FE: Cash Larceny - Chapter 3

Chapter 3: Cash Larceny

Learning Objectives

• Define cash larceny.

• Understand how cash receipt schemes differ from fraudulent disbursements.

• Recognize the difference between cash larceny and skimming.

• Understand the relative frequency and cost of cash larceny schemes.

• Identify weaknesses in internal controls that induce cash larceny schemes.

• Understand how cash larceny is committed at the point of sale.

• Discuss measures to prevent and detect cash larceny at the point of sale.

• Understand and identify methods used to conceal cash larceny of receivables.

• Understand schemes involving cash larceny from deposits, including lapping and deposits in transit.

• Understand controls to prevent and detect cash larceny from bank deposits.

• Be familiar with proactive audit tests to detect cash larceny schemes.

Case Study: Bank Teller Nabbed for Theft

• Laura Grove, a head teller at Rocky Mountain Bank, stole approximately $16,000$ from customer night deposits due to increasing credit card debt and the perception of low risk.

• Laura observed Frank Jeffen dial the other half of the combination to the night vault.

• She left the vault unlocked, planning to return later, but another teller, Melissa Stein, locked it.

• Laura retrieved two customer deposit bags containing large sums of cash on Monday, hid them in her tote bag, and left the bank, discarding the checks in a dumpster.

• Stacy Boone, the bank's audit investigator, became suspicious of Grove after two customers reported missing deposits of $8,000$ each.

• Grove's suspicious behavior, previous unexplained shortages at her former branch, and sudden acquisition of expensive jewelry raised further suspicion.

• Grove's husband found the money in their attic after their daughter overheard Laura's conversation and revealed that she put something in the attic.

• Grove confessed and returned the money, receiving probation and was later found working at another bank without fingerprint checks.

Overview of Cash Larceny

• Cash Larceny Definition: Intentional taking away of an employer's cash (currency and checks) without consent.

Cash Larceny vs. Other Cash Frauds

• Fraudulent Disbursement Schemes: Funds are distributed from a company account in an apparently normal manner (e.g., forged checks, false invoices).

• Cash Receipt Schemes: Outright stealing of cash without relying on forged documents, includes: Skimming and Cash Larceny

Exhibit 3-1 & 3-2

• Skimming is the theft of off-book funds.

• Cash larceny is the theft of money already on the company's books.

• 2011 Global Fraud Survey: Sum of percentages exceeds 100% because some cases involved multiple fraud schemes that fell into more than one category.

  • Skimming accounts for approximately 20% of cash schemes

  • Cash Larceny accounts for approximately 15.4% of cash schemes

  • Fraudulent disbursement accounts for approximately 65.2% of cash schemes

Exhibit 3-3

• Median Loss of Cash Misappropriations

  • Cash Larceny: $54,000$

  • Skimming $58,000$

  • Fraudulent Disbursements: $120,000$

• Cash larceny schemes are the least common form of cash misappropriation with the lowest median loss.

Cash Larceny Schemes

• Cash larceny can occur in any situation where an employee has access to cash.

• Common schemes:

  • Theft at the Point of Sale

  • Theft from Incoming Receivables

  • Theft from Bank Deposits

Larceny at the Point of Sale

• Occurs frequently because that’s where the money is and there is a lot of activities to cover the theft

• Cash register or cash boxes are common access points.
  *Opening the register and removing currency is the most straightforward scheme.
  *It might be done as a sale is being conducted, to make the theft appear to be part of the transaction, or perhaps when no one is around to notice.

Exhibit 3-4 Cash Larceny from the register

• Using others register or access code

• Using Own register or access code

• Other employee steals cash from register

• Place personal checks in register to cover missing money

• Process reversing transaction on stolen sales

• Destroy register tape

• Alter register tape

• Falsify cash count

• Other employee conceals theft

• False refunds

• False voids

Example

• A teller rang a 'no sale' and took currency from the drawer, stealing approximately $6,000$ over time (Case 1252).

Skimming vs. Larceny

• Skimming: Unrecorded transactions, making detection difficult.

• Larceny: Stolen funds are already on the register tape, resulting in an imbalance between the tape and the cash drawer.

• The actual method for taking money at the point of sale opening a cash drawer and removing currency rarely varies, it is the methods used by fraudsters to avoid getting caught that distinguish larceny schemes.

Rationalization

• Fraudsters often rationalize their actions, convincing themselves they are entitled to the funds or are only borrowing them.

• Some might carry missing cash in their registers for days, hoping to repay it before a surprise cash count.

Concealing Larceny at the Point of Sale Methods:

• Thefts from other registers

• Death by a thousand cuts

• Reversing transactions

• Altering cash counts or register tapes

• Destroying register tapes

Thefts from Other Registers

• Stealing from another employee's register or using their access code shifts suspicion.

• Example: An employee stole money by logging onto another teller's register during their break, ringing a 'no sale,' and taking the cash (Case 1252).

Death by a Thousand Cuts

• Stealing small amounts over time, hoping shortages will be attributed to errors.

• e.g. $15$ dollars here, $20$ there

• Shortages may be credited to errors rather than theft.

• Most retail organizations track overages or shortages by employee, making this method largely ineffectual.

Reversing Transactions

• Using false voids or refunds to reconcile the register tape with the cash on hand after the theft.

• Example: A cashier stole payments, destroyed receipts, and voided the transactions to balance the records (Case 02/1947).

Altering Cash Counts or Cash Register Tapes

• Falsifying cash counts to match the register tape totals.

• Example: An employee overstated cash counts on envelopes to match register tapes from which she pilfered (Case 1806).

• Manually altering the register tape to force a balance between cash on hand and recorded receipts.

• In Case 788, a department manager altered and destroyed cash register tapes to help conceal a fraud scheme that went on for four years.

Destroying Register Tapes

• Preventing others from computing totals and discovering imbalances.

• Employees stealing at the point of sale may destroy detailed tapes that implicate them.

Exhibit 3-5 Cash Larceny from the deposit

• Did employee prepare the deposit?

  • Yes

    • Falsely prepare slip to cover stolen money

    • Lap with subsequent receipts

  • No

    • Alter receipt

• Employee steals money from the deposit

• Post missing money as deposits in transit

• Does Victim Company Reconcile its Deposits?

  • Yes

    • Conceal the theft

  • No

Cash Larceny Prevention and Detection at the Point of Sale

• Enforce separation of duties in the cash receipts process.

• Implement independent checks over the receiving and recording of incoming cash.

• Employee conducting the transaction should record each transaction

• Salesperson should count the cash in his cash drawer and record the amount on a memorandum form.

• Another employee then removes the register tape or other records of the transactions.

• Independent verification of cash counts at the end of each shift.

• Cash should be taken directly to the cashier's office

• Register tape, memorandum form, and other pertinent records of the day's transactions are sent to the accounting department, where the totals are entered in the cash receipts journal.

• Periodically run reports showing the number of discounts, returns, adjustments, write offs, and other concealing transactions issued by employee, department, or location. These transactions may be used to conceal cash larceny.

• Scrutinize all journal entries to cash accounts, as these are often used to hide missing cash.

Larceny of Receivables

• Employees steal incoming customer payments on accounts receivable (discussed in Chapter 2).

• Stealing the payment but never recording is a skimming scheme.

• Theft occurring after payment has been recorded is cash larceny.

• Example: An employee posted customer payments but stole the money, taking over $200,000$ in four months (Case 02/1958).

Concealing Larceny of Receivables:

• Force balancing

• Reversing entries

• Destruction of records

Force Balancing

• Fraudsters with total control of a company's accounting system can make unsupported entries to produce a fictitious balance.

• Example: An employee stole customer payments but had control over deposits and ledgers, concealing the crime by force balancing (Case 1663).

Reversing Entries

• Using unauthorized adjustments, such as courtesy discounts, to reverse posted payments.

• Example: An office manager stole approximately $75,000$ in customer payments and reversed the entries with unauthorized adjustments (Case 1886).

Destruction of Records

• Destroying records to conceal theft, though this doesn't prevent the company from realizing they are being robbed.

• Example: A controller stole approximately $100,000$, then destroyed all records, including her personnel file, and left town (Case 1550).

Cash Larceny from the Deposit

• Taking a portion of the money before depositing it into the company's accounts.

• Typically, someone tabulates the receipts, lists the form of payment, currency or check, and prepares a deposit slip for the bank.

• Failure to reconcile the bank copy of the deposit slip with the office copy enables theft.

Altering Deposit Slips

• Altering the bank copy of the deposit slip to reflect a lesser amount.

• Example: An employee altered 24 deposit slips and validated bank receipts in a year to conceal the theft of over $15,000$ by using correction fluid or ballpoint pen to match the company's cash reports (Case 1446).

Entrusting Deposits to the Wrong Person

• Example: A bookkeeper was quickly put in charge of making the deposit and stole the funds (Case 693).

Careless Handling

• Leaving the deposit unattended.

• Example: A part-time employee pilfered checks from the deposit left in the bookkeeper's desk overnight for six months (Case 02/1932).

Deposit Lapping

• Stealing the deposit from day one and replacing it with day two's deposit, and so on.

• The perpetrator is always one day behind.

• Example: A company officer stole cash receipts and withheld the deposit, eventually replacing the missing cash with a check received later (Case 1993).

Deposits in Transit

• Carrying the missing money as deposits in transit.

• Example: An employee took over $20,000$ in collections and carried the missing money as deposits in transit for several months (Case 1716).

Preventing and Detecting Cash Larceny from the Deposit

• Separate duties: calculating receipts, preparing deposits, delivering deposits, and verifying deposit slips.

• All incoming revenues should be delivered to a centralized department where an itemized deposit slip is prepared, listing each individual check or money order along with currency receipts.

• Itemizing the deposit slip is a key anti fraud control.

• Before it is sent to the bank, the deposit slip should be matched to the remittance list to ensure that all payments are accounted for.

• The cashier will deliver the deposit to the bank, while a cash receipts clerk posts the total amount of receipts in the cash receipts journal.

• Authenticated deposit should be compared with the organization's copy of the deposit slip, the remittance list, and the general ledger posting of the day's receipts

• Two copies of the bank statement should be delivered to different persons in the organization.

• To prevent deposit lapping, organizations can require that deposits be made in a night drop at the bank and verify each deposit at the beginning of the next day's business.

Case Study: The OL' Fake Surprise Audit Gets 'Em Every Time

• Bill Gurudeau, a branch manager for a consumer loan finance company, stole his branch's deposits by placing the money into his own account rather than his employer's.

• Harry Smith audited Gurudhu's branch to determine the scope of his scheme.

• Gurudhu overheard that he was about to get audited and returned the funds immediately, he confessed, the company did not pursue any criminal or civil action against him

Proactive Computer Audit Tests for Detecting Cash Larceny

• Summarize by employee the difference between the cash receipt report and the sales register system.

• Summarize by Employee by Day the difference between the Cash Receipt Report and the Sales Register System.

• Summarized by location discounts, returns, cash receipt adjustments, accounts receivable write offs, and voids charged.

• Summarize by Employee Discounts, Returns, Cash Receipt Adjustments, Accounts Receivable Write Offs, and Voids Charged.

• List Top 100 employees who have been on any Top 100 list for three months, whether for discounts, for refunds, for cash receipt adjustments, for accounts receivable write offs, or for sale voids.

• List top 10 locations that have been on a top 10 list for three months, whether for discounts, for refunds, for cash receipt adjustments, for accounts receivable write offs, or for sale voids.

• Compute standard deviation for each employee for the last three months, and list those employees that provided three times the standard deviation in the current month, separately for discounts, for refunds, for cash receipt adjustments, for accounts receivable write offs, and for sale voids.

• Summarize user access for the sales, accounts receivable, cash receipt, and general ledger systems for segregation of duties reviews.

• Summarize user access for the sales, accounts receivable, cash receipt, and general ledger systems in non business hours.

• In this case, the fake surprise audit prompted Gurudeau to confess and return the stolen funds, highlighting the deterrent effect of auditing.

Essential Terms

• Cash Larceny: The theft of an organization's cash after it has been recorded in the accounting system.

• Cash Receipts Schemes: Frauds that target incoming sales or receivables, where perpetrators physically take the cash.

• Deposit Lapping: Concealing deposit theft by using receipts from subsequent days to cover previous thefts.

• Fraudulent Disbursement Schemes: Illegally causing distribution of funds in a way that appears legitimate through forged checks, false invoices, etc.

• Reversing Transactions: Using false transactions to void sales or refund cash, reconciling sales records to the amount of cash on hand after the theft.