Skimming Sales Receipts – Cash Frauds

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 the skimming of sales?

Skimming is the theft of money before it has been recorded in the books of a business as being received. Skimming sales is the theft of money received from a sale of goods or services before it has been recorded. The ‘sales’ part of the name is simply a description of what money is targeted (sales) and the ‘skimming’ part is a description of when the attack takes place (before recording). A different fraud – usually a billing fraud – is necessary once the receipt has been recorded and banked.

Skimming frauds are never meant to be discovered. In some cases frauds may not need to be hidden, and this is one of those cases. But this will depend on the controls over inventory or whether a good or service was sold.

Major Headings

Description of the Fraud

How is Skimming done?
Hiding the Loss
Handling skimmed cheques

Lessons to be Learned
Prevention and Detection

Description of the Fraud

Skimming is an easy fraud to commit and may occur anywhere money is received by the business. The two common places are where cash sales are made and where debtors are collected. Skimming these different receipts requires some different techniques: whether hiding missing stock from skimmed sales; hiding missing debtor receipts; or converting stolen cheques. This paper concentrates on skimming debtors receipts.

Skimming money from sales is a common fraud and because individual sale receipts may be small and an individual skimming fraud may go unnoticed for some time. Because sales receipts are skimmed before they are recorded they may not be missed immediately – if at all – so there may be some time for the fraudster to hide the theft.

This fraud is harder to detect than other skimming frauds as there is no starting point in the records. Skimming of debtors receipts occurs after the credit sale has been recorded in the books. Skimming sales receipts does not occur after another transaction has been recorded, so no action may be necessary to hide the theft.

Sometimes the aim of the fraud is not to permanently keep the stolen monies, but to hold and invest the money for a short period – even a few days – return the original money and keep the interest earned. This can be profitable, but is usually only worthwhile when the amounts involved are large. A $10 million receipt invested on Friday afternoon to Monday morning may earn the fraudster $5,000 in interest – not a bad extra income – while the receipt may not be missed for that short period.

How is Skimming done?

Skimming sales in as easy as stealing a receipt before it is recorded. This leaves no record of the sale and therefore no entry in the business’s records that may raise suspicion. The actual skimming may be as easy as pocketing the money. Hiding the theft may be the hard part, if hiding the theft is necessary. The common ways of skimming sales are:

(a) Skimming at the cash register or at the usual point that the sale is made without recording the sale. This is the most common place for skimming in retail businesses, as it is the most common place for money to pass through the hands of employees and commonly where cash is used for sales.(b) After hours sales – off the books sales – are easy if the perpetrator is in charge of conducting the business on late night shifts or after the business should have been closed.

(c) Off site sales, where the salesperson conducts the sale outside the normal business premises. Off site sales are generally less supervised than on site sales, due to their nature, and receipts are more vulnerable. The sales person may issue false receipts and other documents and may direct payments to another address or bank account.

There are variances to skimming sales. Not the whole sale has to be skimmed, particularly if the sales system is too sophisticated to overcome the controls completely. Only part of the sale may be skimmed and disguised as a discount, or the sale may just be recorded at a reduced amount. This can happen in industries that have larger ticket items and where discounted sales are more common, and particular when individual employees have the power to give discounts to customers.

The money is generally skimmed before the sale is recorded. If the theft occurs after the sale is recorded, the sales and banking will not match and the loss may be discovered. Stealing the money before the sale is recorded may stop any record of the transaction occurring and leave no starting point for an investigation. The fraudster will have to consider how to issue a receipt to the customer, if one is needed, and how to manipulate the inventory records, if necessary.

The main problem for the fraudster may be recording the reduction in the perpetual inventory for the item passed to the customer. In some instances, by the time the reduction of stock is noticed – if it is noticed at all – there will probably be no way of tracing that missing item to a particular sale, a department or a date, let alone to a salesperson. So the employee may think it unnecessary to hide the reduction of stock. Skimming of a sale of a service that is performed by the fraudster may not need any action to hide the loss.

Hiding the Loss

The theft may not need to be hidden. If the lost inventory item will go unnoticed, the theft is likely to go unnoticed. But, sometimes the theft needs to be hidden and this is where a simple theft becomes a fraud. The way a theft is hidden may depend on what authority the employee has within the business and the system in place. The more common ways of hiding losses are:

(i) Destroying the records that are generated for the sale. This is becoming more difficult as computers handle business transactions, particularly when the system is linked directly to inventory records. It is likely that these records could be reproduced even if they are destroyed. This method may only work in very small businesses with manual recording systems and with very small losses.Of course, for any controls to uncover a fraud, the controls will have to be enforced by management.

(ii) Having false entries entered into the inventory records to balance these levels of stock. These entries may be false sales, scrapping items, etc. or a false record that money was received. Any stock count will match the amount in the inventory records and no loss will be recognized. Depending on the system in place, the employee may be able to generate documentation that record a sale in the inventory records, but not in the sales records.

There are various means to amend inventory records. These are discussed in greater detail in the “Stock – Inventory Records” Fraud Awareness paper.

Handling skimmed cheques

Cash does not need to be converted to be useful, but cheques do.

Cheques can be skimmed easily, but converting the cheque adds a level of difficulty to the fraud. Cheques usually have to be presented at a bank and this creates a paper trail. Usually skimming cheques requires a bank account with a similar name to the victim business to be set up, or for the cheque to be falsely endorsed. But this also leaves a paper trail.

Some methods of handling skimmed cheques are:

(i) to forge an endorsement on the cheque to change the payee, but this leaves a trial to the employee’s account.(ii) to forge an alteration to the payee name on the cheque, but this leaves a trail that may be followed to the employee’s account.

(iii) to open an account with a similar name as the victim business. Opening accounts may be difficult, and there is always the paper trail and it is rarely worth opening a bank account for one stolen cheque.

(iv) to steal cash from somewhere else in the business and replace that cash with the cheque. The cheque will balance the banking in that other area. This means that two thefts must occur at about the same time, but only one needs to be hidden and it solves any conversion problems. Of course the cheque in the other area may raise questions.

Lessons to be Learned

1. Money is vulnerable to fraud whenever it is handled by employees.

2. Attacks on receipts can occur at any point of the business cycle. The two major areas are: (a) where sales (cash or otherwise) are made; and (b) where debtor’s receipts are collected.

3. Businesses without proper controls and those that are too reliant upon one or a few employees handling money and recording transactions provide an opportunity for this fraud.

4. Thefts can be hidden by the lapping of a series individual frauds, each covering the last. Lapping is most easily uncovered by separating or rotating duties amongst employees, thus taking away the opportunity of the fraudster to continue with the scheme.

Prevention and Detection

Some things to look for

(i) Comparing levels of recorded sales and costs of sales against budgeted levels and against historical data. Any unexplained increase in the gross margins could be an indication of stolen sales receipts. The sale is not recorded, but the reduction of stock should be – legitimately or not – and should appear in cost of sales. An increasing cost of sales percentage may indicate missing sales.(ii) Unexplained entries in the inventory records. These may be used by fraudsters to balance perpetual inventory records to actual stock or supplies on hand after goods have been passed to customers in unrecorded sales.

(iii) Unexplained inventory shrinkage may indicate inventory is either being stolen directly, or that it is being utilized in sales that are being skimmed.

Some basic controls

(i) Retail businesses with over the counter sales should install a sales system that requires the use of the cash register. The cash register should be sophisticated enough to record sales and update inventory records.

(ii) Non-retail businesses can have an order system on pre-numbered orders. This may include the warranty or similar being based on the order number and sales receipt number. Customers will then ensure that they complete a proper order form and get a receipt.

(iii) Have very specific discount policies for employees to follow and a procedure for discovering sales at reduced prices.

(iv) Technology advances have made keeping inventory records more convenient and close to, or at, real time. Many retail businesses use bar code technology that records the sales and immediately updates inventory levels. The use of these systems limits the opportunity to hide reductions of stock with false entries.

(v) The use of credit cards adds a control. Without money being passed to employees, there is less opportunity to handle, conceal and steal money. Using credit cards creates a paper and authorization trail. Credit card sales also do not generate debtors that are susceptible to theft (see Skimming Debtors), so that opportunity is also reduced.