ACCT 4345 Instructions and questions for chapter 14 case Please read the following case and answer these questions on paper and bring the answers to class. 1. How would you categorize this fraud and why did you select that? (Skimming, larceny, false refund, etc.) 2. See any red flags? What were they? 3. What sort of analytical procedures caught this fraud? 4. What controls that were in place that should have prevented this fraud were ignored? 5. What controls should be in place to protect retailers from this sort of fraud? Register Disbursement Schemes OVERVIEW So far we have discussed two ways in which fraud is committed at the cash register. skimming and cash larceny. These schemes are what we commonly think of as theft. They involve the surreptitious removal of money from a cash register. When money is taken from a register in a skimming or larceny scheme, there is no record of the transac- tion (unless or until the thief takes separate steps to conceal the scheme)--the money is simply missing. In this chapter, we discuss fraudulent disbursements at the cash register. These schemes differ from the other register frauds in that when money is taken from the register, the removal is recorded on the register. A false transaction is recorded as if it were a legitimate disbursement to justify the removal of money. Bob Walker's fraudulent refunds in the next case study were an example of such a false transaction. Two basic fraudulent disbursement schemes take place at the register: false refunds and false voids. Although the schemes are largely similar, there are a few differences between the two that merit discussing them separately. Case Study: Demotion Sets Frand in Motion Following a demotion and consequent pay cut, Bob Walker' silently vowed to even the score with his employer. In six months Walker racked up $10,000 in ill-gotten cash from his employer, who was caught completely off guard, before someone blew the whistle. The whistleblower was Emily Schlitz, who worked weekends as a backup bookkeeper at a unit of Thrifty PayLess, a chain of 1,000 discount drugstores crossing ten Western states. One October, while reviewing her store's refund log, Schlitz noticed an unusually large number of protocol breaches by the head cashier-one Bob Walker-who naturally handled most refunds. In issuing cash refunds for big-ticket items, for instance, Walker frequently failed to record the customer's phone number. Often he neglected to attach sales receipts to the refund log, noting that the customers wanted to keep their receipts. Schlitz questioned the high proportion of these irregularities and notified the store manager, who in turn called the asset protection (security) department at headquarters to investigate what he termed "strange entries." Thrifty PayLess pays serious attention to such phone calls, according to its direc or of asset protection, James Hansen, who celebrated his thirteenth anniversary with the retailer that year. In 57 percent of the fraud cases for that year, Hansen reported, investigators received their first alert directly from store managers, as in this case. The strange entries that Schlitz found called for immediate action. Hansen dispatched a field investigator, Raymond Willis, to review the findings and conduct brief background check of Walker-a 32-year-old single male who had been aployed by Thrifty PayLess for five years. Willis soon learned that six months earlier the store manager, citing poor perfor- ance, had demoted Walker from a management position to head cashier, which also 145 CORPORATE FRAUD HANDBOOK brought a $300 a month pay cut for Walker. To Willis, that information alone raised some red flags of potential fraud by employees: personal or financial problems, lifestyle changes or pressures, and low morale or feelings of resentment. Further inquiry revealed Walker blamed management for the demotion. But those red flags paled next to the wealth of evidence Willis uncovered during his investigation, He began by calling customers listed in the refund log to inquire about the service they received at the drugstore, discreetly looking for verification or vilification. Next, he compared the number of refunds for food processors-by far the most popular merchandise item Walker accepted for return--to the number originally received in shipment minus those sold. These numbers were in turn compared to the food processors actually in stock. The investigator discovered major discrepancies. Willis brought the case to a conclusion in just three days. "He stayed awake nights working on this one because he quickly saw the enormity of the take," recalled boss Hansen. "It just fueled his fire." "The perpetrator had really gotten carried away with his activity. As will often happen, over time he got greedy. And once Walker got greedy, he got careless and sloppy," said Hansen. Although aggressive in his investigation, Willis kept it quiet. He limited his inter- views to just two or three of Walker's fellow employees. "Several coworkers had previously told managers that Walker seemed disgruntled and somewhat upset. But outwardly, his frustration was never piqued enough to warrant the need for manage- ment to keep an eye on this guy," explained Hansen. At the end of Willis's third day in the field, it was time to interview Walker. Initially, Willis asked general questions about store policies and procedures. He went on to focus more on cashiering methods. Walker seemed at ease in the beginning, helpful and responsive. At one point, Walker even offered the suggestion that "more controls should be placed on refunds." As the interview progressed, however, Walker got more and more nervous. The smooth talker began to stutter and stammer. Willis asked Walker if he knew the definition of "shrinkage." He haltingly replied, "For one, loss of cash or inventory due to customer or employee theft." Willis then asked, "What have you personally done to cause shrinkage?" Walker became very quiet. After a long pause, he asked in a bushed tone, "Well, what if I did do it?" Willis laid out the consequences and continued to query the formerly trusted employee. Walker vented his anger toward the managers who had "unjustly" demoted him. He confessed to writing fake cash refunds in retaliation. While the fraud began in May as an occasional act, it soon increased in frequency and flagrancy. At first, to fill the blanks on the customer information part of the refund log, he pulled names at random from the phone book. Later he simply made up names and phone numbers, he said. As his greed escalated, he altered legitimate refunds that he had issued, earlier in the day, adding merchandise to inflate their monetary value and pocketing the difference. 146 16 Register Disbursement Schemes Although store policy dictated that management approval was required for refunds totaling more than $25 or in the absence of a sales receipt, Walker deliberately thumbed his nose at those rules and others. No one ever questioned the signature authority of this recently demoted member of the management team. To further justify his actions, Walker detailed his previous financial problems, which he said were exacerbated by the $300 monthly pay cut. Proceeds from the fraud initially went toward his two mortgage payments, which equaled $800 a month. His ongoing scheme subsequently financed his insurance premiums and living expenses, which were now mounting. He easily paid off his credit cards. The single man also used the cash for fancy dinners out on the town. During the two-hour confrontation, Walker claimed ignorance about the exact amount he'd filched, saying he had never tallied the score. He did admit, however, that he played this lucrative game with a growing ardor and intensity. As it turned out, all three refunds Walker had issued the day of the interview proved fraudulent. Yet he still seemed shocked that his fraud totaled upward of $10,000-more than five and a half times his total pay cut over the past six months. In a store that generates $4 million in annual sales, $10,000 over six months rep- resents a small percentage of loss. In the retail industry, such shrinkage may be explained away by shoplifting, bad checks, accounting or paperwork errors, break- age or spoilage, shipping shortages, or numerous other reasons. Employee theft, of course, is also a significant factor in shrinkage, said Hansen, who began his career as a store detective. "In my mind, a comprehensive loss prevention program is well balanced between preventive and investigative efforts." He said Thrifty PayLess maintains an outstand- ing educational program for all employees. They attend mandated training classes in both the prevention and detection of fraud. Crucial to the success of the anti-fraud program, employees always are made to feel like integral parts of Thrifty PayLess's whole loss prevention effort. Hansen and his asset protection staff regularly visit the stores to introduce themselves, become familiar to employees, form and maintain rapport, and build a level of trust in confidentiality. To further encourage comma- nication, the retailer established a hotline that employees can call with anonymous tips about suspected fraud or abuse. As evidenced by the part-time bookkeeper's suspicions and subsequent actions this case, Thrifty PayLess's efforts obviously work, said the head of security. It's not that our controls were in any way inadequate; it's that a local manager was not properly enforcing those controls. Generally, he got lax with a 'trusted' employee." (Needless to say, the store manager suffered some repercussions as a result of this case.) As a result of the Walker experience, manager approval is now required for all funds over $5. A sales receipt must also accompany all refunds, said Hansen. Thrifty PayLess's internal audit and asset protection departments perform audits egularly, checking for compliance. 147 CORPORATE FRAUD HANDBOOK "Proper implementation is the key," Hansen said. "You cannot prevent fraud 100 percent. The best you can do is to limit it through your proactive educational, awareness, and audit programs. And, of course, aggressively investigating all red flags or tips as well." Hansen's asset protection department concludes over 1,400 employee theft and fraud cases and 30,000 customer shoplifting cases annually. Owing to the grand scale of theft in this case, Walker was arrested immediately after his interview, booked on felony charges of embezzlement, and held pending bail. Walker made bail within hours, then disappeared without a trace. All inves- tigative efforts to locate him thus far have failed. To this day Bob Walker remains a fugitive of justice. REGISTER DISBURSEMENT DATA FROM THE ACFE 2015 GLOBAL FRAUD SURVEY Register disbursements were reported less frequently than any other fraudulent disbursement scheme in our 2015 survey; they accounted for less than 7 percent of the reported fraudulent disbursements. However, recall that our survey asked respondents to report only one case they had investigated; it was not designed to measure the overall frequency of various types of schemes within a particular organization. Thus, the low response rate for register disbursements does not necessarily reflect how often these schemes occur. Furthermore, the type of fraud that occurs within an organization is determined to some extent by the nature of business the organization conducts. For example, register disbursement schemes most commonly occur in large retail stores that employ several cashiers as opposed to a law firm where a cash register would not even be present. Keep in mind that the frequency statistics presented in this book represent only the frequency of cases that were reported by our respondents. (See Exhibit 6.1.) In addition to being the least frequently reported type of fraudulent disbursement, register disbursements were the least costly, with a median loss of $30,000. The typi- cal register disbursement scheme in our survey caused about one-fifth the losses of the typical check tampering scheme. (See Exhibit 6.2.) FALSE REFUNDS A refund is processed at the register when a customer returns an item of merchandise purchased from that store. The transaction that is entered on the register indicates that the merchandise is being replaced in the store's inventory and that the purchase price is being returned to the customer. In other words, a refund shows a disbursement of money from the register as the customer gets money back. (See Exhibit 6.3.). Fictitious Refunds In a fictitious refund scheme, a fraudster processes a transaction as if a customer were returning merchandise, even though no actual return takes place. Two things result from 148