What Is Cash Skimming? Examples, Detection & Prevention

Businesses with very relaxed or nonexistent internal controls over cash transactions are at a high risk of skimming fraud. The best way to detect and prevent cash skimming is to implement a robust internal control system with a strong emphasis on proper and adequate transaction documentation.

In this article, we’ll talk about how cash skimming is perpetrated and how businesses can detect and prevent this type of fraud.

Cash Skimming Example

That sample scenario is a classic case of cash skimming. It also shows the elements of the fraud triangle that led Todd to commit the fraud. Let’s discuss how each element was applied briefly.

• Incentive or pressure: Todd is drowning in credit card debt. He needs extra money to pay off the debt, which is the pressure that pushes Todd to commit the fraud.
• Opportunities: Debbie doesn’t check records and seldom visits the store. Todd sees this as an opportunity to commit fraud.
• Attitudes or rationalization: Todd admits that Debbie doesn’t pay him right, which is his rationalization for committing fraud.

Opportunities for Cash Skimming

When opportunities for cash skimming exist, employees with the pressure or attitude to commit fraud will see this as the best time to steal from the business. While we’re not implying that you should distrust employees, eliminating the opportunities can give you some peace of mind.

Lax Cash Handling Practices

Do you just leave coins and bills lying around the cashier’s desk? Can employees open the cash register even if there’s no sale? Do you keep the cash lockbox unlocked all the time? If you do any of these things, you’re giving fraudsters an opportunity to skim cash.

Here’s what you need to do:

• Install a POS system that’ll open only when a sale is made. Otherwise, opening the POS system’s cash register must require a special passcode that only you know.
• Use a manual cash register, if you can’t afford a POS system for now. Manual cash registers often have two keys: the cashier’s key and the manager’s key. The cashier’s key can only lock and unlock the cash drawer—but it won’t open the drawer without ringing a sale. The manager’s key can access all the cash register’s functions and open the drawer even without ringing a sale. Don’t let anyone know where you keep the manager’s key for safety reasons.
• Encourage cashless payments. We highly recommend you use POS systems because they often come with cashless payment methods as part of the software subscription.

Too Much Cash in Business Premises

One of the ideal cash controls for small businesses is to make timely deposits. Keeping too much cash in the business premises exposes you to a higher risk of internal or external theft. Ideally, you should deposit cash to the bank at the end of the business day. However, if you find that tedious, we recommend depositing every twice a week.

No Proper Surveillance

Cash skimming leaves no trail because the fraudster steals the money before it is recorded in the system. If there is no CCTV camera in the cashier’s area or around the business premises, it’ll be easy for employees to skim cash. We recommend installing CCTVs to monitor the movement of people getting in and out of the premises.

How to Detect Cash Skimming

If you were Debbie, what would you do to detect cash skimming? Detecting fraud can be tricky because there is an intention to conceal the act. But with small business internal controls in place, cash skimming can be detected easily, especially if the fraudster is not careful.

Here are some ways you can uncover skimming fraud.

1. Do Surprise Cash Counts

One of the best ways is to conduct a surprise check. Unannounced checks and audits increase unpredictability, hindering the fraudster’s plan to commit fraud. Even though fraud is not present, surprise visits can encourage employees to update accounting records regularly. You might even catch employees slacking off or not doing their jobs.

When conducting surprise visits and cash counts, here are some steps to follow:

1. Conduct visits randomly. You lose the element of surprise when your employees expect to see you on a particular day or time. Don’t create a pattern when visiting the store for a surprise count (e.g., every Tuesday for weeks one and four of the month and every Friday for weeks two and four of the month). Arriving randomly will derail the plans of the fraudsters, which could discourage them from committing fraud.
2. Count the cash with the employee on the side. When counting the cash in the register, you must ask the employee to witness the count as a form of transparency. The employee’s presence ensures that the count is correct and that you have not intentionally miscounted the cash.
3. Pull POS data as of the time of the count. The cash in the register—excluding the change fund—must match the cash sales recorded by the POS. Small discrepancies are possible red flags because fraudsters often steal small amounts to make them unsuspicious. In this case, investigate and observe if they happen frequently or if there are patterns.

While surprise cash counts are important, they’ll only detect cash skimming if the original sale was entered in the POS system. Notice in our example, Todd didn’t enter the sale in the POS, so a surprise cash count wouldn’t have detected his theft. To detect it, Debbie needs to compare inventory records to the actual inventory remaining in the store.

2. Monitor Inventory

Another way to detect cash skimming is to examine inventory movement. Reviewing inventory records may not raise suspicion because some fraudsters may think it doesn’t directly relate to cash.

Here’s how you can detect cash skimming by reviewing inventory records:

1. Check that inventory records match the actual inventory on hand. When an employee performs cash skimming, they don’t record the sale. Hence, the POS system will not record a reduction in the inventory quantity, which overstates inventory records.

When inventory per physical count is significantly lower than inventory per the accounting records, that could be a sign of skimming. This missing inventory is called inventory shrinkage and can also be a sign of shoplifting.

2. Compare inventory turnover rates. Inventory turnover is the rate at which inventory is sold, and a higher number indicates that inventory is sold quickly. When there is cash skimming, inventory turnover becomes inflated because the cost of goods sold (COGS) isn’t recorded. It can be hard to detect skimming here, but comparing turnover rates across accounting periods may indicate or raise suspicion of cash skimming.

3. Observe Patterns in Cash Sales

Cash skimming directly affects cash sales because cash isn’t recorded. However, declining cash sales is a potential red flag for cash skimming. Overall sales may be declining, which may also be why cash sales are declining. To rule out that possibility, it’s best to

• Review sales performance. Cash sales decline if total sales performance declines, so cash skimming may not be a potential threat if total sales are declining.
• Check credit card sales. Are customers shifting to card payments? If yes, a decline in cash sales may be expected. However, if credit card sales are stable while cash sales are declining, that’s a potential red flag for cash skimming.

How to Prevent Cash Skimming

Cash skimming fraud can be prevented if adequate controls are in place. For small businesses, the owner’s active participation and constant presence in the business are good compensating controls if proper segregation of duties in accounting can’t be followed due to limited staffing.

Here are some measures to prevent cash skimming in your small business.

1. Establish Strict Cash Controls

The best way to keep fraudsters at bay is to establish strict cash controls. Due to the nature of cash being easily stolen, especially in small amounts, you must develop specific procedures and rules regarding cash handling.

• Segregate incompatible duties. The cashier’s main responsibility is to receive customer payments and punch the customer’s purchases in the POS. Since the cashier has custody over cash, the duties listed below are considered incompatible:
  • Recording sales transactions from POS data to the accounting system
  • Counting and preparing cash to be deposited to the bank at the end of the business day
  • Reconciling bank accounts
  • Voiding transactions entered in the POS
  • Counting inventory It's common for cashiers to help in inventory counts when there are no customers in the store. This practice is allowable as long as the cashier will only count the inventory. and maintaining inventory records
• Require strict cash handling procedures. Aside from receiving customer payments, the cashier should also perform the following responsibilities as part of their job description:
  • Count bills and coins at the start of the shift
  • Record all transactions in the POS
  • Keep the cash drawer closed and secure all the time
  • Always issue receipts to customers even if they don’t take it
  • Carefully count change before giving it to the customer
  • Refrain from providing loose change for larger bills—unless the customer bought something
• Use a POS system with built-in cash drawers. Traditional cash lockboxes are great for safekeeping cash, but POS systems with built-in cash drawers are more secure because the drawers only open when there is a transaction.

2. Encourage Customers to Use Credit Cards

The most surefire way to avoid cash skimming is to avoid cash. Accept credit cards, and don’t charge the customer an additional fee. Accepting credit cards does require paying a fee to your credit card processor, but it also has so many benefits.

In addition to eliminating the opportunity to skim cash, it automates much of your bookkeeping when your credit card processor integrates with your bookkeeping software. It also helps you avoid daily trips to the bank to make deposits.

3. Install CCTV Cameras

CCTV cameras can help your small business in many different ways. Primarily, they’re used to record store activities and capture shoplifters. However, you can also use them to spot employees not punching customer purchases and pocketing customer payments.

We recommend placing a CCTV directly under the cashier’s position. The camera angle should clearly capture the POS and the cashier. A CCTV in place can deter fraudsters because they know they’re being watched.

4. Rotate Employees

If you have several employees, rotating them significantly reduces the risk of fraud. Employees who stay in a position for too long become more knowledgeable about the processes and procedures of their jobs. In positions that involve cash handling, it’s not ideal to keep a single employee in that position for too long.

Rotations can disrupt the fraudster’s plans, which could further deter them from committing fraud. It’s because the next person who will handle their job might uncover their fraud and report them to the owner. However, employee rotation doesn’t eliminate the risk of fraud. Collusion, wherein two or more employees are scheming to steal from the business, may exist.

5. Know Your Employees

Another great way to prevent fraud and cash skimming is to know your employees. Get in touch with them on a personal level if possible. Knowing your employees’ attitudes, personalities, and lives can give insights into their performance and attitudes toward work.

For example, assume one of your employees in charge of cash handling is experiencing a financial crisis. This information alone increases the risk of theft. Though we don’t want to accuse them of stealing, it’s prudent to be more skeptical and pragmatic.

You might want to do the following:

• Re-assign the employee to another role that doesn’t handle cash
• Retain the employee in the position but increase supervision
• Restrict the employee’s physical access to cash
• Offer support, whether emotional or financial

Frequently Asked Questions (FAQs)

What is skimming a cash register?

---

Can cash skimming be eliminated?

---

Bottom Line

Cash skimming is a fraudulent practice that can be easily perpetrated in a business without existing or strong internal controls over cash. We hope this article taught you how to prevent and detect cash skimming practices. Though we discussed how cash skimming is performed, we hope that you’ll not do this.