Category Archives for "Asset Misappropriation"

receipt fraud test for auditors
May 08

Three Receipt Fraud Tests

By Charles Hall | Asset Misappropriation

Today I provide three receipt-fraud tests for auditors. 

The audit standards require that we introduce elements of unpredictability. Additionally, it’s wise to perform fraud tests. But I find that auditors struggle with brainstorming (required by AU-C 240, Consideration of Fraud in a Financial Statement Audit) and developing fraud tests. That’s why I wrote Five Disbursement Fraud TestsIt’s also why I am providing this post.

So, let’s jump in. Here are three receipt-fraud tests.

receipt-fraud tests for auditors

Three Receipt-Fraud Tests

1. Test adjustments made to receivables

Why test?

Receipt clerks sometimes steal collected monies and write off (or write down) the related receivable. Why does the clerk adjust the receivable? So the customer doesn’t receive a second bill for the funds stolen. 

How to test?

Obtain a download of receivable adjustments for a period (e.g., two weeks) and see if they were duly authorized. Review the activity with someone outside the receivables area (e.g., CFO) who is familiar with procedures but who has no access to cash collections.

If there are multiple persons with the ability to adjust receivable accounts (quite common in hospitals), compare weekly or monthly adjustments made by each employee.

Agree receipts with bank deposits.

2. Confirm rebate (or similar type) checks

Why test?

When rebate checks are not sent to a central location (e.g., receipting department), the risk of theft increases. Rebate checks are often not recorded as a receivable, so the company may not be aware of the amounts to be received. Stealing unaccrued receivable checks is easy.

How to test?

Determine which vendors provide rebate checks (or similar non-sales payments). Send confirmations to the vendors and compare the confirmed amounts with activity in the general ledger.

Theft of rebate checks is more common in larger organizations (e.g., hospitals) where checks are sometimes received by various executives. The executive receives a check in the mail and keeps it for a while (in his desk drawer – in case someone asks for it). Once he sees that no one is paying attention, he steals and converts the check to cash.

3. Search for off-the-book thefts of receipts

Why test?

The fraudster may bill for services through the company accounting system or an alternative set of accounting records and personally collect the payments.

How to test?

Compare revenues with prior years and investigate significant variances. Alternatively, start with source documents and walk a sample of transactions to revenue recognition, billing, and collection.

Here are a few examples of actual off-the-book thefts:

Police Chief Steals Cash

An auditor detected a decrease in police-fine revenue in a small city while performing audit planning analytics. Upon digging deeper, he discovered the police chief had two receipt books, one for checks that were appropriately deposited and a second for cash going into his pocket. Sometimes, even Andy Griffith steals.

Hospital CFO Steals Cash

hospital CFO, while performing reorganization procedures, set up a new bank account specifically for deposit of electronic Medicaid remittances. He established himself as the authorized bank account check-signer.

The CFO never set up the bank account in the general ledger. As the Medicaid money was electronically deposited, the CFO transferred the funds to himself.  What was the money used for? A beautiful home on Mobile Bay, new cars, and gambling trips.

Another Receipt Fraud to Consider

Sometimes it’s not the front-desk receipt clerk that steals. Surprisingly, your receipt supervisor can be on the take. So, consider that receipt theft takes place up-front and in the back-office.

College theft
Feb 05

College Theft of Funds: Official Steals $4.1 Million

By Charles Hall | Asset Misappropriation

College theft happens more than we think. After all, aren’t these guardians tasked with looking after our children? Even in places where we expect unselfishness, sometimes there’s a bad apple. Today, we review a theft of funds involving a college aid official. 

College Theft

When I was a student at the University of Georgia, I needed every dollar I could find. I ate my share of cheap hamburgers and peanut butter sandwiches. In the summers, I scouted peanuts and cotton to make ends meet. So when I see a college aid official stealing student money, I wince. College theft hurts the needy.

College theft

A New York college aid administrator used a simple scheme to steal $4.1 million of student aid funds. How? She made out financial aid checks to nonexistent students and then endorsed them over to the name of an alias. The administrator set up a bank account in the name of the alias and deposited the checks into the bank account, allowing her to convert the checks to cash.

How long did the theft go on? Over ten years. The fraudster stole most of the money in the last two years of the scheme. As is often the case, the thief became bolder over time. 

How many fraudulent checks did she issue? Over 1,000, each to a different student.

How was the fraudster caught? A change in the accounting system required cross-referencing of financial records.

College Theft of Funds Control Weaknesses

No one was comparing the checks written to student admission files. Legitimate students have admission and other information that can be used to verify the students’ existence.

So let’s see how to reduce college theft.

Decreasing College Theft

A person other than the financial aid administrator should compare the student name on the check to student files to verify the existence of the student. If this control can’t be performed for each disbursement, it should be performed on a sample basis, and the persons creating and signing the checks should know their work is being monitored.

This test could be performed by someone in the financial aid office or by an external professional such as a CPA or a Certified Fraud Examiner.

The college can request from the bank the endorsement side of the cleared checks. If the back side of the checks are obtained, then the endorsements can be examined for appropriateness.

Banks Not Providing Cleared Checks

In an effort to save money, some banks don’t provide cleared checks to their clients. And very few banks (if any) provide the copies of the back side of checks. From a fraud prevention perspective, this is not good. Why? Because checks and endorsements can’t be inspected for potentially fraudulent activity. At least periodically, request some endorsements and test those on a sample basis. (The bank may require you to pay for these copies.) Additionally, as I said in another post, someone should be comparing cleared check payees to the general ledger–if not for every check, then at least on a sample basis.

Free Fraud Course

Click here for free ten-day fraud course.

Nonprofit fraud
Jan 30

Nonprofit Fraud: Selling Donated Goods

By Charles Hall | Asset Misappropriation

Nonprofit fraud is real. Hard to believe? Yes. But it happens.

Sometimes nonprofit embezzlers sell donated goods. Today, we examine how nonprofit employees can steal assets rather than cash and how you can prevent such thefts.

Nonprofit Fraud

Several workers at a California Goodwill pled guilty to taking over $15 million. Their scheme involved the selling of donated goods by the barrelful to private dealers who sometimes wheeled tractor trailers up to the rear of Goodwill stores.

Nonprofit fraud
The dealers sold most of the goods in Mexico. The thefts–involving seven primary culprits, four of whom were sisters–occurred over a twenty-year period that started in the mid-70s.

So how were the fraudsters caught?

One culprit went through a bitter divorce, and the husband disclosed the scheme to authorities.

Nonprofit Fraud Control Weakness

The article describing this case did not provide details of the store operations, but it appears–at the time–inventories of donated goods were not properly documented. When assets, of whatever form, are not inventoried, they are more likely to disappear.

Lessening Nonprofit Fraud

Account for all inventories. Also, clothing that is sold in bulk should be documented. So each time a truck backs up to a store, the activity should be recorded—who received the goods, the sales price, who approved the sale, why the goods were sold in bulk. The store should have a policy that cash is not to be received for such sales.

Consider adding a whistleblower hotline. Nonprofit employees sometimes see signs of theft. Make it easy for them to report fraudulent activity. Doing so creates the camera effect

Also, install a security camera that records all loading dock activity.

Note–This case was adjudicated in the 1990s, and Goodwill has, since that time, made significant improvements to its controls.

Librarian theft
Jan 26

Do (Some) Librarians Steal? You Bet!

By Charles Hall | Asset Misappropriation

Do some librarians steal? While most don’t, some do. Today we see that some guardians of knowledge take that which belongs to the general public.

I remember my childhood librarian, Ms. Adams. She was a lady of rectitude, dignity, and uprightness. Never one to harm or take from her patrons—or the library. Theft by her? Unthinkable. The memory of her colors, in a positive way, my view these public servants. But not every librarian is Ms. Adams.

Recently I spoke to about 50 librarians about fraud prevention and was shocked by their stories of thefts from libraries. It appears library fraud is alive and well in the United States. No place is immune. The following is a story of one such librarian, Bob Rice Jr.

Librarians steal
Do Librarians Steal?

Bob Rice Jr. served as the director of the Revere Public Library for twenty-seven years before he pled guilty to twenty counts of fraud and embezzlement. So, how did the librarian steal?

Mr. Rice apparently could approve purchases by issuing requisitions and purchase orders. The library paperwork would reflect the acquisition of dictionaries, for example, but the real purchase might be a Rolex watch.

Rice also purchased items that appeared to be for the library such as computer software, but he would–after receiving the goods–sell them on eBay. Then, with the cash, he would purchase items for personal use.

Lastly, in some instances, he requested reimbursements for items he never received. Those reimbursement checks were cashed and placed in his bank account.

So, yes, librarians steal.

How Rice Used the Funds

And how was the money used?

Mr. Rice purchased personal items including:

  • A model of the Star Trek’s Starship Enterprise
  • A replica Tommy Sub-machine gun
  • Robo-Pets
  • A vacuum
  • A Leica camera
  • Star Wars collectibles
  • Rolex watch
  • An ice cream making machine
  • An elephant tusk sculpture

His total theft was estimated at $236,000.

Weakness Leading to Librarian Theft

And what internal control weakness allowed the theft? No one was comparing the purchase orders with the payments made or to cleared checks. (This same weakness allowed a $16 million theft from a bakery.) It also appears that Mr. Rice could issue purchase orders and sign checks.

How to Stop the Librarian Theft

The person authorizing payment (e.g., issuing purchase orders) should not also make the payment. Supporting documentation (e.g., purchase requisition, purchase order, bids) should be provided to a second person for review. Thereafter, the reviewer can issue the check or authorize payment.

Check signers should not issue purchase orders. For instance, board members might sign the checks, while operating personnel request the purchase.

When possible, have a central receiving department. Goods received should be recorded upon receipt by a person that did not issue the purchase order. Why? Segregation of duties. One person authorizes the purchase and another receives the physical goods. Such a procedure makes it more difficult for someone to buy products and then sell them on websites such as eBay.

Finally, require appropriate documentation (e.g., invoice) for all reimbursements. A second person should approve these payments. The person buying the goods should not also approve the reimbursement payment.

What Happened to Mr. Rice?

Though he initially denied the charges against him, Mr. Rice pled guilty to 20 counts of fraud and embezzlement. He did provide $230,000 in restitution, which led to a reduction in his sentence. He received six months in jail. 

Cash receipts theft
Jan 08

Cash Receipts Theft: Supervisor Steals

By Charles Hall | Asset Misappropriation

In this article, I discuss cash receipts theft and how you can lessen this threat.

Sometimes the person you hire to prevent theft is the one stealing. This is one of the dangers of a trusted bookkeeper. Below I provide a real-life story of a cash receipts supervisor on the take.

Cash Receipts Theft

Is your cash receipts supervisor taking your cash? I once worked on a case where this person took over $300,000.

Cash receipts theft
Cash Receipts Supervisor

Many businesses funnel cash receipts to a supervisor who counts the money from each cash drawer and compares the funds to the daily receipts. The purpose of this step is to ensure no front-desk clerks are stealing.

The cash collections supervisor has usually worked a cash drawer in the past. So she knows all about how the receipts enter the system and how they are deposited.

Typical Deposit Cycle

The collections process often works as follows:

  1. Money is collected at the front cash-collection desks and placed in the cash drawers that are assigned to each clerk; receipts are written for each payment
  2. These clerks tally their collections at the end of each day and reconcile the monies in their cash drawers to the receipts written
  3. The daily reconciliation for each cash drawer goes to the cash receipts supervisor who recounts the funds received and reconciles collections to the receipts written (performing the same reconciliation as the front desk clerks)
  4. The cash receipts supervisor creates a deposit slip for all funds collected (if there are seven cash drawers, then the deposit slip represents the total collections for all seven cash drawers)
  5. The cash receipts supervisor gives the checks and cash and deposit slip to a courier to take to the bank
  6. The courier receives a bank deposit receipt from the bank
  7. The courier provides the bank deposit receipt to the cash receipts supervisor (so she can compare the bank deposit receipt with the copy of the deposit slip–to ensure the courier did not steal any funds in transit)

Cash Receipts Supervisor Theft

So how can the cash receipts supervisor steal funds in the above scenario?

In the case I worked on, the supervisor also reconciled the bank statement. After step 3., but before step 4., she would steal the cash and then lessen the deposit slip accordingly. So, if she took $2,200, the deposit slip would reflect the total daily collections less $2,200.

You’re thinking, “But then the bank account would not reconcile since the computers have recognized the front-desk collections?” You are correct—unless someone monkeys with the bank reconciliation. And that’s what she did. The supervisor adjusted the reconciling items–on the bank reconciliation–to cover up the stolen funds. The scheme worked until the annual audit.

When the auditors tested the outstanding items on the bank reconciliation, they could not tie substantial amounts to the subsequent bank statement. Generally, outstanding reconciling items clear the subsequent month’s bank statement—but large amounts on the year-end bank reconciliation could not be accounted for (because they were fictitious).

When confronted, the clerk confessed to her theft and method.

So what was the control weakness that allowed the cash receipts theft?

Cash Receipts Theft Control Weakness

The weakness was the cash receipts supervisor who had custody of assets (cash) also performed the reconciliation of the related bank account.

Correcting the Control Weakness

The person reconciling the bank statement should not also handle cash. It’s also a good idea to perform surprise tests of the receipting records. Doing so puts everyone on notice. The receipt employees know someone can appear at any time and review their work.

For additional assistance, see my article about how to audit cash.

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