Previously in this series, we wrote that the war on government fraud starts with the five components of internal control known as the Committee of Sponsoring Organizations (COSO) framework. Internal controls are the foundation every government needs to ensure fraud can be detected and prevented, internally and externally. This article continues the discussion by highlighting another important area in which every government should apply this framework.
Similar to accounts payable, which we presented previously in this series, accounts receivable is an area in a government that is vulnerable to fraud. The most common types of accounts receivable fraud are lapping and skimming.
Lapping is a fraudulent practice that involves altering accounts receivables to hide stolen cash. This method involves taking a subsequent receivable payment from a transaction (for example, tax collection) and using that to cover the theft.
Skimming is when cash is taken before it is deposited and before there is a record of the receipt. This is accomplished by failing to ring up a sale on the cash register or to write up a receipt. Skimming can be sophisticated involving a second receipt book or a second register. The fraudster will cover up the theft by manipulating customer accounts in the accounting system.
In 2010, Jennifer Bivens, a utility clerk with the Fulton Electric System in Fulton, Kentucky, was convicted of theft for the unlawful embezzlement of funds. An audit identified $81,137 missing from the utility’s operations and further investigation revealed that Bivens utilized check lapping to carry out an internal fraud scheme. To cover up the missing funds she had previously skimmed from her cash drawer, she would utilize inbound checks from customers to cover the missing cash.
Could Fulton Electric System's management have detected, prevented, or mitigated the severity of Bivens' scheme? Can governments detect and prevent skimming? While theft cannot be predicted, governments can implement procedures that minimize vulnerability.
The following are risks, red flags, and best practices against lapping and skimming schemes to observe in a governmental accounts receivable operation.
Money that should be deposited with the government is diverted to the fraudster.
- Excessive number of voids, discounts and returns.
- Unauthorized bank accounts.
- Sudden activity in a dormant banking account.
- Taxpayer complaints that they are receiving non-payment notices.
- Discrepancies between bank deposits and postings.
- Abnormal number of expense items, supplies, or reimbursement to employees.
- Presence of employee checks in the petty cash for the employee in charge of petty cash.
- Excessive or unjustified cash transactions.
- Large number of write-offs of accounts.
- Bank accounts that are not reconciled on a timely basis.
Does one person always open the mail? Making even the smallest of transactional and/or operational activities into a two-person job can go a long way to ensuring the security of inbound assets. Even small government operations with limited staff can establish task specific redundancies. In the receipting process, maintain a log and have a person independent of the receipting and recording reconcile it to the bank deposit.
Are funds that are received deposited timely? In many jurisdictions, there are statutory requirements for the timely deposit of receipts. The person depositing the money should not be involved in the receipting or recording of the receipts.
How often are cash drawers reconciled? Dependent on the volume, cash drawers should be relieved of excess cash frequently. Using a safe with controlled access is a best practice to use until the deposit can be made.
Are employees permitted to void a transaction or issue a refund without authority? In many governments, refunds are not issued at the point of transaction but are issued after the governing body or a member of management approves the payment voucher for the refund. If point of transaction refunds are permitted, an approval process should be established, whereby refunds and voids require a supervisory signature and the documentation of the signature and contact information for the person receiving the refund.
Are complaints about outstanding balances, which the complainant reports having paid, being documented and addressed? Are complaints about a failure to receive receipts or documents (such as a license) taken seriously? It is critical to establish protocols for handling complaints that ensure a system of checks and balances. For example, directing complaints to employees that are removed from the receipting process.
Review these situations to determine whether lapping or skimming may have occurred.
Applying Best Practices
These best practices would ensure that the government has established a robust system of internal control in line with the Committee of Sponsoring Organization (COSO) framework. In our next article in this series, we will present the risks, red flags and best practices against fraud in government contracts management.
There are online tools that can help a government win the war against fraud by accounts receivable lapping.