Audit Forensic-John Markov's Department Store

Below is another case for audit forensic which is given by my lecturer as an assignment. Hope it will give you benefit and knowledge by reading it :)

Case Study

John Markov runs a family-owned department store in St. Louis.  The store consists of nine different departments, each with its own department manager. Store hours are Monday through Saturday from 10:00 A.M. to 7:00 P.M., and from noon until 5:00 P.M. on Sunday.

Each department has its own cash register, and two salespersons are assigned to each register. To prevent any confusion, each salesperson must enter his or her own secret code with each transaction. At the end of each day, the sales manager in each department tallies the department’s register, collects the money (cash and checks) from the register, and prepares a transmittal slip for the general manager to review and sign. The general manager then double-checks the cash count before signing the transmittal slips.

After collecting all cash receipts from all departments, the general manager prepares a daily cash sales report and sends it to the store’s finance manager. The finance manager again counts the money and signs three copies of the daily cash sales report. She keeps one copy for herself, a second copy goes to the store accountant, and the last copy goes to the store manager. The finance manager then puts all of the cash into the company safe, where it stays until the next morning when it is picked up by an armored car service. The store accountant reconciles copies of cash sales reports with bank deposit slips and with credits on the monthly bank statement.

John Markov has a close relationship with the bank, so he is always called first when there is any kind of issue or problem. He just received a call from one of the bank’s customer service representatives who suggested that he look into some customer checks that had recently bounced. The bank representative said that some of the payer names on the checks had come up in bad checks written to a number of other local businesses.

“You have an insider working against you,” said the bank employee. “This is happening all over town; I heard a police investigator say that there’s always in insider involved.

Questions

a.      What possible check fraud schemes might the company be a victim of?

b.     Given the store’s procedures for processing cash receipts, which persons in the store are in a position to participate in a check fraud scheme?

Answers

Bad Check is a check drawn on a nonexistent account or on an account with insufficient funds to honor the check when presented.  "Passing" bad checks is illegal, and the crime can range from a misdemeanor to a felony, depending on the amounts involved and whether the activity involved crossing state lines. 

a. The possible check fraud schemes might the company be a victim are:

1.      Check Kiting

It is a form of check fraud by utilizing the bank transfer.  In here, the fraudster uses bank check as a means to steal the company’s money. The fraudster will transfer the money from company’s account to his/her account through bank check. It means that the account balance in company’s account will be decreased, to cover this event, the fraudster will transfer the money from another bank using check with non-sufficient funds before the bank check to his/her account be cleared.

2.      Paperhanging

This fraud involves writing and reordering checks from closed accounts. Paperhangers pass checks at retail stores where they write the check for more than the purchase amount. Sometimes they will stop the payment, return the item, and ask for a full refund. Alternately, the fraudsters might make a fake deposit at a bank and ask for cash back. 

3.      Check Tampering, counterfeiting or alteration

Counterfeit checks are created either by using desktop publishing equipment (personal computer, scanner, bookkeeping software and printer) or by duplicating a check with photocopiers. In doing counterfeiting, the fraudster will rename the check company’s name into another local business name. The case is happened in United States, the United States has a system whereas the checks that have been cashed will be returned by the bank that issued the check. So the company can reviewing anyone the checks are paid.

4.   Salami Technique

This form of fraud is done by taking the small amount of each transaction at the time of thousands of transactions, and just set aside a few cents from each transaction.

b. The possible persons in the store are in a position to participate in a check fraud    according to the given the store’s procedures are:

1. Salesperson, sales manager and general manager

     According to the case above, Sales Manager in charge of calculating the cash register, collecting money (cash and check) from cash machines, and set up a slip remittance to the General Manager for review and signature. There’s also possibility that the sales person do a collusion Sales Manager and General Manager by did not write down the name of the company as the recipient of the check (leave it blank), through that way, it will easier the Sales Manager to steal the check. Sales Manager also can do another fraud by stole the remittance slip of customer credit. Since the check and remittance slip (invoice) on credit is not included in the daily cash sales report, the store accountant did not receive a bank deposit slip and bank credit on the monthly statement, so that when the reconciliation made by the Store Accountant, there will not show anything wrong.

2. Sales manager and store accountant

Both of them doing collusion through check kiting by opening two book accounts to make fraudulent balances in order to theft the customer’s money and took the money for themselves.

3. Cashier

This form of fraud is done by taking small amount of each transaction. It is done when the customers still has cash back for several cents. The cashier steals those cents from each transaction. The common modus that used is by changing those cents with candies and then give those candies to customer because the customer will not be suspicious when their cash back will be exchanged with candies.

Check Fraud Tips for the Consumer:

        i.            Make sure your checks are endorsed by your financial institution and incorporate security features that help combat counterfeiting and alteration.

      ii.            Store your checks, deposit slips, bank statements and canceled checks in a secure and locked location. Never leave your checkbook in your vehicle or in the open.

    iii.            Reconcile your bank statement within 30 days of receipt in order to detect any irregularities. Otherwise, you may become liable for any losses due to check fraud.

    iv.            When you receive your check order, make sure all of the checks are there, and that none are missing. Report missing checks to your bank at once. Should you fail to receive your order by mail, alert your bank. Checks could have been stolen from mail box or lost in transient.

     v.            If someone pays you with a cashier's check, have them accompany you to the bank to cash it.

    vi.            If at all possible, only accept a check during normal business hours so you can verify whether it is legitimate. Make sure you obtain identification information from the individual

  vii.            Use your own pre-printed deposit slips, and make sure the account number on your slip is correct. Thieves occasionally alter deposit slips in the hope you won't notice and the money goes into their account.

viii.            Don't make a check payable to cash. If lost or stolen, the check can be cashed by anyone.