Cash is more susceptible item and it is the favorite target of fraudsters, using skimming, outright larency, and fraudulent disbursements. There are fraud risk factors and red flags on cash which we can summarize them as follow:
- Personal financial obligations may create pressure on management or employees with access to cash or other assets susceptible to theft to misappropriate those assets.
- Excessive use of alcohol or drugs
- Emotional trauma in home life or work life
- Inadequate income for lifestyle
- High personal debts or financial losses
- Large amounts of cash on hand or processed
- Close association with suppliers and other key people.
- Rapid turnover of key employees either by quitting or firing
- Unrealistic productivity measurements
- Poor compensation practices
- Inadequate internal control over assets may increase the susceptibility of misappropriation of those assets. For example,
- Inadequate segregation of duties or independent checks
- Inadequate management oversight of employees responsible for cash, for example, inadequate supervision or monitoring of remote locations
- Inadequate job applicant screening of employees with access to cash
- Inadequate recordkeeping with respect to cash
- Inadequate system of authorization and approval of transactions (for example, in payments)
- Inadequate physical safeguards over cash, short-term investments.
- Lack of complete and timely reconciliations of bank and petty cash.
- Lack of timely and appropriate documentation of transactions
- Lack of mandatory vacations for employees performing key control functions
- Inadequate management understanding of information technology, which enables information technology employees to perpetrate a misappropriation
- Inadequate access controls over automated records, including controls over and review of computer systems event logs.
- Cash disbursements for unrecorded liabilities and routine expenses (e.g., rent) when all expenditures must be vouchered prior to payment.
- Multiple remittance addresses for the same vendor.
- Unusual even dollar or high cash disbursement amounts for routine odd dollar or low value purchase.
- Infrequent bank deposits, allowing cash to accumulate
- Consistent shortages in cash on hand
- Excessive number of voided transactions on a regular basis without proper explanation
- Missing copies of pre-numbered receipts
- Disregard for the need for monitoring or reducing risks related to misappropriations of cash
- Disregard for internal control over misappropriation of assets by overriding existing controls or by failing to correct known internal control deficiencies
- Behavior indicating displeasure or dissatisfaction with the company or its treatment of the employee
- Changes in behavior or lifestyle that may indicate assets have been misappropriated
This scheme, involves the numerous types of theft of cash after the cash has been recorded on the books, such as directly from a cash register or petty cash which some employees place phony refund forms or voided sales slips in the register to cover the missing funds, or bookkeepers also can reverse transactions on paper to cover misappropriated cash.
Skimming is “off-book” technique to remove cash before a company records the receipts. In some instances, unrecorded or understated sales, or employees first do not record incoming cash, then delay posting the funds in order to divert the funds to personal accounts, then they can post the previous incoming cash and not record the new incoming cash.
Fraudster may alter check contents by changing the amount of checks or payee’s name or counterfeit the signature of the signatories, forged endorser. In many situations check writers leave spaces and gaps when populating the various fields.
Kiting is more appropriate if the Company’s and its branches maintain a lot of bank accounts in different locations and different banks that allow Fraudster to temporarily conceal cash shortage. If bookkeeper misappropriates funds from a bank account or petty cash fund by unauthorized withdrawals, the shortage may be covered at the audit date by writing but not recording , a check on another Company bank account, preferably in a distant city to increase the time required for clearance that is after audit date and create another shortage. Wire transferring makes kiting easier which record the deposit transaction before audit period and record the withdrawal transaction after audit period.
Money can be stolen by somebody else from cashier location without taking the attention of cashier or by copying the key of safe and cashier room and access to the cash to steal money.
Forensic analysis for cash is a method for collecting and analyzing cash data by using formula and statistical techniques to reconstruct, detect or support claims of cash fraud or to detect accounting errors. Forensic analysis help accountant or auditor to go further investigation on error or fraud by using several investigation techniques. Below are examples of forensic analytics for cash.
1) Number Duplication Test
Number Duplication test is used to detect duplication in payment
Benford's law test can be used to detect errors or fraud in the bank/check/cash registers
All the below controls can prevent fraud schemes for cash
- Segregation of duties for receiving cash, count cash, make bank deposit and record cash and deposit in the system.
- Mandatory vacations.
- Prenumbered Cash/Bank Payment and Receipts Vouchers.
- Having two employees open mail
- Surveillance cameras
- Encouraging customers to request receipts.
- Obtaining balance confirmations from customers and statement of account from supplier and bank.
- Rotation of duties
- Effective internal audit and internal audit procedures
- Changing internal audit procedures and methods to be unexpected by cash custodian.
- Updating SDN list and ensuring that is ran against the entire foreign payments.
The following controls can detect fraud on cash:
- Bank Reconciliation
- Tracking transfers to the bank statements
- Tracking the reconciled items in the subsequent period.
The following procedures made by forensic & investigative accountant can detect fraud on cash
- Trace interbank transfers by preparing Bank Transfer Schedule as it is shown below as the examples of audit working papers for detecting the possibility of kiting.
- Trace cash receipts to bank deposit slips by tabulating the details of cash receipts, documentations, and bank deposits as it is shown below in the examples of audit working papers for detecting skimming/lapping.
- Trace cash receipts from cash sales to sales register; and
- Make a surprise cash count.