How to Avoid Skimming and Protect Your Business

Skimming refers to the theft of cash or other assets from a business before those funds are recorded in the accounting system. This form of financial fraud is often termed “off-book” because the stolen amounts never appear in the company’s financial records. Because of this, skimming can be particularly challenging to detect through standard reconciliation processes alone. Businesses of all sizes can experience skimming, making it important to understand both prevention and detection methods.

Common Skimming Techniques

Skimming often involves misappropriating incoming funds before they are recorded. One frequent method is unrecorded sales, where an employee completes a cash sale but does not ring it into the point-of-sale system. This leaves no direct audit trail. A variation involves understated sales, where the employee records a sale for a lower amount than received, then keeps the difference. This might be achieved by applying a fictitious discount or manipulating the cash register.

Skimming can also target incoming payments on accounts receivable. An employee might steal a customer’s payment. Concealment often involves writing off the customer’s account as uncollectible, applying fraudulent discounts, or using “lapping,” where a payment from one customer covers the theft from another. These methods aim to balance the customer’s account in the system while funds have been diverted.

Establishing Robust Internal Controls

Implementing strong internal controls prevents skimming. Segregation of duties is a key principle, requiring no single employee to have complete control over a financial transaction. For instance, the person collecting cash should not also record sales or perform bank reconciliations. This division minimizes opportunities for an individual to commit and conceal fraud.

Physical controls over cash assets are another preventive measure. This includes using secure cash registers, storing cash in a safe, and requiring daily bank deposits. Limiting cash access to authorized personnel reduces theft risk. Clear policies should also be established for cash handling, such as procedures for cash pickups from tills and counting cash drawers at shift changes.

Authorization procedures provide an additional layer of control, requiring management approval for specific transactions that could be exploited for skimming. This includes supervisory sign-off for sales returns, voided transactions, or customer account write-offs. These approvals ensure legitimate business reasons support adjustments, rather than covering stolen funds. Businesses should also implement clear, standardized cash handling policies and provide regular employee training.

Monitoring and Reconciliation Practices

Beyond preventive measures, consistent monitoring and reconciliation practices are key for detecting skimming. Regular bank reconciliations are a primary practice, comparing internal cash records with bank statements. This process helps identify discrepancies, such as unauthorized withdrawals or deposits that do not match recorded transactions. Businesses should perform bank reconciliations at least monthly, or more frequently for high-volume operations.

Detailed sales and cash receipt reconciliations are also important. This involves comparing daily sales reports from point-of-sale systems or sales invoices to the actual cash and other payments received. Any disparities between recorded sales and collected funds warrant immediate investigation. This daily reconciliation helps ensure all sales are properly accounted for and no cash has been diverted.

Businesses should also conduct analytical reviews, such as monitoring gross profit margins and analyzing revenue trends. An unexpected or consistent decline in gross profit margins, particularly in cash-heavy operations, could signal unrecorded sales. A sudden or unexplained decrease in revenue trends compared to historical data or budgets might also indicate sales are being skimmed. Conducting surprise cash counts, where cash on hand is verified against recorded amounts without prior notice, can uncover immediate shortages and reinforce accountability.