Fraud Cash Trail

Heidi Wendel, Certified Fraud Examiner

Heidi M. Wendel, CPA, CFE, Partner

Fighting Fraud by Following the Cash

Cash is often the weakest link in an organization's internal controls and opens up vulnerabilities for fraud. Look for these signs.

by Heidi M. Wendel, CPA, CFE
As published in the Traverse City Business News, May 2011

We’ve all heard the phrase, “show me the money.” In many businesses, it is also a good idea to “show me the cash.” Cash handling is an important duty in many workplaces, but also a common cause for fraud and embezzlement.
Despite the popularity of debit and credit cards, cash is still commonly used to pay for many goods and services. Transactions may range from co-pays at a doctor’s office to retail purchases, from salon services to food and beverages. Regardless of industry sector, cash is often the weakest link in an organization’s internal controls. That weakness opens up vulnerabilities for fraud.
The three most costly forms of embezzlement are larceny of cash, skimming and fraudulent disbursements. Combined, they cost businesses billions of dollars each year. The methods aren’t necessarily complicated. Cash larceny is most commonly seen as theft from deposits or cash register theft. Skimming is embezzlement of cash before it is recorded on the books whether through sales, receivables or refunds. Examples include unrecorded or understated sales, such as “selling under the table,” or recording a sale as a discount or write-off.  
Several safeguards help minimize risk. Establishing good internal control provides checks and balances to assure operations are effective and efficient, and financial reporting is reliable. Examples include segregation of duties or, separating financial functions and responsibilities to assure that adequate checks and balances are in place. Never allow only one person to control all financial duties such as receiving cash, processing payments, making deposit, purchasing and reconciling bank statements. Even in the smallest of companies, segregation could include an owner receiving and reviewing a bank statement before it is passed on to a bookkeeper. Several examples of segregation of duties are listed below.
Controls must extend to external cash actions. For example, when cash is received and recorded in an office setting, it is then deposited with other monies into a financial institution.   It’s important to compare the bank deposit slip with the daily journal.   Make sure that both internal and external records that track the same business activities are reconciled regularly. This is important whether deposits are made by an employee or by an outside courier or other service.
Assure that accounting systems are tracking cash accurately. Whether accounting is done ‘in-house,’ by an outside firm or a combination, the amount and type of money and its source must be recorded appropriately. Does it make sense? Accounting records should reflect actual business operations (i.e. percent of cash vs. check vs. credit card payments) and not just appear arithmetically correct. The system should make financial sense and offer useful information, not simply columns of numbers.
Never underestimate the importance of awareness by owners, managers and employees at all levels. Active oversight can detect problems early but, more importantly, can deter fraud from happening. Educate staff and engage them to watch for warning signs or unusual activities. 
Regular reconciliation, active oversight and accurate recordkeeping  are the best defense to deter fraud from happening in the first place. If in doubt about your systems or if you suspect your organization might be vulnerable, seek guidance from your trusted business advisors, CPA or a fraud specialist. Additional information is available through the Association of Certified Fraud Examiners at www.ACFE.com or visit www.dgncpa.com.
# # #
ABOUT THE AUTHOR: Heidi M. Wendel CPA, CFE is a Certified Fraud Examiner and a partner at Dennis, Gartland & Niergarth in Traverse City where she oversees the audit department and DGN’s government/nonprofit industry niche team.   For more information, contact 231.946.1722 or hwendel@dgncpa.com.