Some fraudsters steal unaccrued receivable checks and convert them to cash. In this article, I explain the mechanics of the theft and how you can prevent it.
Susan is an hospital executive that has the authority to approve purchases of medical devices. She commonly receives rebate checks from vendors. Since she negotiates the purchase contracts, the vendors mail the rebate checks to her. Some of these checks are north of $50,000.
A while back she received a rebate check and placed it in her top left-hand drawer, thinking she would take it to accounting the next day. But she forgot.
A month later she opened her drawer, and there it was. Oops! She hurriedly took the check to the receipting department and said, “Gosh, I must be losing my mind.” They all laughed, knowing it was an innocent mistake. But in the course of these events, she realized that no one knew she had the check. Why would they? Susan approves the purchases, and she provides the rebate information to no one. So, the rebates are not accrued in the general ledger.
Not long thereafter, Susan decides to retain two of the rebate checks totaling over $100,000. She places them in the same left-hand drawer, but this time, she does so on purpose. And then she waits—several weeks. No one calls about the checks. It’s obvious that no one knows she has them.
Susan converts the checks to cash by depositing them into a new bank account that she has opened in the name of the hospital. She is the sole authorized signer for the new bank account.
Now, let’s see what the control weaknesses are and how we can remedy this problem.
The weakness is that no one is tracking or accruing the rebate checks.
How can we cure this weakness?
Determine what companies provide rebates checks (and any other checks commonly received and not accrued). Send confirmations to the paying parties and compare the confirmed amounts with activity in the general ledger.
A master list of rebate companies should be maintained by someone in accounting, and the related activity should be monitored by comparing receipting information to this list. When possible, accrue rebate receivables.
Charles Hall is a practicing CPA and Certified Fraud Examiner. For the last thirty-five years, he has primarily audited governments, nonprofits, and small businesses. He is the author of The Little Book of Local Government Fraud Prevention, The Why and How of Auditing, Audit Risk Assessment Made Easy, and Preparation of Financial Statements & Compilation Engagements. He frequently speaks at continuing education events. Charles consults with other CPA firms, assisting them with auditing and accounting issues.