August 13, 2013

Most organizations are vulnerable to embezzlement from a dishonest employee. A retail establishment is especially vulnerable because of the high volume of cash passing through the business.

As the saying goes, “Cash is king,” and wherever there is cash, there is a risk of embezzlement.

Following are some common embezzlement schemes committed against retail operations along with some easy preventive controls.

Theft of Cash

This type of fraud can be committed by any employee in the cash-handling process and is fairly easy to cover up if proper internal controls are not in place.

How it’s done

The cashier collects a cash payment from a customer but doesn’t enter the sale into the cash register. The cashier later skims this cash. The theft is not noticed because the cash in the drawer balances the cash register tape. Restaurants and retail stores are especially vulnerable.

How to prevent it

  1. Never allow the same person to collect payments (cashier) and balance (z-out) the register.
  2. Institute a policy that all customers must receive a cash register receipt for purchase.
  3. Post a sign at the register saying any customer not receiving a receipt will receive a free $5 gift certificate. Some national companies use this control to help ensure that all sales are entered into the cash register.
  4. Actively monitor your product margins. Unusual spikes up or down can indicate embezzlement.

Unauthorized Write-off of Bills

A retail business that allows customers to establish credit at its store has the added risk of potential abuse of accounts receivable.

This type of embezzlement cost an Illinois car dealership more than $300,000. The controller was writing off amounts that relatives owed on vehicles purchased at the dealership.

How it’s done

An individual with access to the accounts receivable ledger and accounting records simply writes off the amounts friends or relatives owe to the business. They may cover their tracks by posting accounting adjustments to hide the write-off.

How to prevent it

  1. Minimize the number of customers to whom you grant credit. Most people should be able to pay your retail business by credit card.
  2. Limit the number of people with access to customer accounts receivable records.
  3. Monitor write-offs or adjustments to the accounts receivable very closely with monthly system reports detailing all write-offs.
  4. Implement a monitoring program in which a periodic surprise inspection of your accounts receivable and other records is conducted.
  5. Require all employees who handle receivables to take an annual vacation. A receivables scam falls apart if the person is away for an extended period.

“Phantom” Merchandise Return

This type of fraud involves processing a bogus merchandise return in the cash register and later skimming off the excess cash.

How it’s done

The cashier processes a “phantom” merchandise return into the cash register with no cash refund paid. The excess cash in the register is later taken or processed as a credit on one of the cashier’s personal credit cards. The cash in the drawer will balance with the cash register tape, so nothing is detected.

How to prevent it

  1. Institute a policy requiring all customer refunds over a certain amount be approved by a manager.
  2. Monitor the level of merchandise returns processed. If one person has an unusually high level of returns, scrutinize further.
  3. Watch your inventory for unexplained inventory write-offs.
  4. Monitor your product margins. Unusual spikes up and down can be an indication of embezzlement.

Embezzlement is an unfortunate reality in today’s business world. Retailers are especially vulnerable because of the volume of cash they handle. All retail businesses should consider implementing some of the above controls to help safeguard their organization

This article was originally posted on August 13, 2013 and the information may no longer be current. For questions, please contact GRF CPAs & Advisors at