How Does Financial Skimming Work in Accounting?

Financial skimming is a type of fraud where money or assets are taken from an organization before being formally recorded in its accounting system. This theft bypasses traditional record-keeping, making it an “off-book” fraud. Skimming exploits the moment cash or payments are received but not yet entered into company records.

The Core Concept of Skimming

Skimming is challenging to detect because stolen funds never officially enter the accounting system. Since money is intercepted before it is recorded, there is no direct audit trail or discrepancy within the company’s books. This differs significantly from other forms of theft, such as larceny or embezzlement, where funds are stolen after being recorded, leaving an imbalance in financial statements.

The “off-book” nature of skimming means that standard internal controls, like reconciling bank deposits with recorded sales, are less effective for detection. The missing revenue was never expected to be present in the records, making it appear as if transactions did not occur or were for a lower amount. Consequently, the absence of these funds does not create the red flags that typically arise from discrepancies in recorded financial data.

Common Skimming Methods

Methods for skimming funds target different points in a business’s revenue cycle, diverting money before it becomes part of official financial records.

Sales Skimming

Sales skimming occurs when an employee pockets cash from a sale without recording the transaction. An employee might not ring up a sale, ring up a lower amount than the actual purchase, or process a fictitious return, then keep the cash. For example, a cashier might not issue a receipt for a cash purchase, directly taking the money. This method is prevalent in businesses with high volumes of cash transactions.

Receivables Skimming

Receivables skimming involves diverting payments received from customers for outstanding invoices. One common technique is “lapping,” where an employee takes a payment from Customer A, then uses a subsequent payment from Customer B to cover the theft from Customer A’s account. This continuous cycle requires constant manipulation of customer accounts to hide the initial theft, often involving applying payments from new sales to older, already stolen receivables. Other methods include writing off customer accounts as uncollectible after the payment has been received and stolen, or issuing unauthorized discounts to customers and pocketing the full payment.

Refund or Void Skimming

Refund or void skimming involves an employee creating a false refund or voiding a legitimate transaction and then taking the corresponding cash from the register. This can happen by issuing a fictitious refund to a non-existent customer or to themselves, or by voiding a completed sale and removing the cash that was paid for that transaction. The lack of a legitimate underlying transaction or the manipulation of a real one allows the perpetrator to extract cash without a corresponding reduction in inventory or other traceable assets.

The Nature of Skimmed Funds

Once funds are skimmed, they exist entirely “off the books,” meaning they are never reflected in the company’s official financial records. This absence makes the funds inherently difficult to trace through standard accounting reconciliation processes. The transaction was never recorded, so there is no corresponding debit or credit entry to balance, unlike other forms of theft where money is removed from an already recorded account.

The direct consequences on reported financial metrics are significant. Sales revenue will be understated because the transactions were never fully recorded. Consequently, the company’s reported cash balances will be lower than they should be. If accounts receivable were skimmed, the accounts receivable balance might also be misstated, appearing higher than the actual amount owed by customers, or specific customer accounts might show an uncollected balance when the payment was, in fact, made.