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Skimming Fraud

A white-collar crime that involves taking the cash of a business prior to entering it into the accounting system

What is Skimming Fraud?

Skimming fraud is a type of white-collar crime that involves taking the cash of a business prior to entering it into the accounting system. Skimming is an “off-book” fraud because the cash theft has occurred before it is entered into the bookkeeping system; thus, it is never reported on the company’s accounting records. Individuals are also vulnerable, and can experience ATM, debit card, and credit card skimming.

 

Skimming Fraud

 

Among other types of white-collar crimes, skimming is the simplest form of fraud. However, skimming is the most difficult to detect because it does not have audit trails that can reveal the source of the theft. Frequently, skimming is detected by accident. However, in some cases, businesses can suspect potential fraud by discovering lower than expected revenue.

Skimming is a slang word. The legal term for skimming fraud is defalcation.

 

Types of Skimming Fraud (Business)

Skimming fraud can take several forms:

  • Direct theft: A fraudster hides cash from the employer, business partner, or shareholders.
  • Tax evasion: Skimming is a popular scheme for tax evasion. The owner of a business can pocket cash without recording it in the accounting system. In this case, cash is transferred from the customer directly to the owner of the business. Thus, the owner can avoid paying either business or personal income taxes.
  • Bribery and other crimes: Sometimes, skimming involves other crimes such as bribery or protection racket. The owner of a business may use skimming to set aside funds for a bribe or as payment to racketeers.

 

Mechanism of Skimming Fraud

 

Example of Accounting Skimming Fraud

Sam is the owner of a hot dog stand. Recently, he hired a new employee. After two weeks, Sam discovered that the hot dog stand’s profit (significantly) decreased by 40%. He started to suspect potential fraud from his new employee, and he decided to install a hidden camera in the stand to watch the production process.

After analyzing the business’ accounting records, he found out that his new employee did not always use the cash register for hot dog sales. He did not give receipts to customers who purchased only hot dog or drink and paid in cash. Also, the customers usually did not ask for receipts because the amounts were small. At the same time, Sam could not detect the fraud from his accounting books because the transactions were never recorded. After this discovery, Sam fired his new employee.

 

Types of Skimming Fraud (Personal)

Skimming for individuals can take different forms:

  • ATM: With ATM skimming, thieves obtain a person’s debit card number by installing an illegal card reading device on the ATM machine. In addition to this, thieves use a camera to record the person’s personal PIN number.
  • Credit Card: With credit card skimming, thieves make small charges that are likely to go undetected by the card owner. For example, when paying for a meal at a restaurant, an employee may obtain your card number and later make a series of small charges from the restaurant and take cash from the till so that it goes unnoticed by management.

Learn more about how to protect yourself from personal skimming crimes in this New York Times article.

 

Related Readings

CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful:

  • Audited Financial Statements
  • Forensic Audit Guide
  • Projecting Income Statement Line Items
  • Top Accounting Scandals

Financial Analyst Certification

Become a certified Financial Modeling and Valuation Analyst (FMVA)® by completing CFI’s online financial modeling classes and training program!