Fraud Risk Related to Cash Cycle
There are a lot of ways in which an individual can commit cash fraud. And maybe new fraudulent ways are being discovered right now. Cash, both on deposit in banks and petty cash, can be misappropriated through many different schemes.
Cash fraud schemes may be listed as skimming, voids/under-rings, swapping checks for cash, alteration of cash receipt documentation, fictitious refunds and discounts, journal entries, and kiting. In addition, as relating to cash scheme, there are also two of the most common types of fraud in accounts receivable, lapping and fictitious accounts receivable. In this article, the two widespread cash fraud schemes will be discussed; kiting and lapping schemes.
Kiting Scheme
Cash kiting, or check kiting, is a method of fraud in which an individual may artificially inflate the balance on a bank account by writing checks and taking advantage of bank floats. It occurs when funds are stolen from the company and, to cover this theft, the employee transfers money from one bank account to another account right before year-end. There are several types of kiting such as circular Kiting, the ‘endless kiting’, retail-based kiting, and corporate kiting. When it comes to cash fraud detection methods; there are also several methods to detect cash fraud which generally are included in most cash audit programs.
The primary audit procedures performed to test the completeness, valuation and allocation, and existence of the ending cash balance are the bank confirmation and the audit of the year-end bank reconciliation. The most common is that kiting can be detected by preparing an interbank transfer schedule. Interbank transfer schedule is usually obtained if there are numerous bank transfers, regardless of internal controls or for the purpose of detecting suspected fraud. Some of the cash fraud detection methods include;
- Bank reconciliations
- Cut-off statements
- Surprise cash counts
- Customer complaints
- Altered or missing documentation
- Fictitious refunds or discounts
- Journal entry review
- Review and analyses of decreases in gross sales or increases in returns and allowances
- Analytical review
Cash Fraud Prevention Methods
Segregation of Duties; Segregation of duties is a key element over cash. Proper segregation of duties demands that close consideration be given to check-writing authority. Separation of cash handling, record keeping, and reconciliation of bank statements should exist, as well as separation of petty cash activities. It should be noted that whenever one person has control over the entire accounting process, the opportunity for cash fraud exists. Each of the following duties and responsibilities should be segregated: (a) Cash receipts, (b) Bank deposits, (c) Bank reconciliation, (d) Cash disbursements. If anyone has the ability to collect money, deposit receipts, record collections and distribute company funds, there is a high risk of fraud occurring.
Assignment Rotation; Mandatory job rotation is an excellent method for detecting and preventing cash fraud. To perpetuate a fraud, it is necessary to constantly hide it. By creating an imperative job or assignment rotation, the concealment element is interrupted. It should also be noted, both from an operational and auditing point of view in scope of preventing fraud, in the absence of that employee due to some reasons, it would be beneficial to have the normal workload handled by another person.
Surprise Cash Counts; Surprise cash counts are a useful fraud prevention method when used correctly. It is important for employees to know that cash will be counted at a specific time and on an unscheduled basis.
Lapping Scheme
The lapping scheme is a fraudulent practice that involves changing accounts receivable to hide stolen cash. The method involves receiving a subsequent credit payment from a transaction (a payment from another costumer) and using it to cover up the theft. The receivable arising from the second transaction is covered by the money obtained from the third transaction, and so on.
When lapping occurs, an employee uses current remittances to conceal remittances that have been stolen previously, the current payment is applied to the previous costumer’s account. Lapping is a defalcation in which a cash shortage is concealed by applying later costumer remittances to a receivable account from which money was stolen. The only way to detect this fraud is to match each customer’s cash receipts with their own account. If you notice a customer’s cash receipts applied to other customers’ accounts, it’s a sign that the seller is following the lapping scheme. Error and mistakes in accounting are fairly common, but if you see a pattern of incorrect receipts applied to customer accounts, then someone in your company is definitely using the lapping scheme.
Safeguards against lapping include the following
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- Appropriately applying of segregation of duties
- Independent comparison of recorded cash receipts with deposits
- Independent comparison of deposits with remittance letters
- Reconciliation of customer balances
One of the best ways to protect against exercises is to use the “lock box” system. In this system. A lockbox is a bank-operated mailing address to which a company directs its customers to send their payments. The bank opens the incoming mail, deposits all received money into the company’s bank account, and scans the payments and remittance information. A statement is then sent by the bank to the company so the cash can be applied in the general ledger to the outstanding receivable balance. For businesses that receive a large volume of checks accompanied by remittance letter, a lock box system can facilitate collections and payment processing. But, Lockbox banking services can be costly due to the fact that the banks charge a setup fee and a recurrent monthly fee as well as charging a fee per transaction.
