FRAUD TREE -

FOCUS ON ASSET
MISAPPROPRIATION AND
CASH
ACFE Fraud Tree
• ACFE has developed a fraud tree
which categories types of fraud
schemes into three primary
areas:
• Corruption
• Asset Misappropriation
• FS Fraud
• Previous courses have addressed
corruption and FS fraud.
• This course will address asset
misappropriation – specifically
cash on hand and cash receipts.
ACFE Fraud Tree
• To identify how fraud can be
mitigated, individuals must
understand the types of fraud
most prevalent to their
business.
• For asset misappropriation –
cash on hand and cash receipts -
this course will delve into
various components that impact
these categories.
Agenda
• Explore types of asset
misappropriation related to cash.
• Identify fraudulent schemes
related to cash on hand.
• Explore fraudulent schemes for
cash receipts including skimming,
lapping, refund or discount
skimming, ST skimming.
• Examine concealment procedures
used for fraudulent cash receipts.
• Explore the cash larceny aspect of
asset misappropriation.
Asset Misappropriation
• A scheme in which an employee
steals or misuses the employing
organization’s resources.
Asset
Misappropriation

Inventory and
Cash Other Assets

Fraudulent
Cash on Hand Cash Receipts
disbursements
Misuse

Skimming Cash Larceny Larceny

Sales

Receivables

Refunds
CASH ON HAND
Cash On Hand
• Scheme where the perpetrator
misappropriates cash kept on
hand at the victim organization’s
premises.
• 2016: 11.5% of cases; Median
loss $25K.
Cash On Hand
• Includes petty cash or other forms of
cash kept on premises:
• Bank teller boxes
• Cashier drawers at retail
establishments or other
businesses
• Petty cash funds at operational
locations
• Cash collection sites such as:
• Sporting events (parking)
• Sporting events (vendor)
• Turnpike
Cash
• Methods used depends on the
nature of the business and how
the cash cycle operates.
• The term “cash receipts” is used
to refer to incoming funds that
are currency, customer checks,
wire transfers.
CASH RECEIPTS
ACFE Fraud Tree
Asset Misappropriation

Inventory and
Cash Other Assets

Fraudulent Misuse
Cash on Hand
Cash Receipts disbursements

Larceny
Skimming Cash Larceny

Sales

Receivables

Refunds
Skimming
• An incoming payment is stolen
from an organization before
being recorded on the books.
• 2016 11.9% of cases; Median
loss $53K
• Categories include:
• Sales
• Receivables
• Refunds
SALES SKIMMING
Sales Skimming
• Employee makes a sale of goods/
services to a customer.
• Collects the customer's payment at
the point of sale.
• No record of the transaction is
made.
• The ‘sales’ part is simply a
description of what money is
targeted (sales).
• The ‘skimming’ part is a
description of when the attack
takes place (before recording).
Sales Skimming
• Because sales receipts are skimmed
before they are recorded they may
not be missed immediately.
• Provides fraudster time to hide the
theft.
• Leaves no starting point for an
investigation.
• This fraud is harder to detect than
other skimming frauds because there
is no starting point in the records.
Sales Skimming
• Cash register skimming -
Skimming at the cash register or
point of sale without recording
the sale.
• Common in retail businesses.
• After hours sales – off the
books sales.
• Easy if the perpetrator is in
charge on late night shifts or
after business close.
Sales Skimming
• Off site sales - salesperson
conducts the sale outside
normal business premises.
• Generally less supervised
than on site sales. Receipts
are more vulnerable.
• Sales person may issue false
receipts and direct payments
to another address or bank
account.
Solutions
• Begin with establishing the
proper culture, expectations and
behavior.
• Ensure appropriate back-ground
checks are completed for all
sales personnel.
• Examine any significant changes
in sales personnel activity.
• Ensure well established controls
for sales personnel considered in
positions of “higher threat risk”
(ex: off-site sales, door to door
sales).
Solutions
• Detect unrecorded sales by
comparing actual inventory with
book inventory.
• Look for unusual count
discrepancies, changes in inventory
shrinkage and excessive write-offs
for damaged or destroyed
merchandise.
• Evaluate declining inventory levels
without a corresponding rise in
sales is a red flag for unrecorded
sales skimming.
RECEIVABLES
SKIMMING
Receivables Skimming
• Occurs when an employee steals
money the victim organization is
expecting or has already billed.
• Receivable skimming is difficult to
conceal.
• When payments are not recorded,
accounts become overdue and
customers are typically notified of
their past due balances.
• Customer will complain and
scheme will be detected.
Fictitious AR
• Fictitious AR are usually set up
to disguise fictitious sales.
• Once a sale is booked, the
corresponding journal entry is to
a receivable that is never
collected and eventually
written-off.
AR Skimming
• It is an enabler for FS fraud
schemes and asset
misappropriation schemes.
• The most common fraud
schemes in accounts receivable
are:
• Lapping
• Fictitious receivables
• Improper posting of credits
AR Skimming
• Techniques to conceal
receivable skimming
include:
• Lapping - extraction of
money from one account
to cover shortages in
another account.
AR Lapping
Customer Customer A
A owes pays $100,
$100 clerk pockets
the money

Customer C
owes $100 , Customer B
pays clerk who owes $100 and
pay the amount
posts the to the clerk. The
amount to clerk posts $100
Customer B's to Customer A’s
account. account

Scam
continues
AR Skimming
• Force balancing - employee
receives a customer payment,
marks the account paid, doesn't
deposit the money into the
business but takes it.
• To cover up actions, he
purposefully miscalculates the
balance in the account so it
reflects the deposit that was
never made.
Solutions
• Do not allow the same employee
access to AR and GL.
• If employee must have access to both
sets of records, require at least one
other employee check the entries on
the GL and verify payments have
been posted properly.
• Investigate employees prior to hiring
them to ensure they have no history
of criminal behavior.
Solutions
• Strong internal controls
• Separation of duties
• Regularly rotate job duties
• Ensure employees take vacations
• Supervisory approval for write-offs
or discounts
• Properly trained audit staff
• Automated tests
• Trend analysis on aging of
customer accounts
REFUND OR DISCOUNT
SKIMMING
Refunds Skimming
• Picking an item from the store and
returning it for cash or a gift card.
• Claiming to have received items
as a gift but no receipt.
• Returning merchandise that appears
to be sealed in a box (but the box
does not contain the merchandise).
• Picking up tossed receipts and then
selecting merchandise inside the
store and return for refund.
• Fake receipts'.
False Discounts
• Employees can misuse their
discounts to skim cash off the
business.
• Customer pays full price for
merchandise and the employee
collects the total amount.
• When customer leaves,
employee swipes their discount
card to lower the invoice
amount and keep the price
difference.
False Discounts
• False discounts go undetected
because the sale is entered into
the accounting system.
• The invoice shows the items
sold, and the amount of cash
collected plus the employee
discount equals the total sales
amount.
• The invoice does not show who
actually purchased the
merchandise.
Solutions
• Monitor refunds by customer/by
employee or by item.
• Place a dollar limit on the
discount amount an employee
can take each month.
• Require specific approval of an
employee discount before it is
taken.
• Prepare employee discount
reports and trend them.
SHORT TERM
SKIMMING
ST Skimming
• An employee takes cash from a
sale with intent of returning it
later.
• Employee may replace the cash
within a few days or weeks to hide
the theft.
• The employee may ring up a "No
Sale" to create appearance of
accounting for all business
transactions.
Solutions
• Detect ST by comparing daily
cash reports and looking for
days with unusual cash
shortages and overages.
• Specifically assign the daily cash
count to a trusted employee.
 CONCEALMENT
STRATEGIES AND
SOLUTIONS
Concealment Strategies
• Assuming funds won’t be missed
• Cashier diverts customer payment
without recording the sale in the
cash register.
• Controlling communication with
customer
• Person receives funds directly from a
customer but provides customer a
false statements.
• The fraud will continue until a
mistake or a customer attempts to
collect the funds.
Concealment Strategies
• Responsibility for explaining the
unfavorable discrepancies
• The theft of funds should create
an unfavorable variance.
• If the local manager is
responsible for explaining the
variance, they could divert the
funds and provide false
explanations.
Solution
• Best deterrent is good customer service.
• If a customer doesn’t want a receipt,
destroy it.
• Shred documents
• Check regular customer’s refund history.
• Require supervisor approval for refund.
CASH LARCENY
Asset Misappropriation
• A scheme in which an employee
steals or misuses the employing
organization’s resources.
Asset
Misappropriation

Inventory and
Cash Other Assets

Fraudulent
Cash on Hand Cash Receipts
disbursements
Misuse

Skimming Cash Larceny Larceny

Sales

Receivables

Refunds
Cash Larceny
• Scheme where an incoming
payment is stolen after it has been
recorded on the books and records.
• 2016: 8.4% of cases; Median loss
$90K
• Cash larceny is a form of
embezzlement limited to operations
involving the original receipt of
cash.
 Cash Larceny
• Most prevalent cash larceny schemes:
• Stealing from register: (most
common)
• Writing personal checks to cover
theft: (typically uncovered quickly)
• Reversing cash transactions:
(creating voids)
• Removing/altering register tape
• Altering cash count (most likely to
be easily detected)
Red Flags
• Infrequent bank deposits, allowing
cash to accumulate.
• Consistent shortages of cash on hand.
• Consistent fluctuations in bank
account balances.
• Closing cash drawer before shift end.
• Missing items due to physical theft.
• Lack of regular physical inventories by
independent personnel.
Red Flags
• No policy for identification,
sale, and disposal of obsolete
and surplus materials.
• Goods received by same person
who orders them.
• Unusually high number of voids
or returns.
Solutions
• Reconcile accounts timely.
• Require daily bank deposits/receipts and
deposit preparation.
• Segregate duties between receiving cash
and posting to accounts.
• Utilize security cameras with recording
devices.
• Perform regular inventory counts to
uncover issues of theft or waste quickly.
• Utilize security guards.
• Create and utilize internal reports.
Solutions
• Utilize itemized deposit slips.
• Compare authenticated
deposit slip to organization’s
copy of deposit slip,
remittance list, and general
ledger posting.
• Deliver two copies of bank
statement to different people
in organization.
• Require approval of a manager
for voids or returns.
SUMMARY
Summary
• We have reviewed the
multiple types of cash on hand
and cash receipts fraud.
• Organizations must be vigilant
on understanding the
processes, procedures and
methods that can lead to cash
asset misappropriation.
Summary
• Considerations may be given
to potential dollar (value)
loss when establishing
controls.
• However, be aware that
fraudsters may start with
the small frauds, gain
confidence and move to
the larger frauds.