Cash Larceny, Part 12

The Finale: A Summary of Internal Controls Over Cash Receipts

By Joseph R. Dervaes, CFE, CIA, ACFE Fellow

Fraud's Finer Points 

"Lucille,” a central office bookkeeper at a school district, was a smart woman. Unfortunately, she was also needy. Lucille needed a lot of money to pay for continuing medical expenses and care for her husband who was incapacitated after life-threatening heart surgery.

So she began a sophisticated lapping scheme by taking currency from funds transmitted to her office by many decentralized locations throughout the district.

But she didn’t stop there. Because the function was totally under her control, she began stealing from accounts receivables in other districts. Lucille would bill these districts for services performed on their behalf, receive payments on these accounts, and then steal the revenue instead of depositing the money in the bank.

There’s more. Lucille stole cash receipts from miscellaneous revenue sources and falsified accounting records to try to conceal these losses from managers. Finally, the district discovered two of these checks in her office that hadn’t been promptly deposited in the bank and questioned her about them.

She was able to satisfy her supervisor’s initial inquiry about these transactions and corrected the situation by including them in the bank deposit she was preparing. Lucille then left work to take her husband to a scheduled medical appointment. Her supervisor inspected Lucille’s office and found nine additional checks in her in-basket totaling almost $600.

Additional research determined that these checks represented only a portion of the revenue a day-care facility had transmitted to Lucille that day. Instead of giving credit to the facility, Lucille credited several other district functions with these funds to conceal that she had previously stolen money from them in a lapping scheme. The nine remaining checks her supervisor discovered weren’t needed to complete processing on this day. However, I’m certain they would have been used to continue lapping other transactions on subsequent business days. But Lucille never got the chance to do this. When she returned to work the next day, she was trapped; she couldn't respond truthfully to her supervisor’s questions.

During an interview with external auditors, she said she pulled off the initial lapping scheme by making the cash receipting locations whole by depositing an equal amount of the missing funds into the accounts. The auditors knew this wasn’t true; they had seen the day-care checks. Finally, she admitted misappropriating funds from her employer and resigned.

In the end, the district found that Lucille had stolen $143,150 in seven years. The insurance bonding company reimbursed the district for its loss plus audit costs. Lucille got a plea bargain deal with the county prosecuting attorney’s office but she still paid dearly; the court ordered her to pay back all the money and sentenced her to 13 months in the state penitentiary.

This column summarizes key points from our two-year study about cash larceny such as the crimes committed by Lucille, the ambitious central office bookkeeper.

In these types of frauds, employees steal revenue after they’ve recorded accountability for the underlying cash receipt transactions in the organization’s accounting records. As a fraud examiner, you can learn to detect these schemes if you understand the basic mechanics of cash receipting systems within an organization and use only original source documents when you perform audit tests. The cliché is true: follow the money. In my practice, I’ve found that employees who commit these crimes often make little or no effort to conceal the irregularities that eventually lead to their demise. They make our jobs a lot easier!

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