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Financial Adviser: 5 most common ways of misappropriating cash (and how to prevent them)

Be aware of possible fraud that can happen in your company
By Henry Ong |




Question: I have a business which is in partnership with my best friend. I handle all the sales while my friend handles the finance part. The business has been doing well but I don’t understand why it is always short of cash in the bank. I feel like the business is not earning enough even though our sales are up. Is there something wrong with our set up? Can you advise? – Brian G by email



Answer: Sound cash management is one of the hallmarks of a healthy finance function. Every business needs to have a good system of financial management, from cash collections to disbursements. Cash is a highly vulnerable asset that should always be secured from abuse. Without proper controls and accountabilities, cash can be easily stolen by the people who you thought will protect you.


It is important that you become aware of the possible fraud that can happen in your company. It is either your friend who handles your finance may not be doing it properly out of inability, or he may be committing fraud. We can never tell unless you know how it works.


Here are the five most common methods of misappropriating cash, to help you detect potential fraud in your company:



1. Manipulating the accounts receivable to divert cash

If the person you assigned to monitor the accounts receivable (the list of clients who owe you money) happens to also be your collector, there is a risk that the cash being collected is stolen by delaying the recording of the collections in the accounts receivable. Subsequent collections from other clients may be used to cover up the theft by crediting it to the account that has been diverted earlier.



For example, let’s say your staff collected Php 10,000 from client ABC. Instead of recording in the books that the receivable has been collected, your staff may have diverted it into his account. To cover up for the loss, your staff will use the subsequent collections from another client, DEF, who paid Php 20,000 to record that the receivable of Php 10,000 from ABC has been collected and that DEF still has unpaid balance of Php 10,000. The unpaid balance will be covered up again later through collections from other clients. This cycle will go on undetected because everything will look neat and documented.



2. Manipulating customer discounts, allowances and bad debts

If the person doing the bookkeeping is also doing the actual sales transaction as well as cash collections, manipulation in the accounting record is highly probable. For example, the person receiving the cash can simply divert a portion of the proceeds and record it as sales discounts or allowances. Also, because this person controls the bookkeeping, portion of the cash collections can also be recorded as bad debt. These transactions may not be so regular but it can happen once in a while if not detected properly.



3. Failing to report sales and pocketing the cash

If your business does over-the-counter sales similar to a store where customers buy something on the spot and pay, it is possible that your cashier can pocket some of the cash received for the day. For example, if the total cash sales is Php 10,000, your cashier may only report Php 9,000 worth of sales slips, pocketing the difference. You will not be able detect this until you do an audit later.


Your cashier can also pocket some cash and treat it as refunds to customers or maybe record it as incidental expenses. These types of expenses are normally unbudgeted and they arise only on certain occasions like for example, payment to courier, delivery charges of merchandise orders, meals for guests and others. You will never know whether this is true or not because it is too small and time consuming for you to check.




4.  Delaying turnover of cash collections

If you have salespeople who are also in charge of cash collections from clients, there’s the risk that your sales may not be properly reported. Your sales agent can borrow the cash collections from clients temporarily without reporting to the company. Your agent can turn over the cash later to update your record, or never at all, depending on how disciplined your finance officer is in monitoring.



5. Forging vouchers and checks for payment

A voucher is an internal accounting document that authorizes payment to another entity, for example, a supplier. Normally, this is generated after receiving a vendor invoice. If you pay to a lot of suppliers regularly, there is risk that you may be signing some false vouchers to benefit some staff in your company. Sometimes, valid vouchers are used, only twice. Your staff may present to you a payment for approval using the valid voucher that you have previously approved and paid for. Most of the time, if you are always busy with so many things, you will not notice this, and some transactions may simply slip without detection.



To prevent these kinds of cash misappropriations from happening, you will need to implement proper internal controls of cash collection. One such control is the segregation of duties. The person recording the books must have no access to cash collections. The collecting function must be assigned to another person to ensure proper accountability. You can also assign an internal auditor to do surprise audit once in a while, to keep everyone alert that they need to comply with policies at all times.


Perhaps the best start is to identify all the present control risks that your company has and develop an internal control manual of procedures to properly document all your business transactions. Your procedures will serve as part of your company policies that everyone has to follow. You can hire the services of an experienced auditor or someone with competence such as a certified internal control auditor.





Henry Ong, CMC, is president of Business Sense Financial Advisors. Email Henry for business advice or follow him on Twitter, @henryong888


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