Are Funds from Customer Credit Card Payments Going to Your Employees

Are Funds from Customer Credit Card Payments Going to Your Employees

By Timothy R. Gallagher, CPA, CFE, CGMA

Most businesses today accept credit cards from consumers as a form of payment. The process of accepting credit cards for payment of goods or services helps to guarantee the collectability of customer account balances. Additionally, during difficult economic conditions, credit cards may be the only method available for consumers to pay for their intended purchases.

When a business makes a sale and the customer pays with a credit card, the overall objective is to deposit the funds into the company's business bank account. As indicated by Stephen Pedneault, CFE, CPA/CFF, in his article, "Don't Sing the Credit Card Blues" in the January/February 2011 FraudMagazine release, Pedneault writes, "Credit cards are processed through a merchant bank, which charges a monthly fee along with a percentage of each sale transacted. The percentage varies depending on the card processed and the size of the transaction. The corresponding deposit into the business account can be gross (for the full amount of the sales transactions processed) or net (the sales less deducted applicable fees associated with the sales). Gross sale deposits are desirable for reconciling activity because the fees and discounts are taken as separate transactions periodically" (Pedneault 26).

Although credit cards can increase the collectability of customer sales, these forms of payment create a platform for organizations to become victims of their own employees' fraudulent acts. A common method where businesses fall prey to their own employees is when their workers have the ability to process refunds and credits. If there is a lack of internal controls in this area, employees might have the opportunity to authorize fraudulent or fictitious credits or refunds to their personal credit cards. Additionally, when unauthorized credits or refunds are initiated on business days where there are large or above-average sales, the fraudulent transactions could become absorbed into the details, causing the deposits to appear legitimate while simultaneously resulting in lower funds being deposited into the business bank account.

In order to combat this common area of fraud, we recommend that business owners accepting credit cards as a method of payment adopt the following internal control procedures:

  • Ensure a company form is completed each time a refund or credit is to be processed. The form should list the name of the employee authorizing the transaction, the amount and reason for the refund or credit, and the employee's name granting the return.
  • Only permit refunds or credits to be returned to the credit card that was originally used for the initial sale transaction.
  • Require a management-level employee to authorize and authenticate every credit or refund.
  • Verify that all refunds or credits are supported by appropriate company documentation.
  • Guarantee employees designated to authorize refunds or credits are independent of the employees processing the refunds or credits.

Have you seen credits or refunds on your merchant statements that do not make sense? What other questions do you have related to the potential issues of accepting credit cards as a form of customer payment?

For more information, contact the fraud and forensic accounting experts.

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