Asset misappropriation schemes make up more than half of all occupational fraud schemes, according to the Association of Certified Fraud Examiners. It’s a broad category that includes everything from skimming cash to stealing inventory to paying “ghost” employees. One hotspot for asset misappropriation is the accounts receivables department, where dishonest staffers could potentially divert customer payments for their own use. If you don’t have strong internal controls for receivables, what are you waiting for?

Lapping leads

The most common form of receivables fraud is lapping, where perpetrators apply receipts from one account to cover misappropriations from another. For example, rather than credit Customer A’s account for its payment, a thief may pocket the funds and later post a payment from Customer B to A’s account, Customer C’s payment to B’s account, and so on.

Unethical write-offs and discounts are also popular. Instead of crediting a payment to a customer’s account, fraudsters might pocket the funds and then record a bad debt write-off or discount to the customer. Even though incoming payments are diverted, the customer’s account would reflect the expected current balance.

Investigation and prevention 

If receivables fraud is suspected, a forensic expert usually can trace a sample of cash receipts to the sales ledger and deposit slips to find discrepancies in dates, payee names and amounts. An expert also may compare deposit slips against the books and send requests for confirmations to a sample of customers to verify current balances and payment histories. Bad debt write-offs, accounts with unexplained credits, increased customer credit limits and random adjustments to the accounts receivable ledger could also come under scrutiny during a fraud investigation.

But to help prevent receivables fraud from occurring in the first place, businesses should segregate duties. This means that an employee who handles incoming payments from customers should be different from the person who handles invoicing. Also consider assigning a different employee to manage customer complaints because complaints tend to increase if someone is misappropriating receivables. Other helpful controls include mandating vacation time and job rotation for all accounting staffers.

Consider audits 

You may also want to consider conducting regular (and surprise) audits of receivables. Not only might audits help catch schemes in progress, but they enable you to test your controls and ensure employees are following them to the letter.

(This is Blog Post #1425)