Cash Schemes – Most Common Form of Fraud

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Cash Schemes – Most Common Form of Fraud

Part 2 in a 4 part series: “Fraud, Embezzlement & Thievery: Oh, My!”

By Karen McMurray
Businessman lie
Fraud can occur in an Organization as financial statement fraud or asset misappropriation fraud. Financial statement frauds generally involve larger sums of money.  However, asset misappropriation is still the most common form of fraud and “Cash Schemes” are the most common type of asset misappropriation. These fall into three categories:

  • Cash Larceny-theft of funds recorded in the Organization’s accounting records.
  • Fraudulent Disbursements-making a distribution of the Organization’s funds for a personal or dishonest purpose.
  • Skimming-theft of funds before entry in the Organization’s accounting records.

While good internal controls can’t stop fraud, they can serve as a deterrent if individuals think they will “get caught” and they do provide a much better chance that the fraud will be caught in a timely manner.

Some common red flags in cash schemes:

  • Inadequate segregation of duties-The same person is responsible for revenue generation to cash collection and bank deposits, ordering supplies, receiving them, writing the checks, signing them, posting them to the accounting system and reconciling the bank statement.  Many times this person is the “most trusted” employee in an Organization.
  • Inadequate supervision-Preparation of budgets or expectations and comparing those expectations to actual results can detect when items are not appropriate.
  • Improper adherence to policies-Failure to properly complete control documents or follow other financial policies make it easier for fraud to occur.
  • Living beyond their means-It can be an indication of fraud when the person in control of an Organization’s funds is spending beyond what their pay level should permit. There can be other sources of their income, but it should be a “red flag.”

A recent article in the ACFE’s Fraud Magazine detailed problems in a trade-skill education program where the instructor had complete control of everything in the program.  No one reviewed the requests for more funding for the program and inventory costs exceeded the revenue charged for the auto body work the students performed.  Even though half the fee for materials was to be received as a deposit before the work was started, the policy was not followed. The director opened a separate bank account and deposited over $145,000 of repair revenue directly into it. No one else knew the account existed. Students reported that something was wrong.

Even when there are very few controls, the following techniques can help determine if fraud may have occurred.

  1. Compare total costs to total revenue. In the above case, customers were to pay for materials the students used in the work performed.  The inventory costs exceeded the revenue recorded by over $330,000.
  2. Determine activity level by talking with individuals involved with the Organization.  The students were able to provide information on the amount of work performed even though work orders were not prepared in accordance with policy.

Having good separation of duties, adequate supervision, proper adherence to financial policies and procedures and just “paying attention,” as the students did, can go a long way in helping to prevent or detect fraud.

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