Skim it is the disposal of cash for a victim business before the transaction is entered into the accounting system. Since skimming is a type of fraud off the books (never recorded), there is no direct audit trail, making fraud difficult to detect. Employees with the opportunity to commit skimming schemes are those who deal directly with customers or those who handle their payments. This article will cover the four main categories of skimming schemes and discuss some of the red flags for fraud detection.
The most common way to skim is not to record the sale of goods, but to collect money from the customer. Despite controls such as tape, administrators, and surveillance equipment, employees can manipulate the system to avoid detection of fraud. In some examples of unrecorded sales, the fraudster manipulates the recording tape so that it is not printed on the tape when transactions are entered into the system. One means of detection would be the pre-numbering of the system records, so that if a skimming occurred when the scammer turned the recording tape back on, the previously numbered transaction would be interrupted. Businesses should be especially wary of unrecorded sales schemes with revenue streams that are difficult to monitor and generally unpredictable in value.
Underestimated sales and accounts receivable
In these skimming schemes, the customer receives a receipt for the full amount of the transaction, but when the employee enters it into the system, they record a discount or a lower value sale. To cover their tracks, they can manipulate carbon copies of the receipt by writing their own amounts or generating false discount documentation. Fraud prevention is possible by requiring approval of sales discounts, checking receipts for tampering, and tracking cashiers’ sales discount history.
Theft of checks by mail
In this particular scheme, the sale has been posted to the company’s system, but the account receivable payment has not been received. The person in charge of receiving the payment at the company physically steals the check and cashes it at the bank. If the employee can overcome check cashing issues such as endorsement and the bank’s belief that the transaction is legitimate, then they must address how to hide fraud when the customer’s balance becomes delinquent. If the employee is not careful, the company will send late notices to customers that are likely to result in customer complaints with a copy of the canceled check. Scammers have prevented this by intercepting advertisements or manipulating the customer’s address to divert mail. An important red flag for the opportunity to commit this scheme is when the employee who receives the mail is also the same person who has the job of recording the receipt. By properly separating duties and marking all checks for deposit only, a business can easily reduce the potential of this skimming scheme.
The last category of short-term skimming is less about stealing money than it is about borrowing it to accumulate earnings from the time value of money. By delaying receipt of payment, the employee can use the funds for short-term investments that generate interest for the perpetrator. The means of obtaining access to the money could be any of the above forms, but there is a clear distinction that in this case the money is finally returned to the company and the only loss is the time value of that receipt. Red flags in this area would include a higher day pending sales rate or unusual payment timing compared to the customer’s historical payment, especially when looking at specific customers.
Regardless of the method of skimming, the most important means of prevention is to establish adequate internal controls. Segregation of duties and employee awareness of company policy on theft can eliminate the opportunity and rationalization of committing these frauds. When early detection fails, skimming can lead to costly losses and a corporate culture that ignores signs of fraud.