Wk 6 Discussion (Expense Reporting Fraud) - Post 2
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“Proper implementation is the key.” Hansen continued, “You cannot prevent fraud 100
percent. The best you can do is to limit it through your proactive educational, awareness,
and audit programs. Of course, aggressively investigating all red flags or tips as well.”
Hansen’s asset protection department concludes over 1,400 employee theft and fraud cases
and 30,000 customer shoplifting cases annually.
Owing to the grand scale of theft in this case, Walker was arrested immediately after his
interview, booked on felony charges of embezzlement, and held pending bail. He faced
criminal and civil prosecution. Walker made bail within hours, then disappeared without a
trace. All investigative efforts to locate him thus far have failed.
To this day Bob Walker remains a fugitive of justice.
Several names and details have been changed to preserve anonymity.
OVERVIEW
We have so far discussed two ways in which fraud is committed at the cash register—
skimming and cash larceny. These schemes are what we commonly think of as outright
theft. They involve the surreptitious removal of money from a cash register. When money is
taken from a register in a skimming or larceny scheme, there is no record of the transaction
—the money is simply missing.
In this chapter we will discuss fraudulent disbursements at the cash register. These schemes
differ from the other register frauds in that when money is taken from the cash register, the
removal of money is recorded on the register tape. A false transaction is recorded as though
it were a legitimate disbursement to justify the removal of money. Bob Walker’s fraudulent
refunds were an example of such a false transaction.
Register Disbursement Data from the ACFE 2009 Global Fraud Survey
Register disbursements were reported less frequently than any other fraudulent
disbursement scheme in the 2009 survey; they accounted for 6 percent of the reported
fraudulent disbursements. It should be remembered, however, that the survey only asked
respondents to report one case they had investigated; it was not designed to measure the
overall frequency of various types of schemes within a particular organization. Thus, the
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low response rate for register disbursements does not necessarily reflect how often these
schemes occur. Furthermore, the type of fraud that occurs within an organization is, to
some extent, determined by the nature of business the organization conducts. For example,
register disbursement schemes would tend to be much more common in a large retail store
that employs several cash register clerks than in a law firm, where a cash register would not
even be present. Readers should keep in mind that the frequency statistics presented in this
book only represent the frequency of cases that were reported by the survey respondents
(see Exhibit 8-2).
In addition to being the least frequently reported type of fraudulent disbursement, register
disbursements were the least costly, with a median loss of $23,000. The typical register
disbursement scheme in the survey caused about one-sixth the losses of the typical check
tampering scheme (see Exhibit 8-3).
REGISTER DISBURSEMENT SCHEMES
Two basic fraudulent disbursement schemes take place at the cash register: false refunds
and false voids. Although these schemes are largely similar, a few differences between the
two merit discussing them separately.
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EXHIBIT 8-2: 2009 Global Fraud Survey: Frequency of Fraudulent Disbursements
The sum of these percentages exceeds 100 percent because some cases involved multiple fraud schemes that fell into more than one category
EXHIBIT 8-3: 2009 Global Fraud Survey: Median Loss of Fraudulent Disbursements
False Refunds
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A refund is processed at the register when a customer returns an item of merchandise
purchased from that store. The transaction that is entered on the register indicates that the
merchandise is being replaced in the store’s inventory, and that the purchase price is being
returned to the customer. In other words, a refund shows a disbursement of money from
the register as the customer gets his money back (see Exhibit 8-4).
Fictitious Refunds
In a fictitious refund scheme, a fraudster processes a transaction as if a customer were
returning merchandise, even though no actual return takes place. Two things result from
this fraudulent transaction, First, the fraudster takes cash from the register in the amount of
the false return. Since the register tape shows that a merchandise return has been made, the
disbursement appears legitimate. The register tape balances with the amount of money in
the register, because the money that was taken by the fraudster is supposed to have been
removed, given to a customer as a refund. These kinds of
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fraudulent transactions were used by Bob Walker in the case study at the beginning of this
chapter.
EXHIBIT 8-4: False Refunds
As we also saw in that case study, the second thing that happens in a fictitious refund
scheme is that a debit is made to the inventory system showing that the merchandise has
been returned to the inventory. Because the transaction is fictitious, no merchandise is
actually returned. As a result, the company’s inventory is overstated. For instance, in Case
1583, a manager created $5,500 worth of false returns, resulting in a large shortage in the
company’s inventory. He was able to carry on his scheme for several months, however,
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because (1) inventory was not counted regularly, and (2) the perpetrator, a manager, was
one of the people who performed inventory counts.
Overstated Refunds
Rather than create an entirely fictitious refund, some fraudsters merely overstate the
amount of a legitimate refund and steal the excess money. This occurred in Case 1875, in
which an employee sought to supplement his income by processing fraudulent refunds. In
some cases he rang up completely fictitious refunds, making up names and phone numbers
for his customers. In other instances he added to the value of legitimate refunds, overstating
the value of a real customer’s refund, paying the customer the actual amount owed for the
returned merchandise, and keeping the excess portion of the return for himself.
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Credit Card Refunds
When purchases are made with a credit card rather than cash, refunds appear as credits to
the customer’s credit card rather than as cash disbursements. Some fraudsters process false
refunds on credit card sales in lieu of processing a normal cash transaction. One benefit of
the credit card method is that the perpetrator does not have to physically take cash from the
register and carry it out of the store, the most dangerous part of a typical register scheme
(since managers, coworkers, or security cameras may detect the culprit in the process of
removing the cash). By processing the refunds to a credit card account, a fraudster reaps an
unwarranted financial gain and avoids the potential embarrassment of being caught red-
handed taking cash.
In a typical credit card refund scheme, the fraudster rings up a refund on a credit card sale,
though the merchandise is not actually being returned. Rather than use the customer’s
credit card number on the refund, the employee inserts his own. As a result, the cost of the
item is credited to the perpetrator’s credit card account.
A more creative and wide-ranging application of the credit card refund scheme was used by
Joe Anderson in the following case study. Anderson processed merchandise refunds to the
accounts of other people, and in return received a portion of the refund as a kickback. CFE
Russ Rooker discovered Anderson’s scheme, which cost Greene’s department store at least
$150,000. This case is also a bribery scheme, because Anderson took illicit payments in
exchange for creating fraudulent transactions. It serves as an excellent example of how the
cash register can be used as a tool for theft.
CASE STUDY: A SILENT CRIME
“A silent crime”—that’s the way Russ Rooker refers to the theft he uncovered at a Detroit-
area Greene’s department store. “It takes only about 30 seconds, and you can have a
thousand bucks,” explains the regional investigation specialist.
Joe Anderson, a 15-hour-a-week employee in that store’s shoe department, was an expert at
that silent crime—ringing up fictitious returns and crediting credit cards for the cash.
During his five-year tenure with the store, Anderson did this time and time again. Rooker
documented at least $150,000 in losses, but believes it was closer to $500,000, and wouldn’t
be surprised if the fraud exceeded $1 million. “We’re scared to even know,” he says.
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This was a scam that was right up Rooker’s analytical alley. At the time of the investigation,
he had worked in retail security for about a decade—first as a credit fraud investigator
checking the external, or customer, side of credit card fraud. Then he went into internal
investigation, searching out employee theft and fraud.
At Greene’s store, records showed that the store’s shoe department was losing money
because it had an exceedingly high rate of returns on its shoes. Rooker decided to
investigate by using his “FTM” formula—Follow the Money.
He ordered up five months of sales data for the department from ten sales terminals.
Rooker had returns divided into categories of cash, proprietary credit cards (i.e., Greene’s
cards), and third-party credit cards such as Visa and MasterCard.
And he saw a trend. Around the twenty-eighth of each month, certain credit card numbers
would be credited for a return of approximately $300. “Two hundred ninety-seven dollars
and sixty cents to be exact,” says Rooker. There was never a corresponding sale recorded
for the returns. And each month, each credit card number was credited only once—thus, if
Rooker had chosen to study only one month’s data, the crime would not have been
discovered.
He eventually found that one part-time employee, Joe Anderson, was crediting more than
200 credit cards belonging to 110 persons. Each week, Anderson credited $2,000 to $3,000 in
returns to his friends’, neighbors’, and relatives’ accounts. In return, Anderson was paid up
to 50 percent of the credit. For instance, if a friend was running $300 short at the end of the
month and still needed to make his house payment, he’d phone Anderson. According to
Rooker, the word around Detroit was if you needed money, “Call Joe. Give him $150 and
he’ll double your money.”
The friend might contact Anderson at the home he shared with his girlfriend, or he might
meet Anderson at the local bar or in the back of his souped-up van. Or he might simply text
him a credit card number.
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Either way, the friend gave Anderson his credit card number and promised to pay him $150
for the money. Then, Anderson, in thirty-second increments at the cash register, punched in
the credit. Next, just as rapidly, he’d phone the friend and tell him the deal was done.
Finally, the friend would go to the nearest ATM, swipe through his credit card, and—
knowing that he had a $300 credit to his account—get $300 in cash.
“So it was basically turning the money right into cash,” says Rooker. “You can see the drug
connection here.” Yet a drug connection was never actually proven. What was proven, to
quote Rooker, was that a man who “worked fifteen hours a week at Greene’s was living the
high life. He dressed like a million bucks. He ate at fancy restaurants.” And he wore lots of
gold jewelry—and drove a “fully decked out” conversion van.
The majority of his “customers” looked as though they lived an upper-middle-class life, too,
but appearances can be deceiving. Most of them were in the lower-income bracket—
Anderson had helped them move up. Sometimes he gave them a $300 pair of shoes to go
along with their $300 credit; that way, they could go to another Greene’s location, return the
shoes, and get an additional $300. One customer was credited $30,000 in one year, says
Rooker.
One regular customer was Anderson’s girlfriend, who owned the house in which the two
lived. And, although she worked as a branch manager for a major bank in Detroit, she was
not prosecuted; the Secret Service and the U.S. Attorney, whom Rooker called into the
investigation upon his discovery of the perpetrator, decided who was prosecuted.
Anderson was well known by many; he had friends and acquaintances just about
everywhere. The fifteen-hour-a-week employee with the big, illegal income was a mover
and shaker of sorts. Rooker thinks that was part of Anderson’s motive—Anderson hung out
with the upper-middle class and was well accepted in their stratum. He wanted to stay in
that social group, but the only way he could find to do that was to commit fraud.
Rooker also believes that Anderson simply got “caught up in it” because people came to
expect the fraud of him. In fact, they came directly into the store and asked for Anderson:
only he could wait on them. Those people were often the ones to whom he gave a pair of
shoes as well.
The Secret Service told Rooker that if he would document a minimum of $10,000 in returns
via video surveillance, they would go from there. So Rooker had video surveillance
equipment installed throughout the shoe department, and at the point-of-sale registers. The
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first day the equipment was up and running, Anderson was up and running as well; he
credited $5,000 that day.
According to Rooker, Anderson simply reached into the inside pocket of his expensive suit
jacket, pulled out a list, and started ringing up credits. One day, he gave a single customer a
$300 cash refund, a $300 credit refund, and a $300 pair of shoes.
This wreaked havoc on Greene’s inventory. Let’s say the store’s inventory reports showed
that there were ten pairs of style 8730 in stock. But then along came Anderson, ringing up a
return for style 8730. Suddenly the inventory reports showed eleven pairs of style 8730 in
stock, even though there were still only the original ten pairs.
Five thousand dollars of returns in one day caused inventory to be overstated by
approximately seventeen pairs of shoes. Seventeen pairs of shoes, five workdays a week,
4.3 weeks per month—and Greene’s had a lot of invisible shoes in stock.
Six weeks after the start of in-store surveillance, $30,000 in losses was recorded on
videotape—put another way, that’s 100 pairs of non-existent shoes that were falsely
reported as in-stock.
Most of those losses were documented at the end of each month, because by then,
Anderson’s customers were in a typical end-of-the-month money crunch. “They came to
really depend on this money,” explains Rooker.
The certified fraud examiner next started matching customers to credit card numbers. That
was easy to do with the Greene’s cards, but it was a slightly harder task for the third-party
cards, which were responsible for the majority of the returns.
By working his professional connections, Rooker was able to contact fraud investigators at
various banks to find out informally “what was going on” from the banks’ perspectives.
That’s how he learned that some of Anderson’s customers were Anderson’s friends and
relatives.
Ironically, the part-time employee never carried a credit card. He was a cash customer only.
His only known asset was his conversion van. The house he shared with his girlfriend was
held in her name.
The Secret Service put Anderson under surveillance. Over two weeks, they discovered how
he was making his contacts. All day long, friends, relatives, and neighbors streamed in and
out of the home he shared with his banker girlfriend. In essence, his fifteen-hour-a-week
job demanded more than fifteen hours a week. And often the same people who were
observed going into his home received credits that same day.
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Anderson had apparently started his “side” job as a bit of a lark and charged only 10
percent of the fictitious refund as his fee. As the scam and his renown grew, he upped his
percentage to 25, then 50 percent. Everyone in town, everyone in his shoe department
knew he was doing something fishy, reports Rooker, but they were scared to report him.
Anderson allegedly carried a gun. And though many liked Anderson, many also feared him.
But that did not deter Rooker and the Secret Service. “The Secret Service was very
aggressive,” says Rooker.
They promised to pursue any co-conspirator who had earned at least $5,000 in returns over
two years. That led them to Ohio, where they interviewed a middle-aged couple.
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(Most of Anderson’s customers were between the ages of 30 and 50.)
This couple had once lived in the Detroit area. After getting the couple to turn state’s
evidence (as the Secret Service did with numerous co-conspirators during this
investigation), the law enforcement officers learned Anderson’s entire scam.
Soon thereafter, four armed U.S. Secret Service agents entered the store, grabbed Anderson,
pulled him through the stock room, and arrested him. When confronted with the crime,
Anderson told the agents and Rooker, “Pound sand.” He had $5,000 in cash stuffed into his
socks. In his coat pocket, he had a list of fifteen third-party credit card numbers with dollar
amounts to credit.
Having those fifteen numbers on his person, says Rooker, was enough to charge the
perpetrator. Eventually, though, Rooker learned that $60,000 in refunds had been credited
to those fifteen numbers over the previous two years.
Anderson was led through the mall, in handcuffs, by the Secret Service. As he exited, mall
store manager after store manager stood at their doors and yelled, “Hey, Joe, what’s going
on?” They were worried.
They were losing one of their best cash customers.
Local and federal charges for embezzlement and financial transaction card fraud against
Anderson and twenty-seven conspirators are pending.
Not pending are new internal controls at Greene’s. Rooker implemented them immediately.
Over time, another fifty to sixty employees were determined to be pulling off the same
scam, at losses of $10,000 to $30,000 to Greene’s. The only difference was that these
employees were crediting their own charge cards; Anderson only credited other people’s
charge cards, silently, in thirty-second increments.
Several names and details have been changed to preserve anonymity.
False Voids
False voids are similar to refund schemes in that they generate a disbursement from the
register. When a sale is voided on a register, a copy of the customer’s receipt is usually
attached to a void slip, along with the signature or initials of a manager that indicate that
the transaction has been approved (see Exhibit 8-5). In order to process a false void, then,
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the first thing the fraudster needs is the customer’s copy of the sales receipt. Typically, when
an employee sets about processing a fictitious void, or she simply withholds the customer’s
receipt at the time of the sale. If the customer requests the receipt, the clerk can produce it,
but in many cases customers simply do not notice that they didn’t receive a receipt.
With the customer copy of the receipt in hand, the culprit rings a voided sale. Whatever
money the customer paid for the item is removed from the register as though it were being
returned to a customer. The copy of the customer’s receipt is attached to the void slip to
verify the authenticity of the transaction.
Before the voided sale will be perceived as valid, a manager generally must approve it. In
many of the cases in the ACFE studies, the manager in question simply neglected to verify
the authenticity of the voided sale. Such managers signed essentially anything presented to
them, thus leaving themselves vulnerable to a voided sales scheme. An example of this kind
of managerial nonchalance occurred in Case 1753. In this case a retail clerk kept customer
receipts and “voided” their sales after the customers left the store; the store manager signed
the void slips on these transactions without taking any action to verify their authenticity. A
similar breakdown in review was detected in Case 1787, where an employee processed
fraudulent voids, kept customer receipts, and presented them to her supervisors for review
at the end of her shift, long after the alleged transactions had taken place. Her supervisors
approved the voided sales, and the accounts receivable department failed to notice the
excessive number of voided sales processed by this employee.
It was not a coincidence that the perpetrators of these crimes presented their void slips to a
manager who happened to be lackadaisical about authorizing them. Generally, such
managers are essential to the employee’s schemes.
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EXHIBIT 8-5: False Voids
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Because not all managers are willing to provide rubber-stamp approval of voided sales,
some employees take affirmative steps to get their voided sales “approved.” This usually
amounts to forgery, as in Case 1753 (previously noted), whereby the fraudster eventually
began forging his supervisor’s signature as the employee’s false voids became more and
more frequent.
Finally, it is possible that a manager will conspire with a register employee and approve
false voids in return for a share of the proceeds. Although ACFE researchers did not
encounter any cases like this in their studies, they did come across several examples of
managers helping employees to falsify timecards or expense reimbursement
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requests. There is no reason why the same kind of scheme would not also work with false
voids.
CONCEALING REGISTER DISBURSEMENTS
As we discussed above, when a false refund or void is entered into the register, two things
happen. First, the employee who is committing the fraud removes cash from the register;
second, the item allegedly being returned is debited back into inventory. This leads to
shrinkage: a situation in which there is less inventory actually on hand than the inventory
records reflect. A certain amount of shrinkage is expected in any retail industry, but too
much of it raises concerns of fraud.
Remember: inventory is accounted for by a two-step process. The first part of the process is
the perpetual inventory, which is essentially a running tabulation of how much inventory
should be on hand. When a sale of merchandise is made, the perpetual inventory is credited
to remove this merchandise from the records; the amount of merchandise that should be on
hand is reduced. Periodically, someone from the company takes a physical count of the
inventory, going through the stockroom or warehouse and counting the amount of
inventory that is actually on hand. The two figures are then compared to see if there is a
discrepancy between the perpetual inventory (what should be on hand) and the physical
inventory (what is on hand). When a fraudulent refund or void has been recorded, the
amount of inventory that is actually on hand will be less than the amount that should be on
hand.
Typically, fraudsters do not make any effort to conceal the shrinkage that results from their
schemes. In many register disbursement cases, the amount of shrinkage is not large enough
to raise a red flag, but in large-scale cases the amount of shrinkage caused by a fraudster
can be quite significant. For example, in the previous case study, Joe Anderson, a part-time
employee, rang up $150,000 in documented fictitious returns in a scheme that had a
significant effect on the victim company’s inventory. An excessive number of reversing
transactions, combined with increased levels of shrinkage, would generally be considered a
strong indicator of register disbursement fraud. For a discussion of how fraudsters attempt
to conceal shrinkage, please see Chapter 9.
Aside from shrinkage, a register disbursement scheme leaves the victim organization’s
books in balance. The whole purpose of recording a fraudulent refund or void, after all, is to
account for the stolen funds, and to justify their removal from the cash drawer. Therefore,
fraudsters often take no further steps to conceal a register disbursement scheme. However,
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a register disbursement scheme can still be detected if someone notices abnormal levels of
refunds or voids. There are two methods that fraudsters often use to avoid this form of
detection.
Small Disbursements
One common concealment technique is to keep the sizes of the disbursements low. Many
companies set limits below which management review of a refund is not required. When
this is the case, fraudsters simply process copious numbers of refunds that are small enough
that they need not be reviewed. In Case 791, for example, an employee created over 1,000
false refunds, all under the review limit of $15. He was eventually caught because he began
processing refunds before store hours; another employee noticed that
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refunds were appearing on the system before the store opened. Nevertheless, before his
scheme was detected, the employee made off with over $11,000 of his employer’s money.
Destroying Records
One final means of concealing a register scheme, as with many kinds of fraud, is to destroy
all records of the transaction. Most concealment methods are concerned with keeping
management from realizing that fraud has occurred. When an employee resorts to
destroying records, however, he typically has conceded that management will discover his
theft. The purpose of destroying records is usually to prevent management from
determining who the thief is. In Case 2728, for example, a woman was creating false
inventory vouchers that were reflected on the register tape. She then discarded all refund
vouchers, both legitimate and fraudulent. Because documentation was missing on all
transactions, it was extremely difficult to distinguish the good from the bad. Thus, it was
hard to determine who was stealing.
PREVENTING AND DETECTING REGISTER DISBURSEMENT SCHEMES
The best way for organizations to prevent fraudulent register disbursements is to always
maintain appropriate separation of duties. Management approval should be required for all
refunds and voided sales in order to prevent a rogue employee from generating fraudulent
disbursements at his cash register. Access to the control key or management code that
authorizes reversing transactions should be closely guarded, and cashiers should not be
allowed to reverse their own sales.
In addition to management review, voided transactions should be properly documented.
Require a copy of the customer’s receipt from the initial purchase, which should be attached
to a copy of a void slip or other documentation of the transaction. This documentation
should be retained on file.
Every cashier or sales clerk should be required to maintain a distinct login code for work at
the register, allowing voids and refunds to be traced back to the employee who processed
them. Periodically, organizations should generate reports of all reversing transactions at the
register, looking for employees who tend to process an inordinate number of these
transactions. Recurring transaction amounts, particularly in round numbers such as $50,
$100, and so on, are also common indicators of register disbursement fraud.
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If the organization requires management approval only for voids and refunds above a
certain amount, look for large numbers of transactions just below this amount. For instance,
if the minimum review amount is $20, fraudsters may process multiple refunds for $19 in
order to avoid review.
One way to help deter register disbursements is to place signs or institute store policies
encouraging customers to ask for and examine their receipts. For example, offer a discount
to any customer who does not receive a receipt. This will prevent employees from retaining
customer receipts to use as support for false voids or refunds.
Random customer service calls can also be made to customers who have returned
merchandise or voided sales as a way of verifying that these transactions actually took
place. This type of verification is effective only if the persons who make the customer
service calls are independent of the cash receipts function.
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PROACTIVE COMPUTER AUDIT TESTS FOR DETECTING REGISTER DISBURSEMENT SCHEMES
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Title Category Description Data file(s)
Summarize by location refunds and voids charged.
All Locations with high adjustments may signal actions to hide register disbursement schemes.
• Sales system register
Summarize by employee refunds and voids charged.
All Employees with high adjustments may signal actions to hide register disbursement schemes.
• Sales system register
List top 100 employees by dollar size (once for refunds and once for sale voids).
All Employees with high adjustments may signal actions to hide register disbursement schemes.
• Sales system register
List top 100 employees who have been on the top 100 list for three months (once for refunds and once for sale voids).
All Employees with high adjustments may signal actions to hide register disbursement schemes.
• Sales system register
List top 10 locations that have been on the top 10 list for three months (once for discounts and once for sale voids).
All Locations with high adjustments may signal actions to hide register disbursement schemes.
• Sales system register
Compute standard deviation for each employee for the last three months and list those employees that provided three times the standard deviation in the current month (once for discounts and once for sale voids).
All Employees with high adjustments may signal actions to hide cash larceny schemes.
• Sales system register
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Title Category Description Data file(s)
Compare adjustments to inventory to the void/refund transactions summarized by employee.
All First, a summary of adjustments by inventory number (SKN number) and employee is completed, which is then compared to credit adjustments (to inappropriately decrease inventory that was supposedly returned) by inventory number.
• Sales system register
• Inventory detail register
Extract users who can enter and approve void and refund transactions.
All Users who can enter the void/refund and subsequently approve it have a nonsegregation of duties that gives an opportunity for fraud.
• Sales system user access master file
• Sales system user access log file
Extract users who can post refunds and voids as well as inventory adjustments.
All Users who can enter the void/refund and subsequently conceal the misappropriation through adjustments to the inventory system have a nonsegregation of duties that gives an opportunity for fraud. User access should be reviewed from the perspective of adjustments within the application and adjustments to the data itself.
• Sales system user access master file
• Inventory system user access master file
• Sales system user access log file
• Inventory system user access log file
