Last month we reviewed foundational internal controls, including the tone at the top, store policies and job responsibilities. This month we continue our discussion of cost-effective controls to minimize the risk of fraud in your organization.
Balancing the register: The process of counting the money, reconciling the receipts and balancing the cash drawer creates accountability for the day’s transactions. Balancing a cash register usually takes place at the end of the day or at the end of the cashier’s shift and should occur in an office or other secluded area.
By adding the beginning cash in drawer to the daily sales figures, a retailer will know exactly how much money should be in the cash register at any given time. The use of a reconciliation form with a copy of the daily closeout tape attached should be reviewed daily by an appropriate person. Management should maintain a cash “over” and “short” list for each cashier and investigate both overages and shortages and unusual reconciling items.
Empower your customers: To ensure all sales are accurately recorded, consider posting notices offering customers gifts if they don’t receive a receipt or if the sale is recorded incorrectly. Under-ringing or overcharging occurs when the cashier does not ring up the entire sale or charges the customer more than the actual cost of the purchase.
These are simple ways for employees to steal and it is hard to detect. A cashier using a cash register or POS system with a digital display, showing the customer what the cost of the transaction should be, is also a good deterrent to this kind of theft.
Lock the drawer: The cash register drawer should not be able to open unless a sale is rung up. Otherwise a transaction can be made and the sale is not recorded.
Track and monitor: Owners or management should review daily sales reconciliation forms and corresponding sales reports, and review of budget to actual reports and budget variances to quickly spot problem areas. Monitor financial reports specifically for decreasing sales with increasing inventory costs, lower average sale per cashier or shift, or lower transaction counts per cashier.
Management should also choose other reports and backup documentation to spot check for accuracy in a random or unpredictable manner. Employees intending to commit fraud will try to identify predictable patterns and then exploit them and if they know someone is looking at documentation on a regular basis, it makes it harder for them to implement a fraudulent scheme.
Additional security: In a cash-rich environment, management should consider using surveillance or spotters to deter theft, use a time-lock safe that dispenses change for large bills and require that large bills be deposited in the safe or depository safe immediately on receipt.
Red flags: Management should monitor employee behavior for warning signs, such as a significant change in employee’s behavior; an employee begins to take a lot of “personal” calls on their cell phone; an employee has high personal debt or other financial pressures; an employee appears to be living a lifestyle that does not fit their current income level; excessive use of drugs or alcohol and/or excessive absences due to this use; or the expression of job dissatisfaction. These warning signs should be particularly considered when noted with other discrepancies to help identify patterns that might indicate fraudulent activity.
Always be alert: There is no way to completely eliminate the risk of fraud or theft. However, by implementing the correct tone at the top, adopting strong store policies, sound cash controls and effective monitoring activities, companies can significantly reduce those risks in their retail environment.
Jon Jenkins, CPA, is a partner with Clark, Raymond & Company PLLC. He enjoys working with companies to improve internal controls and financial reporting. Clark, Raymond & Company is a full-service accounting firm working with companies in the Pacific Northwest.