What is Occupational Fraud?
Occupational fraud is fraud committed by an employee on an employer in the course of their employment. They are more common and cause more financial loss to businesses than frauds committed by third parties. As employees will continue to work at the business, they will generally try to hide these frauds permanently, meaning that occupational fraud can be committed over an extended period of time.
What is Point of Sale fraud?
Point of Sale fraud is where an employee steals money from their employer at the point in the business where a sale is made. Employees may steal money as it passes to or from a customer (through a sale or a return of goods by the customer). Point of Sale fraud usually occurs in retail businesses where there the high number of low value transactions and numerous sales people, making the fraud easier to hide.
There are two major types of Point of Sale fraud. Both result in the theft of monies from the business.
- The first targets sales transactions where customers pay money to the business
- The second targets returns of goods, where money passes from the business to the customer.
Major Headings
Description of Point of Sale Fraud
1. Void Sales
2. False Returns
3. Sales ProcessingPrevention and Detection
Description of Point of Sale Fraud
There is a difference between point of sale theft and a point of sale fraud, though both terms are generally used interchangeably. Point of Sale theft is the theft of monies with no attempt to hide it. The loss should be discovered in the short term – when the daily receipts are matched against sales records. The thief relies on the business owners not being able to show what sale was targeted and who made that sale. A Point of Sale fraud generally is not meant to be discovered (at least in the short term) and the fraudster will take some action to hide the theft.
Many businesses expect some loss from theft and build that cost into their pricing structure. Some business owners become complacent about these losses, believing that they will remain within the estimated range and that there is nothing they can or should do about reducing these losses. This approach may be commercially justifiable in the short term, but does nothing to discourage dishonest employees from committing fraud.
How is this fraud done?
There are two main methods of committing Point of Sale fraud, differing in whether a real customer is involved in a transaction – a sale is targeted – or whether a fictitious customer is used – a false return is made. There are also many variations to these two basic formats.
1. Void Sales
Void sales frauds generally target cash sales. The aim of the fraud is to stop the sale from being recorded and to steal the proceeds. If the sale is not recorded, the money will not be missed from the banking of sales receipts.
A real sale of goods with a real customer is required, as someone needs to hand over the money that is stolen. The employee will sell an item to a customer, hand the item to the customer and take the money from the customer, but will either not ring up a sale or ring up a void sale.
That means that a normal receipt for the money received cannot be given to the customer as, according to the business, the sale did not take place. So requiring a receipt to be issued on all sales may limit the opportunity to conduct these frauds, particularly when the receipt is needed for warrantee purposes etc.
The customer walks away with the goods, but according to the records of the business, the sale never occurred and the money was never received. It may take some time for the loss of the stock item to be noticed (if it ever is) and then tracing it back to a particular employee and a particular sale may be impossible. This is why retail businesses with a high turnover of common stock items are the most common victims.
If the theft (the reduction in stock) needs to be hidden, the fraudster will have to adjust the stock records to record a reduction in the stock item. This is explained in more detail in the ‘Stock Fraud – Inventory Record Frauds’ paper.
An alternative that removes the need to hide the reduction of stock is to process a real sale in the records, but at a discounted price. The real price is collected from the customer, the discounted price is recorded and the balance is stolen. This will be obvious if a receipt is handed to the customer, but eliminates the need to hide the reduction of the stock.
2. False Returns
The aim of a false return fraud is to process a fake return of goods and to steal the money allegedly paid back to the (fake) customer. In most retail businesses, some employees will have the authority to process returns of the goods in certain circumstances.
In a real return of goods, the customer will want the money or a credit after returning the goods, so using real returns for this fraud may be difficult. A false return must be created, processed and the money taken.
Recording the return updates the bank records for the payment to the fake customer, so the reduction in money does not need to be hidden. The problem is that no physical good has been received from the customer. This may or may not be a problem depending on the procedures in place that deal with items returned by customers. Most businesses will want some standard procedure in place to verify the return of any goods, if only to discover the reason and to solve any problems with the item. The employee may use another inventory item as the returned item, even damaging the item to provide a reason why it was returned.
One variation of the fraud is to use a real return of goods to a real customer, and to process an excessive refund of money in the records, hand over the proper (smaller) amount to the customer and steal the balance. The idea is to make the payment of the larger amount appear legitimate in the records. This also provides the physical returned goods, overcoming the potential problem above.
Another alternative is to process a credit to a credit card. This does leave a trial, but eliminates the risk of being seen physically taking monies from the register. The employee will usually process the credit off their own, or an accomplice’s, credit card. But this also has the problem of not having the physical items returned.
3. Sales Processing
Many retail businesses now have point of sale registers that read bar codes. These systems also update the stock listing for the item sold and at the sales amount and cost amount to the business records. What it does not is to ensure that the bar code matches the item passes across the counter. The sales person is meant to do that.
No matter what system is used, a dishonest employee may process a sale to an accomplice but recording the sale price for a cheaper item than actually taken by the accomplice. Generally the accomplice will select the expensive item wanted and a sale tag (including the bar code if that system is used) and take the expensive item and the cheaper tab to be processed. The dishonest employee will process the sale.
Of course, this fraud may be done without the sales person knowingly involved. They may just not notice that the price tag does not match the item – and this will be their defence even if they are involved.
Prevention and Detection
Some things to look for
(i) An increase in recorded returns or void transactions, particularly with one employee or in one department.(ii) Refunds for large, repeated or even amounts.
(iii) Refund paperwork being processed without the returned goods being attached or identified,
(iv) Incomplete cash register tapes (Electronic cash registers are eliminating the need for physical tapes.)
(v) Unexplained reductions in stock may indicate that the item is being passed to customers, without the sale being processed and banked.
Any return being processed without the required paperwork.
Some Basic Controls
(i) Technology increases controls as smart cash registers are linked into other business systems (particularly stock). The use of technology can install controls with little disruption to customer service.(ii) Requiring management approval or two signatures to process returns.
(iii) All returns processed without the physical goods attached or identified should be examined.
(iv) Encouraging customers to make sure that they receive a receipt from each sale, or having the sale process dependent upon the scanning or identifying of the item – thus recording the sale at the correct price.
(v) Having each employee sign onto cash registers to process transactions allowing transactions to be tracked back to a particular employee.
(vi) Reporting on credit card numbers that receive refund credits to highlight cards that have had numerous refunds credited to it.