In 2012, the Association of Certified Fraud Examiners (ACFE) conducted a study of nearly 1,400 fraud cases committed throughout the year. According to the study, nearly 40% of fraud cases occurred at private companies while more than 30% occurred at companies with fewer than 100 employees.¹

The ACFE’s study also shows that skimming schemes are one of the most prevalent forms of fraud, especially within small and medium-sized privately held companies. In the article below we provide a detailed description of how to detect and prevent this particular scheme.

Description

Skimming occurs when the perpetrator steals cash receipts before the transaction is recorded in a company’s financial records; thus, it is often referred to as an “off-the-books” scheme. A common scenario involves employees who have access to cash receipts at the point of sale and recognize that the organization has inadequate internal controls to prevent the misappropriation of funds. Our primary focus, however, is on another common scenario that involves employees who receive checks from customers on account and convert the remittances for personal gain. An employee can carry out this scheme over longer periods of time before being detected if he or she also has the ability to manipulate the billing system.

Indicators to Aid in Detection

Business owners should be alert to signs that might identify a skimming scheme, some of which are described below:

• If gross revenue is lower than expected or gross profit margins are declining, an employee may be skimming cash receipts and not recording the corresponding sale. These schemes are often performed using small amounts over a long period of time. Launching an investigation requires careful consideration and a strong understanding of the company’s operations in order to set a “threshold” or “materiality” from which to begin.
• If unusual credit memos have been issued toward a customer’s accounts, the perpetrator may have attempted to cover up the company’s refund of a customer deposit that was initially misappropriated.
• In some cases, the outstanding customer invoice for which a payment was applied by the perpetrator may be different than the invoice listed on the customer’s remittance advice. This occurs when the perpetrator is using a lapping scheme to conceal the skimming scheme. For example, if the customer intended to pay invoice #003 per the remittance advice but the perpetrator instead applied the customer payment to invoice #002, it is likely that the perpetrator previously skimmed the payment for invoice #002 and must now conceal the misappropriation.
• An unusual number of customer charge-offs may indicate that the perpetrator is identifying an amount as uncollectible when the customer’s payment has already been received and misappropriated by the perpetrator.

Prevention Tips

Thoroughly understanding the skimming scheme is one of the first steps in mitigating this fraud risk within an organization. In order to successfully reduce the risk of this fraud, companies must implement adequate internal processes and controls, some of which are discussed below:

Adequate segregation of duties:

• Cash receipts should be the primary responsibility of an employee who is separate from the cash receipts process. For example, the receptionist can receive all mail and make a record of cash receipts. Copies of that record should be provided to both the accounting department and to the business owner.
• The budget-to-actual analysis on the company’s financial statements should be completed by an employee who is not responsible for the cash receipts process.
• Credit memos issued toward customers’ accounts and manual adjustments to customers’ accounts should be examined by an employee separate from the cash receipts process.
• Monthly account statements and/or confirmations to customers should be sent by an employee separate from the cash receipts process.

Regular customer remittance advice comparison

Customer remittance advices should be compared to the cash application records to determine if variances exist. This should be completed by an employee separate from the cash receipts process.

Regular journal entry review

Unusual manual journal entries should be examined with emphasis on those posted to cash, accounts receivable, and sales.

Customer complaint mechanism

Set up a mechanism for handling customer complaints (for example, a phone number or special email address). This can prove helpful when a perpetrator misappropriates a customer payment and fails to adjust the customer’s account balance accordingly or is using a lapping scheme to cover a previously misappropriated payment. This mechanism allows the customer to see all invoices outstanding at any month-end. Customers will generally complain about any invoices still reflected as outstanding for which payment has been made.

Immediate endorsement

Require that any employee who receives a check immediately endorse it with “For Deposit Only” to an account controlled by the company.

Final Thoughts

Losses from fraud can have a significant impact on your clients’ companies. While this article focuses on only one particular fraud scheme, the information may prove helpful when advising clients on ways to detect and prevent fraud in their organizations.

¹ 2012 Global Fraud Study; Association of Certified Fraud Examiners

This document is for informational use only and may be outdated and/or no longer applicable. Nothing in this publication is intended to constitute legal, tax, or investment advice. There is no guarantee that any claims made will come to pass. The information contained herein has been obtained from sources believed to be reliable, but Mariner Capital Advisors does not warrant the accuracy of the information. Consult a financial, tax or legal professional for specific information related to your own situation.