How would you differentiate between skimming and cash larceny, and what specific investigative steps are crucial to distinguish between these two types of cash misappropriation schemes?
Skimming and cash larceny are both forms of cash misappropriation, but they differ significantly in when and how the cash is taken, which in turn dictates the investigative steps needed to differentiate them.
Skimming occurs *beforethe cash is ever recorded in the organization's accounting system. The perpetrator intercepts the cash before it makes its way into the company's books. Because the transaction is never recorded, skimming is inherently more difficult to detect as there is no record of the sale or service that should have generated the cash.
Cash larceny, on the other hand, occurs *afterthe cash has been recorded in the accounting system. The cash is stolen from the organization's premises, register, or bank deposit after it has been registered. Because a record of the transaction exists, cash larceny is typically easier to detect through discrepancies in the accounting records.
Here's a more detailed breakdown:
Skimming:
Definition: Theft of cash prior to its entry into the accounting system.
Example: A cashier at a movie theater sells tickets but pockets the cash without issuing a ticket or using a "no sale" transaction. Another example includes an employee diverting customer payments sent through the mail to a personal bank account. Another scenario is an employee setting up a shell company and diverting payments from the actual employer, so that it is never accounted for.
Detection Challenges: Since the cash is never recorded, there is no direct audit trail. Detection often relies on indirect methods or tips.
Cash Larceny:
Definition: Theft of cash that has already been recorded in the accounting system.
Example: A cashier takes cash from the register at the end of their shift after the day's sales have been recorded. Another example includes an employee stealing cash from the safe or tampering with bank deposits to withhold a portion of the funds.
Detection Opportunities: Discrepancies between sales records and cash on hand, alterations to deposit slips, or shortages in bank reconciliations can reveal cash larceny.
Specific Investigative Steps to Differentiate Skimming from Cash Larceny:
The investigative steps needed to distinguish between these schemes depend on the circumstantial evidence available, but generally include these elements:
1. Surveillance and Observation:
Skimming: Covertly monitor employees handling cash, especially at the point of sale. Look for instances where cash is received but not recorded, or where "no sale" transactions are excessively used.
Cash Larceny: Install cameras to observe employees handling cash at the register, during bank deposits, or in areas where cash is stored. This can provide direct evidence of theft.
2. Reconciliations and Audits:
Skimming: Because there's no initial record, traditional reconciliations are less effective. Focus on trend analysis. Look for unusual dips in revenue or increases in cost of goods sold without a corresponding increase in sales, which could suggest unrecorded sales. Perform detailed audits of specific processes or transactions. Analyze inventory levels in comparison to sales records.
Cash Larceny: Perform regular and surprise cash counts. Compare cash register tapes to actual cash on hand. Investigate any discrepancies immediately. Review bank deposits and compare them to the cash receipts journal. Scrutinize voided transactions, refunds, and discounts for unusual patterns.
3. Review of Records:
Skimming: Analyze sales patterns, looking for unusual declines during specific shifts or at certain locations. Examine customer complaints for mentions of payments made that weren't properly credited. Analyze customer feedback and identify patterns of unrecorded transactions. Review internal documents for any inconsistencies in payments and funds management.
Cash Larceny: Scrutinize cash register logs, bank statements, and deposit slips for alterations or missing items. Look for out-of-sequence transactions or unusual voids. Compare employee timecards to cash register activity to identify potential perpetrators. Examine reconciliation documents for any alterations or missing paperwork.
4. Interviews:
Skimming: Conduct interviews with employees who handle cash, asking about their procedures and any irregularities they may have observed. Focus on understanding the cash handling process and identifying potential loopholes. Interview customers to determine if they paid in cash and if a receipt was provided. Gather information on the customers' payment experiences and any discrepancies.
Cash Larceny: Interview employees who have access to cash, focusing on their knowledge of cash handling procedures and any suspicious activity they may have witnessed. Question employees involved in preparing bank deposits and reconciling cash accounts. Conduct interviews with managers and supervisors regarding cash management practices and security measures.
5. Data Analysis:
Skimming: Use data analytics to identify patterns of unrecorded sales or unusual discounts. Analyze customer payment patterns to identify any discrepancies or anomalies. Cross-reference sales data with inventory records to detect potential skimming activities. Perform statistical analysis on sales transactions to find irregularities.
Cash Larceny: Utilize data analysis to identify discrepancies between cash register tapes and bank deposits. Analyze employee access logs and transaction records to pinpoint potential suspects. Cross-reference payroll data with cash handling responsibilities to detect inconsistencies. Monitor unusual cash register voids or refunds for suspicious patterns.
6. Fraud Examination Technology:
Skimming: Utilize data mining tools to uncover hidden patterns in financial data and detect irregularities. Implement exception reporting systems to flag unusual transactions or patterns of activity. Employ artificial intelligence to analyze vast amounts of data and identify potential skimming schemes. Utilize data analytics platforms to monitor sales patterns and detect anomalies.
Cash Larceny: Employ advanced software to match cash register transactions with bank deposits and detect any discrepancies. Implement automated reconciliation tools to streamline the process and identify errors or alterations. Utilize forensic accounting software to analyze cash flow patterns and detect fraudulent activities. Utilize fraud detection systems to monitor cash handling activities and flag suspicious transactions.
By combining these investigative techniques, fraud examiners can effectively distinguish between skimming and cash larceny, identify the perpetrators, and implement appropriate preventative measures. The key is to understand the fundamental differences in how these schemes are executed and to tailor the investigative approach accordingly.