. This problem is characterized by failing to properly record the receipt of payments.
  2. Concealment issue – This type of scheme tends to cause certain accounts receivable to be overstated.
  1. Understated Sales
  1. This type of fraud entails recording the transaction, but for a lesser amount than was actually collected from the customer.
  2. Concealment issue – If this type of scheme is perpetrated at the register, it may be detected by the customer.
  1. Check for Currency Substitutions
  1. This scheme involves substituting unrecorded checks for cash received.
  2. Concealment issue – Segregation of duties and effective oversight would severely diminish the opportunity for this type of fraud.
  1. Theft in the Mailroom – Incoming Checks
  1. This form of skimming occurs when employees, who open the daily mail, take the incoming checks and do not record them.
  2. Concealment issues – This type of fraud:
  1. would cause certain accounts receivable to be overstated, and
  2. might cause customer complaints regarding their account balances.
  1. Preventing and Detecting Sales Skimming – In order to decrease perceived opportunity and increase the perception of detection, methods to prevent and detect skimming include:
  1. maintaining a visible management presence at cash entry points
  2. installing video cameras where cash enters an organization
  3. placing cash registers in one "cluster" area so other employees are in full view
  4. investigating customer complaints and tips
  5. recording the login and log-out time of each user
  6. requiring off-site sales personnel to maintain activity logs for business-related activity

II.Receivables skimming – This type of fraud is more difficult to conceal than sales skimming. Generally, one of the following techniques are used to conceal receivables skimming:

A.Lapping
  1. This form of receivable skimming entails crediting one account with the money from another account.
  2. Concealment issues –
  1. certain accounts receivable balances will be overstated, and
  2. the intricacy of these schemes may require the perpetrator to keep a written record of their crime.
B.Force Balancing
  1. This type of scheme is possible when the perpetrator has access to both the receiving and recording function of receivables.
  2. Concealment issues –
  1. this keeps the receivables from aging but creates an imbalance in the cash account
  2. the perpetrator may hide the imbalance by forcing the total on the cash account (i.e. record an entry to fraudulently increase the cash account).
C.Stolen Statements
  1. This entails the theft or alteration of customer account statements
  2. Concealment issues –
  1. late notices or statements showing delinquent balances must be intercepted by the perpetrator, and
  2. false statements showing up-to-date balances must be produced to prevent customer complaints.
D.Fraudulent Write-Offs or Discounts
  1. Preventing the customer from discovering their stolen payment doesn't resolve the discrepancy in the company's accounting records.
  2. Concealment issues – In order to keep customer accounts from falling into delinquency, the perpetrator may engage in:
  1. Lapping, or
  2. fraudulently "writing-off" a customer's account to:
  1. bad debts, or
  2. discounts and allowances
E.Debiting the Wrong Account
  1. This form of fraud entails posting a debit to an existing or fictitious accounts receivable.
  2. Concealment issue – If a balance is posted to an account that will be written off as uncollectible, the skimmed funds will be written off with it.
F.Destroying Records of the Transaction
  1. As a last resort, a perpetrator may resort to destroying the company's accounting records.
  2. Concealment issues
  1. missing or destroyed documents may be a red flag that fraud has occurred, but
  2. without the records, it is difficult to prove that money has been stolen.
  1. Preventing and Detecting Receivables Skimming
  1. Good internal controls are key to preventing receivables skimming schemes, especially:

a.segregation of duties,

  1. mandated vacations for employees and regular job rotation, and
  2. proper authorization for account adjustments.
  1. Some of the red flags for detecting the theft of receivables are:
  1. alteration of financial records
  2. an inordinately large number or size of:
  1. discounts
  2. adjustments
  3. returns
  4. write-offs
  5. overdue accounts
  1. Automated tests may be used to highlight the red flags associated with receivables fraud, such as:
  1. summary reports identifying certain types of activity by department or employee, and
  2. trend analysis on aging of customer accounts.