Asset Misappropriation and Skimming Schemes

SkimmingThe act of removing cash from a victim company prior to the transaction being entered into the accounting system. Skimming, which is an off-the books fraud that is never recorded, is difficult to detect because there is no audit trail. Skimming schemes can be committed by employees who deal with customers directly or with those who handle their payments. This article will discuss the main types of skimming schemes as well as the red flags that can be used to detect fraud.

Unrecorded sales

Skimming involves not recording sales but instead collecting money from customers. Employees might be able, in spite of the presence of managers and surveillance equipment, to alter the system to hide fraud detection. Some fraudsters manipulate the register tape to prevent transactions from being printed on it when they are entered into the system. One way to detect this would be to pre-number the system records. This would allow for skimming to be detected if the fraudster turns the register tape back on. Unrecorded sales channels that generate revenue streams that are unpredictable and difficult to track should be avoided by companies.

Understated sales and receivables

These skimming schemes give the customer a receipt for the entire transaction. However, when the employee enters the information into the system, they either record a discount or a sale with a lower value. To cover their tracks, they can make carbon copies of receipts and write in their own amounts. Fraud prevention is possible through a requirement for approval for sales discounts, by checking receipts for any alterations, and by tracking the history of cashiers’ sales discounts.

Mail-in Theft of Checks

This particular scheme has the sale being recorded in the company’s computer system, but no payment has been made to the receivable. The individual in charge of receiving payments in the company physically takes the check and cashes at the bank. If the employee can overcome the problems with cashing checks, such as endorsement, convincing the bank that it is legitimate and how to hide the fraud when the customer balance becomes indebted. The company will send customers late notices if the employee doesn’t pay attention. Customers may complain if they have a copy the canceled check. In order to redirect the mail, fraudsters can intercept the notices and manipulate the address to circumvent this. If the same person receiving the mail is responsible for recording the receipt, this is a red flag. This can be easily reduced by segregating the duties and marking only checks for deposit.

Short-Term Skimming

Short-term skimming, the last category, is not about stealing money but borrowing money to earn earnings from the time value. Employees can use funds to make short-term investments that generate interest by delaying payment. Although any of these forms could be used to obtain the money, there is a clear distinction. In this instance the money is ultimately returned to the company. The only loss is the time value. If you are looking at particular customers, red flags would be a higher days outstanding ratio or an unusual payment timing.

Fraud Prevention

No matter what method is used, the most effective way to prevent skimming is to have proper internal controls. Separation of duties and awareness by employees of the company’s theft policy can reduce the chance and rationalization for these frauds. Skimming can result in very expensive losses and a culture that doesn’t recognize the signs of fraud.

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