By B.J. Hoffman
Special to the Legal
Last week, I ordered my usual lunch at a popular restaurant chain – a salad and drink. The total charge, $9.27, was the same price as it has always been. I handed the cashier a $10 bill and received 73 cents in change, without a receipt. The cashier hadn’t bothered to ring up the sale, however. A small pile of change was sitting behind the register. These are telltale signs of a retail cash skimming theft. It also marked the third time that I had witnessed the same scheme at that restaurant.
Employee theft of cash presents a major problem for companies with significant volumes of currency transactions. Retailers and food service providers are the typical industries susceptible to cash skimming, but other enterprises also commonly collect cash; medical practices, for instance, charge co-payments to patients and tend to accumulate currency. Though the dollar magnitude of individual cash-skimming cases is usually lower than other frauds, the frequency of such schemes tends to cause losses that become material. In today’s economy, with company profit margins under pressure, losses from employee theft present a cost that enterprises are bearing unnecessarily.
The theft of cash by employees can either occur before funds have entered a company’s accounting system (skimming), or after, (larceny). Exposure to both types of theft can be limited by the adoption of an effective internal control system.
Pure larceny can be quickly detected by a company through the adoption of basic internal controls. For instance, the matching of daily cash register sale report totals with the cash collected from the register can identify the pocketing of funds by an employee, assuming that the original register sale was properly rung up. Reconciling overall company daily recorded sales with the ultimate deposit of cash in bank accounts also tends to quickly identify cash discrepancies. Such tasks, when regularly performed by company personnel independent of the cash register and bank deposit function, tend to increase the perception of detection among potential thieves, dissuading the scheme from ever occurring.
Skimming is a more challenging fraud to detect, because the company never has evidence of the original sale, and accordingly would not know that cash is missing. When a lunch is not rung up at a cash register, there is no ability for a company to match bank deposits with reported daily cash register sales. Accordingly, it becomes vital for the company to ensure that all sales are initially recorded. A particularly effective way to compel cashiers to record sales is through the posting of signs indicating “your purchase today is free if you do not receive a receipt.”
Other cash-skimming schemes involve voided sales, or fictitious refunds of merchandise. Cashiers may initially record a sale properly, but then subsequently void the sale, pocketing the cash. When cashiers have the ability to issue cash refunds to customers for items returned, there exists an opportunity for a dishonest employee to again pocket the refund.
A key defense against these skimming frauds is timely financial ratio analysis of transactions on a cashier-by-cashier basis. Does one particular cashier have a significantly higher rate of voided sales than his or her peers? Or, perhaps, consistently lower overall sales? If so, additional scrutiny of the cashier might be warranted. Similarly, if a particular cashier is associated with an inordinately high rate of product returns and related refunds, company management should investigate the anomaly. In a retail environment, legitimate returns should be associated with a corresponding increase in inventory (clothing, for instance). Missing product inventory could be a sign that product returns as recorded on a cash register were indeed fictitious.
Some of the best defenses against cashier theft are the implementation of thorough background checks at the time employees are hired. Unfortunately, though, employees caught stealing are often merely terminated, allowing the fraudster to move on to the next unsuspecting employer. Physical surveillance measures can also be effective deterrents to cash-skimming schemes. In short, companies need to closely monitor cashiers and those handling currency in order to deter theft.
As for the cashier who failed to ring up my lunch, I notified the manager, who proceeded to shut the cash register down in order to perform a surprise cash count. The count revealed significantly more money in the cash register than there should have been (a result of the money collected by the cashier that had not been rung up as sales). The pile of coins behind the register was the employee’s method of keeping track of the number of unreported sales, so that she would know the correct amount of funds to later steal from the register. She was promptly terminated by the restaurant.
B.J. Hoffman is a certified public accountant and certified fraud examiner for Citrin Cooperman, an accounting, tax and business consulting firm. He is a partner in the Philadelphia office. Hoffman provides clients with a mix of audit, tax and litigation support services. He often works with closely held entities in a variety of industries, including professional service firms and real estate enterprises. He can be reached at firstname.lastname@example.org or 215-545-4800.