How to defend yourself against receivables fraud

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Fraud investigator Andy Wilson has produced a list of self-tests that companies can use to measure how well defended they are against receivables fraud.

Here's a rundown of his guidelines...

"I don't understand it. Business is as good as it has ever been ... but there is no money in the bank," said the owner of a floral business to a group of anti-fraud professionals he had retained to determine if the business was bleeding cash via internal fraud.

Two days before the fraud examination was to begin the bookkeeper failed to report to work. Calls to her home went unanswered.

After less than two hours into the job, the fraud examiners discovered the reason for the unusually low bank balance: Theft.

The investigators confirmed that starting with the third day of her employment, bookkeeper Kristen Green (not her real name) had been running a cash diversion/check substitution scheme.

Each day, Green took cash from the register and substituted checks (received through the U.S. Mail, paid toward house accounts) for the daily receipts. The substitution allowed the daily receipts to balance with the daily cash report.

The company's owner, who regularly reviewed the daily cash reports and deposit slips, noted that the deposit slips listed more money than the actual daily receipts. He assumed that this resulted from inclusion in the deposits of checks received on account. Unfortunately, he couldn't have been more wrong.

Green did not post the payments made on account. Instead, she left the stolen amounts to age on the business's receivable report, and allowed them to continue showing up on future statements sent to customers. As customers complained about the "error," Green simply apologized, blaming the computer. She posted the corrections as write-offs.


The flaws in the financial controls (or lack of them) that enabled Green to steal money from the business for many months could have been corrected if the owner had known how to regularly monitor his receivables activities. Here is a list of self-tests that businesses can use to determine where they may be vulnerable to receivables fraud...


Test 1: Trace a selection of cash receipts to sales ledger to deposit tickets. Follow the money—step-by-step. Look for differences in dates, payee names and amounts. Compare the numbers with those in your bank statements. Inspect for lapping issues. Aim: To screen for diversion of funds.

Test 2: Send mailed payment references. Select a sampling of customers and ask your receivables people for details of all payments to the company. A "Statement of Account" will work. Customers with aging amounts are a good start. Compare the numbers with the ledger and cash books. Aim: To verify the accuracy—or inaccuracy—of accounting records.


Test 1: Examine deposit records. These photocopied records should be chronological, and represent an accurate reflection of the business's receipts. Inspect cash and check divisions declared on the deposit record. Compare "Cash deposited" with "Cash collected," and "Checks deposited" with "Checks collected." Inspect checks without payee names as well as corrected documents. Review items with inconsistent credit postings. Aim: To track actual receipts against actual deposits. This exercise can detect lapping incidents and tests the validity of a specific deposit.

Test 2: Compare validated details with copies. Sample and compare the validated deposit slips with the duplicate records of deposit. Check for differences between the amounts of cash and checks deposited. Check for differences between posting dates and actual deposit verification dates. Aim: To detect deposit holds and possible lapping schemes.


Test 1: Review all statements. Inspect statements for exact deposit amounts on exact days. Investigate discrepancies. Aim: Another procedure to detect deposit holds.


Test 1: Analyze bad debt write-offs. Examine bad debt collection issues for the last 12 months. Research the reasons for specific write-offs. Inspect for mis-postings, diversions, back-dating. Aim: To identify potentially fraudulent postings.

Test 2: Review increases in customer credit limits. Analyze accounts with lagging or no payment activity. Where problems are found, contact customers to verify the accuracy of their statements. Aim: To identify problem customers or questionable posting activity.

Test 3: Inspect aged debtors' records. Obtain a printout of aging debtors for greater than 120 days. Inspect the list of aging accounts. Contact customers and explore reasons. Aim: To detect slow paying customers, and to investigate unusual accounts on which collection efforts should be in progress but aren't.

I usually recommend that managers who suspect funny business in their receivables department start applying these tests on a trial basis to familiarize themselves with proper ways to apply them.

I suggest starting off by inspecting the company's daily cash report for a specific day. Identify the "Cash" and "Check" amounts recorded. Then, inspect the deposit slip for the same day. Do you see the same amounts? If the answer is No...find out why.

Each business should operate with an impress fund—the daily amount of starting cash (i.e. $50). At the end of each business day a business should be able to segregate the $50 impress from the total. The balance should be the total receipts (cash, checks and any other methods of payment) for the day. If the amounts are different, it is a "red flag."

Essential: If fraud is detected, be prepared to take immediate action either on your own or with the help of law enforcement.

Re-published with permission from White-Collar Crime Fighter,


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