They say cash is king, but unfortunately, it’s also the king of fraud targets. According to the Association of Certified Fraud Examiners (ACFE) 2024 report, Occupational Fraud 2024: A Report to the Nations, when it comes to occupational fraud, asset misappropriation accounts for a staggering 89% of cases—and cash is the most vulnerable asset. In fact, only 22% of asset misappropriation cases involve non-cash assets, meaning that businesses handling cash are at an even greater risk.
The good news? With the right controls in place, you can protect your business from falling victim to cash fraud. Here’s what you need to know.
Common Tactics and Risks
Theft of Cash on Hand
When employees have access to stored cash—such as in a safe, vault, or petty cash fund—there is an opportunity for misappropriation. Theft of cash on hand can go unnoticed if proper controls are not in place. To mitigate this risk, businesses should consider the following safeguards:
- Segregation of Duties: Ensure that the individual counting cash at the end of the day is different from the person counting it the next morning or making the deposit. Cash receipts should be recorded immediately and deposited as soon as possible. Regular reviews of cash deposit trends can help detect anomalies.
- Daily Cash Logs: Maintain accurate records of petty cash counts, receipts, and distributions within the organization’s accounting system. Cash logs kept separately are more likely to go missing in the event of fraud.
- Surveillance Measures: Installing security cameras in areas where cash is handled can act as a strong deterrent against theft.
Skimming: Taking Cash Before It Hits the Books
Skimming occurs when an employee takes customer payments before they are officially recorded or after the sale has been logged. This fraudulent activity can be difficult to detect due to the lack of an audit trail, but businesses can look for red flags such as inventory discrepancies or unusual account adjustments.
One particularly deceptive skimming tactic is payment lapping, where an employee covers up stolen funds by applying another customer’s payment to the original account, creating a cycle of fraud that can persist for months.
To reduce the risk of skimming, businesses should:
- Separate billing and collection functions to ensure checks and balances.
- Compare revenue records to inventory levels to detect unexplained discrepancies.
- Include outstanding balance reconciliations on invoices for repeat customers.
Detecting & Preventing Cash Fraud
One of the most effective ways to catch fraudulent activity is through bank reconciliation. Reconciling sales records with cash receipts and bank deposits each month can help identify discrepancies and ensure all revenue is properly accounted for.
Additionally, businesses should consider implementing a Whistleblower Hotline—a third party-managed service that allows employees to anonymously report suspected fraud. Per the ACFE report mentioned above, 43% of fraud cases were uncovered due to whistleblower tips, with the majority coming from fellow employees.
Take Action to Safeguard Your Business
By implementing strong internal controls, regularly reviewing financial records, and encouraging employee reporting, businesses can significantly reduce their risk of cash-related fraud. Proactive measures not only protect financial assets but also foster a culture of accountability and trust within the organization.
Stay Tuned
This is the third article in our “Leader’s Guide to Fraud Prevention” series, designed to provide ongoing guidance on simple, effective actions leadership can take to prevent fraud, waste, and abuse. Future articles will explore everything from emerging fraud trends to critical risk areas like cybersecurity, as well as entity-wide recommendations for strengthening controls. By making a few strategic improvements to your fraud prevention environment, your organization can build a stronger foundation for long-term financial success.
Missed the first two articles of the series? Check them out here:
- Risk Mitigation Starts with You | The Bonadio Group
- Fraud Facts & Misconceptions | The Bonadio Group
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.
