... And one for me: skimming is by far the most popular method for stealing an organization's cash.

Roger had worked hard to earn his CPA. He had big dreams--he had planned to use his newfound financial expertise after college to build a fortune. But 10 years later, here he was, stuck as the controller for a midsize soft drink bottler and distributor in the South, going nowhere fast. It wasn't fair, Roger reasoned. Besides, he thought his boss was ignorant and didn't have a fraction of Roger's accounting knowledge.

A beverage company generates a lot of currency, and Roger's primary responsibility was to keep track of it. The cash came from three principal sources: customer payments on accounts receivable, direct sales to customers (supermarkets) and vending machine collections. Payments on account usually came through the mail, while customer sales and vending machine currency was collected by route salesmen. No matter where the cash came from, it all arrived on Roger's desk daily. He was the last person to see the money before it was deposited in the bank.

At the end of one particularly distressing day, Roger noticed a deposit slip with a math error: There was exactly $1,000 more in cash than reflected on the deposit. At first irritated at the notion of having to correct the mistake, Roger stopped and smiled. And then he put 50 twenty-dollar bills in the top of his desk drawer, locked it, went home and didn't look back. Two years and $475,000 later, Roger still didn't feel good about his job, he hated working in this company, and he despised the boss more than ever.

For Roger, being able to skim money had been no real challenge. He thought the boss should have noticed the glaring internal control deficiency in the operation and that his controller had unrestricted access to cash since he had unrestricted access to the books. On top of that, the company wasn't audited. But so it is with many small to midsize businesses.

Roger's skimming scheme was the essence of simplicity. The daily bank deposits that arrived on his desk had already been prepared by a bookkeeper. Attached to the deposit slip was documentation in two forms: The bookkeeper prepared a list of payments on accounts receivable and each route salesman prepared a deposit for the cash he had collected. Roger left the accounts receivable alone. But for the route deposits (cash sales) he kept a handy supply of blank forms in his desk. After everyone went home, Roger simply removed cash from one of the route deposits and prepared a new form showing the lower deposit amount. Then he'd throw away the deposit slip prepared by the bookkeeper and fill out another in his own handwriting. In an effort to avoid detection, Roger rotated the route salesman he shorted and he took cash on an irregular basis. His scheme seemed to be working. But despite all of that money, Roger still had a serious attitude problem.

The boss noticed how screwy Roger had been acting for months. Things weren't getting done. Financial statements were late. Tax returns were overdue. Roger had not conducted a serious inventory in a year. He was missing more and more work. When the boss would point out all these problems, Roger would just glare at his desk. But in one final fit of anger, the boss fired Roger--effective on Friday. The following Monday, the boss called his CPAs for some temporary help until Roger could be replaced. By that afternoon, one of the CPAs spotted a journal entry of just over $380,000 made by Roger the previous Friday: He debited cost of sales and credited the same amount to inventory. Roger described the reason for the journal as, "To adjust inventory to actual value." That one journal entry wiped out half the bottling company's profits.

It was a pretty simple matter for the CPAs to unravel the scheme. First, they conducted a complete physical inventory of the operation. Next, they examined--by hand--every deposit slip for a three-year period. They located over a hundred bank deposit slips seemingly prepared in Roger's own handwriting. Then, the CPAs traced the bank deposits to their corresponding route deposits. In each case, at least one route deposit was prepared in Roger's writing. Finally, they pulled the deliverymen's copies of their original route deposits. In each and every case, the copy of the original route deposit was higher than the forged copy by exact multiples of $1,000. The CPAs' report helped prosecutors convict Roger of embezzlement. Roger had used the proceeds of his thefts in the classic manner: a new car, a better lifestyle and frequent trips to Las Vegas. Roger's trial defense was twofold: First, he'd won quite a bit of money gambling, and second, anyone could have taken the money. He was unable to explain the stupid journal entry he made on his last day of work. Perhaps he had a compelling need to be precise. Because he was a first-time offender, Roger didn't do any jail time, but he now owes Uncle Sam about $1.4 million. The boss learned a very important lesson about the value of independent oversight. Although the size of the business did not justify a full audit, the CPAs convinced the boss to do three simple things: First, separate the accounting functions from cash handling; that becomes especially important if the CFO is in a position to seriously abuse the trust placed in him or her. Second, hire an independent contractor on an annual basis to take a complete inventory. Finally, have a CPA review the company's bank statements on a regular basis.

Skimming Schemes

By incidence

Skimming sales               64.2%

Skimming receivables         25.3%

Skimming refunds and other   10.5%

Source: Reprinted from "Occupational Fraud
and Abuse," by Joseph T. Wells. Obsidian
Publishing Co., 1997.

Note: table made from pie chart.

Prevention and Detection

Skimming, the single most common form of cash misappropriation, occurs when employees of organizations steal incoming funds. The term comes from the fact that money is taken off the top, the same way cream is skimmed from milk. By understanding the basics, auditors can more easily recognize skimming schemes.

There are three principal skimming targets: revenue, refunds and accounts receivable Revenue or sales skimming is by far the most popular method, accounting for two-thirds of the incidents and preferred by the crooked employee because the other two schemes require alteration of the books and records to avoid immediate detection. Since any employee who comes in contact with cash can, in theory, skim money, the usual suspects are salespeople, cashiers, mail clerks, bookkeepers and accountants. But be aware that top executives, who can easily override controls, also skim. When they do, the losses are invariably large.

Regardless of who skims money or the method used, the accounting effect is the same: Revenue will be lower than it should be but the cost of producing that revenue will remain constant. Therefore, be alert to the following indicators. The greater the number of indicators, the greater the risk that skimming is occurring:

* Flat or declining revenue.

* Increasing cost of sales.

* Excessive or increasing inventory shrinkage.

* Ratio of cash sales to credit card sales decreasing.

* Ratio of cash sales to total sales decreasing.

* Ratio of gross sales to net sales increasing.

* Discrepancies between customer receipt and company receipt.

* Customer complaints and inquiries.

* Forged, missing or altered refund documents.

JOSEPH T. WELLS, CPA, CFE, is founder and chairman of the Association of Certified Fraud Examiners, Austin, Texas. Mr. Wells' article, "So That's Why They Call It a Pyramid Scheme" (JofA, Oct.00, page 91), won the Lawler Award for the best article in the JofA in 2000. His e-mail address is [e-mail].