Theft of Capital Assets: How to Understand It and Prevent It

Day 7 of 30 Days of Fraud

The Theft

In businesses, nonprofits, and governments, the theft of capital assets happens often. Today I explain how these thefts occur and how you can prevent them.

A USA Today article began with, “Stolen and sensitive U.S. military equipment, including fighter jet parts wanted by Iran…have been available to the highest bidder on popular Internet sales sites.” The article went on to say that the equipment, “purchased with taxpayer money,” was available for purchase on eBay and Craigslist and included “components from F-14 fighter jets” and “used Nuclear Biological Chemical protective suit.”

Capital asset theft

Picture is courtesy of Adobe pStock.com

Capital assets often go missing because no one is paying attention, and the thief knows it. Such assets can be stolen with the intent to sell and convert to cash or simply for personal use.

The thefts often occur when employees place equipment or other capital assets in their vehicles and drive home. If the employee wants to cover their tracks, they might complete accounting paperwork for disposal of assets (saying the equipment was junked). More often than not, however, the asset is just stolen because the employee knows that no one will notice, or, if someone does, he can say, “I don’t know what happened to that piece of equipment.”

Long-term employees realize that the external auditors seldom audit existing capital assets. Yes, the auditor will examine an invoice, but how many auditors physically inspect plant, property and equipment?

The Weakness

The main enabling factor is usually a lack of accountability. Many companies, nonprofits, and small governments do not perform periodic fixed asset inventories. Often equipment is purchased and added to the depreciation schedule, but no one–at a later date–compares this master list of fixed assets to what is (or should be) physically present.

The Fix

Performing periodic inventories is the key to lessening the threat of capital asset theft.

First assign each capital asset to a person (usually a department head or a supervisor); let this person know that he or she is personally responsible for the item. Then have someone external to each department perform periodic inventories of departmental assets.

Also, install security cameras to record all activity.

Check-for-Cash Fraud: How to Understand It and Prevent It

Day 6 of 30 Days of Fraud

The Theft

The check-for-cash fraud scheme is a simple yet effective way for employees to steal. Today I explain how this type of theft occurs and how you can prevent it.

Kelly is a receipts clerk in the City of Whosville. She usually collects about $25,000 each day with $8,000 of this being in cash and the remainder in checks. Kelly, based on city policy, receipts all monies she receives, but she does not note on the receipt whether the payment is cash or check.

check-for-cash fraud

Kelly also opens the mail and receipts those checks. Each month the city receives about a dozen alcohol tax checks–each made out to the City of Whosville–in the range of $3,000 to $6,000 each. These payments are paid by the alcohol distributors based on their sales, so the revenue is recognized upon receipt (and no receivable is accrued before payment).

Kelly wants to take a trip overseas, but she needs about $15,000 which he doesn’t have. But then she has a novel idea.

Since she opens the mail, she can steal cash in the following manner:

  1. Don’t receipt a check received in the mail (e.g., an alcohol tax check for $4,503)
  2. Place that check in her cash drawer
  3. Take $4,503 from her cash drawer and place it in her purse

The $4,503 in cash came from legitimate collections. Receipts were written for the payments, but Kelly did not note whether cash or checks were received. 

Over a three month period, Kelly steals $17,505, and no one notices.

The Weakness

Though receipts are issued, the type of payment (cash or check) is not noted. No one (such as a supervisor) is reconciling the composition–total cash and total checks–to the receipts.

The Fix

As receipts are issued, require collection personnel to note the type of payment received (whether cash or check). A supervisor should reconcile the amount of cash and checks in the collection drawer to the receipts. If total cash and total checks don’t reconcile to the receipts, then the check-for-cash fraud might be occurring.

Compare the budgeted alcohol tax amount to the total received.

Also, consider installing a camera to record cash collections activity and do not allow purses or other bags in the collections area.

Backdoor Payroll Theft of Withholdings

Day 5 of 30 Days of fraud

The Theft

Gertrude, the payroll clerk, intentionally overpays state withholding taxes by $25,000. She then amends her own W–2 so that it includes the excess payment (the $25,000 is added to her state withholding total). Once Gertrude files her personal state tax return, she receives an extra $25,000. In effect, she is using the state government as a funnel for theft.

In this business, Gertrude processes payroll, files all related payroll tax reporting information, makes payroll withholding payments and records payroll entries in the general ledger—not uncommon in a smaller organization. Also, no second person reviews the W-2s before mailing.

Backdoor Payroll Fraud

Picture is courtesy of AdobeStock.com

The Weakness

One person is performing all payroll functions, so her actions are not visible to anyone else. Also, no second person–in addition to Gertrude–is reviewing the W-2s before filing.

The Fix

Have someone outside the payroll department review and mail the W-2s. (If the W-2s are returned to the payroll clerk, she could change them.)

Ghost Employee Fraud: How to Understand It and How to Prevent It

Day 4 of 30 Days of Fraud

The Theft

Last year I received a phone call. The payroll clerk of a local business had been monkeying around with the company’s direct deposits. As employees left the business, the payroll clerk left them in the system. Why? To steal those continuing payments. Auditors refer to this as ghost employee fraud–the employees are in the system, but they are not real.

Ghost employee fraud

The picture is courtesy of AdobeStock.com

Knowing no one was paying attention, the clerk changed the terminated employees’ direct deposit bank account numbers to her own. The result?She received multiple direct deposits each payroll. The clerk was able to steal over $800,000 before the theft was detected. 

Also, the payroll clerk had not filed tax returns, so the Internal Revenue Service rubbed salt into the wound by levying fines.

The Weakness

The owners trusted the payroll clerk too much and did not monitor her work. The clerk performed all payroll services with no supervision. While the owners were aware of the lack of segregation of duties, they took no steps to prevent the theft. (Even when a business doesn’t segregate its accounting duties, there are ways to lessen the threat of theft.)

The Fix

Export all direct deposit bank account numbers along with employee names into an Excel spreadsheet and sort the bank account numbers. (The bank account numbers should be in one column and the employee name in a separate column.) Sort the bank account numbers, and the duplicate numbers will appear in adjacent rows. So once you sort the bank account numbers, see if there are any duplicates. If there are, see why.

Another fix is for the owners to review a list of all employees paid (just request a list of all employees paid for one or more payrolls). Since the owners normally know which employees have left, they will know if payroll payments are made beyond the departure dates.

Wire Transfer Fraud: How to Understand It and Prevent It

Day 3 of 30 Days of Fraud

The Theft

In one of the simplest thefts I’ve read about, a nonprofit administrative officer wired $6.9 million from an Ohio bank account to a private Austrian account. In this post, I’ll show you how wire transfer fraud occurs and how to prevent it.

wire transfer fraud

Stealing a Cool $6.9 Million

The nonprofit administrator originated with the wire with a fax, taking less than an hour. Since the officer was authorized to make wire transfers, no one at the bank questioned the transaction–until it was too late. 

The fraudster landed in Austria, called his wife and said, “I’m not coming home.” Interestingly, the wife called the police and turned in her husband. He later came back to the states of his own volition. I guess, after a few boat rides down the Danube, he missed his family. Did he go to jail? Yes.

The Weakness

The nonprofit entity did not establish appropriate controls over cash wire transfers. One person (by himself) could move funds.

The Fix

The fix for this weakness is to require (at least) two persons to consummate all wire transfers.  

As you think about wire transfers, consider that they can originate with:

  • Faxes,
  • Phone calls,
  • Personal visits to banks, and
  • Computers

Determine how your bank handles wire transfers, and craft your internal controls accordingly.

Prevention Steps

Organizations should do the following to mitigate wire transfer fraud:

  • Require the bank to limit daily wire transfer amounts (e.g., $25,000 per day for each employee)
  • Require two persons to consummate all wire transfers to external parties (an essential control in my opinion)
  • If the wire transfer request is made with a phone or fax, require the bank to call your organization back before the wire transfer is consummated
  • The bank should require the use of unique passwords to access wire-transfer software; consider using a bank that provides bank token keys (small hand-held devices that generate unique identification numbers; these numbers are required to make wire transfers)
  • Restrict bank accounts so that wire transfers can be made only to bank accounts of the organization (e.g., transfer from operating bank account to payroll bank account)
  • Have someone peruse the daily bank account activity (using online access); at a minimum, reconcile bank statements in a timely fashion (large organizations should consider reconciling bank accounts more frequently than once a month; some reconcile daily)
  • Require sufficient documentation for all wire transfer journal entries; require a second-person review of these entries
  • Consider using a dedicated computer for all wire transfers; do not use this machine for any other purpose (malware is often picked up by computers as users visit tainted websites)
  • Use all bank-provided wire transfer controls
  • Any transactions over a certain high dollar amount (e.g., $50,000) must have the approval of the business owner/CEO

If you’re an auditor, consider–as you audit cash–whether these controls are in place.

30 Days of Fraud Series

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Skimming Cash Payments: How to Understand It and How to Prevent It

Day 2 of 30 days of fraud

Skimming cash payments is a common theft, especially if receipting controls are lax. Here’s how the theft occurs and how you can prevent it.

The Theft

Your cash clerk is skimming cash as it comes across the counter. He does so by:

  1. Not issuing a cash receipt, or
  2. By using a second cash receipts book
skimming cash payments

Picture is courtesy of AdobeStock.com

In the first instance, the clerk knows which customers expect a receipt and which ones don’t. By not issuing a receipt he (the clerk) can put the cash in his pocket and–at the end of the day–walk out the door. He is careful to write off any related receivable (making an adjustment in the accounting system to reduce the customer’s receivable balance). As a result, the customer receives no bill for nonpayment. The clerk knows that no one–such as a supervisor–monitors receivable adjustments. Also, the business has no security camera.

In the second instance, the clerk has two physical receipt books, one for checks and one for cash (though everyone in the business thinks he has just one). The checks are deposited by the clerk into the business’ checking account and the cash is stolen. The customer receives a receipt whether he pays by check or cash and is unaware of the two receipt books. Again, the collections clerk writes off–by making an entry in the receivable software–the customer receivable. The result? The customer has a $0 balance and the clerk skims the cash.

The Weakness

In the first instance (no receipt is issued), no one is monitoring the adjustments to the receivable accounts. And no one is tracking the receipt books issued (or being used). Also, the business has not installed a security camera to record the theft of funds by the clerk.

In the second instance (use of two receipt books), again, no one is monitoring the adjustments to the customer receivable accounts. And, again, there is no camera to record the use of the second receipt book.

The Fix

Have someone, such as a supervisor in the collections department or the controller outside the department, monitor daily adjustments to customer receivable accounts. The clerk should know that his receivables work (including any adjustments to receivables accounts) is being monitored. If the business is small, the owner should request a daily or weekly printout of all adjustments to the receivable accounts.

Install a camera to record all actions of your cash collection clerks.

These simple steps will greatly reduce the threat of clerks skimming cash payments.

Fictitious Vendor Fraud: How It Occurs and How to Prevent It

Day 1 of 30 Days of Fraud

Fictitious vendor fraud is one of the more dangerous ways employees steal. Today we look at how this theft works and how to prevent it.

The Theft

Your accounts payable director (Susie Jones) sets up a fictitious vendor: ABC Project Management. Susie enters the new vendor in the payables system using her sister’s (Joan Albert) personal home address as ABC’s address. (Susie is the only person tasked with reviewing new vendors for appropriateness.) Susie also creates fictitious consulting invoices to support the payments made to ABC Project Management.

fictitious vendor fraud

Since the checks are signed by the computer, no one reviews the invoice or physically signs a check. And since the vendor file has Joan’s address, the ABC checks are mailed to Susie’s sister.

Joan opens a bank account in the name of ABC Project Management, and she is the sole signature on the bank’s signature card. When the ABC Project Management checks are received, Joan deposits them into the new bank account. Joan then writes checks from the ABC bank account to herself and Susie.

The Weakness

Susie is the only person reviewing new vendors for appropriateness. No one outside of the accounts payable department is performing periodic reviews of the vendor files.

The Fix

If possible, have the company’s computer system automatically email Susie and the controller (a person outside of the accounts payable department) each time a new vendor is added; the email should provide the name and address of each new vendor, and the name of the person who approved the addition of the new vendor.

Require the accounts payable department to archive vendor verification documentation such as:

  • Google search for the business
  • Google search using the vendor address (Google often provides a picture of the location)
  • Phone call made by an accounts payable employee to the new vendor
  • Physical visit to the vendor’s business

The company can also compare payroll addresses to vendor addresses using software packages such as IDEA or ACL. (Sometimes an employee will use their personal address in a vendor fraud such as the one above, rather than that of an accomplice such as a sister.)

Use an outside CPA or Certified Fraud Examiner to sample and verify selected vendors. If accounts payable personnel are aware that this procedure is being performed, they will be less likely to steal.

Thefts of Cash From Local Governments are Common

Local governments are perfect environments for thefts of cash

Thefts of cash from local governments are common, are they not? 

How many times have you seen a local newspaper article like the following?

Johnson County’s longtime court clerk admitted today to stealing $120,000 of court funds from 2015 through 2016. Becky Cook, 62, faces up to 10 years in federal prison after pleading guilty to federal tax evasion and theft.

Thefts of Cash from Local Governments

Usually, the causes of such cash thefts are (1) decentralized collection points and (2) a lack of accounting controls.

Thefts of Cash from Local Governments

1. Decentralized Collection Points

First, consider that governments commonly have several collection points.

Examples include:

  • Recreation department
  • Police department
  • Development authority
  • Water and sewer department
  • Airport authority
  • Landfill
  • Building and code enforcement
  • Courts

Many governments have over a dozen receipting locations. With cash flowing in so many places, it’s no wonder that thefts of cash are common. Each cash receipt area may have different accounting procedures – some with physical receipt books, some with computerized receipting, and some with no receipting system at all. 

A more centralized receipting system reduces the possibility of theft, but many governments may not be able to centralize the receipting function. Why? Here are three reasons:

  1. Elected officials, such as tax commissioners, often determine how monies are collected without input from the final receiving government (e.g., county commissioners or school). Consequently, each elected official may decide to use a different receipting system.
  2. Customer convenience (e.g., recreation centers and senior citizen centers) may drive the receipting location decision.
  3. Other locations, such as landfills, are purposely placed on the outer boundary of the government’s geographic area.

What’s the result? Widely differing receipting systems. Since these numerous receipting locations have varying controls, the risk of theft is higher. 

2. Lack of Accounting Controls

Second, consider that many governments lack sufficient accounting controls for cash.

It’s more likely cash will be stolen if cash collections are not receipted. If the transaction is recorded, then the receipt record must be altered, destroyed or hidden to cover up the theft. That’s why it’s critical to capture the transaction as early as possible. Doing so makes theft more difficult.

Additional steps that will enhance your cash controls include the following:

  1. If possible, provide the government’s administrative office (e.g., county commissioners’ finance department) with electronic viewing rights for the decentralized receipting locations (e.g., landfill).
  2. Require the transfer of money on a daily basis; the government’s administrative office (e.g., county commissioners’ finance department) should provide a receipt to each transferring location (e.g., landfill).
  3. Limit the number of bank accounts.
  4. Deposit funds daily.
  5. Periodically perform surprise audits of outlying receipting areas.
  6. Use a centralized receipting location (and eliminate the decentralized cash collection points).
  7. Persons creating deposit slips and handling cash should not key those receipts into the accounting system.
  8. The person reconciling the bank statements should not also handle cash collections.
  9. Don’t allow the person billing customers to handle cash collections.

If segregation of duties is not possible (such as 7., 8. and 9. above), consider having a second person review the activity (either an employee of the government or maybe an outside consultant).

Final Thoughts About Fraud Prevention for Cash

When possible, use an experienced fraud prevention specialist to review your cash collection procedures. Can’t afford to? Think again. The average incidence of governmental fraud results in a loss of approximately $100,000.

Finally, make sure your government has sufficient fidelity bonding. If all else fails, you can recover your losses through insurance.

For more fraud prevention guidance, check out my book on Amazon; click the book below.

Also, here’s a post concerning how to audit cash.