Ch 9 - Non-Cash Asset Theft Flashcards
What are the 5 categories for the misappropriation of noncash assets?
- Misuse
- Unconcealed larceny
- Asset requisitions and transfers
- Purchasing and receiving schemes
- Fraudulent shipment
Misuse of Noncash Assets
This is the inappropriate use of a company’s assets which typically include, company cars, supplies, computers and other office-equipment. The employee could be using their work computer to print invoices, write letters or do other work that is for a business that employee is running on the side. It would also be considered misuse of noncash assets if an employee is scrolling through social media while on their work computer on the clock.
Unconcealed Larceny Schemes
- Where an employee simply takes property from the company premises without attempting to conceal it in the books.
- Often perpetrated by highly trusted employees/ they leave the assets out in plain sight to steal later
- Assets misappropriated after hours by employees who keys to the building or perpetrator mailed the assets to themselves or another location where they could pick it up
- “The Fake Sale”- where an employee has an accomplice that they will make a “sale” to, but not actually ring up a sale. The bag up the merchandise and the accomplice will leave with stolen goods. To the casual observer, it’s as if a legitimate sale was made.
Preventing and/or detecting unconcealed larceny of non-cash assets
- The jobs of requisitioning, purchasing and receiving assets should all be segregated. To provide additional checks and balances, the payables function should be segregated from all purchasing and receiving duties. (preventative)
- Physical inventory should be guarded and locked, with access restricted to authorized personnel only. (preventative)
- Access logs should be used to track those who enter restricted areas or each authorized personnel should have their own unique access code that can identify them as they enter. (preventative and detective)
- Security cameras should be installed in warehouses and sales floors. (preventative and detective)
- Organizations should conduct physical inventory counts on a periodic basis, and someone independent of the purchasing and warehousing functions should conduct these counts. (detective)
- Organizations need to put in place a mechanism to receive customer complaints and an independent employee should be assigned to follow up on these complaints. (detective)
- Customer shipping addresses can be matched against employee addresses. (detective)
Asset Requisitions and Transfers
- inventory held in multiple locations creates opportunities
- Asset requisitions or other documentation that enable non-cash assets to be moved from one location in a company to another can be used to facilitate the misappropriation of those assets. In the process of moving the assets from one location to another using this documentation, the fraudster takes the merchandise for himself.
- the basic scheme is to requisition assets for a work-related project, then steal the materials
Preventing and/or detecting asset requisitions and transfers
- Reconcile requested materials to actual jobs or work completed. This way if more were requested than was used on the project, this could be an indication of fraud. (detective)
- Authorizations should be required of requested materials (preventative)
- Require both signatures of requestor and approver(preventative/ detective)
Purchasing and receiving schemes
The purchasing and receiving functions can also be manipulated by a dishonest employee to facilitate the theft of non-cash assets.
- assets are intentionally purchased by the company, then are misappropriated.
- “falsifying incoming shipments”: where the employee charged with receiving goods falsifies the records of incoming shipments. The fraudster may also reject portions of the shipment as not being up to quality standards, then keep the “substandard” material rather than sending it back to the supplier.
Purchasing and receiving noncash asset scheme vs. purchasing and receiving billing scheme:
The difference between these two is that purchasing and receiving as a noncash scheme is where the company intentionally purchases assets and then they are misappropriated. Billing schemes are different because they require the purchase of UNNECESSARY materials.
If an employee causes his company to purchase merchandise that the company does not need, this is a false billing scheme: the harm to the company comes in paying for assets for which it has no use.
False Shipments of Inventory and Other Assets
- False shipping and sales documents are created to make it appear that the inventory was sold
- False packing slips can allow the inventory to be delivered to a fraudster or accomplice
- To hide the theft a false sale is created
- Receivable is aged and written off
- Sometimes a legitimate sale is made but understated
Red flag: increase in bad debt expense
Preventing and/or detecting purchasing & receiving and fraudulent shipping schemes
- Match invoices to receiving reports before payments are issued to prevent inventory from being stolen from incoming shipments. (preventative)
- Match every packing slip (sales order) to an approved purchase order, and that every outgoing shipment is matched to the sales order before the merchandise goes out. (preventative)
- Shipments of inventory should be periodically matched to sales records to detect signs of fraud. (detective)
- Evaluate bad debt (detective)
Concealing Inventory Shrinkage
- physical count of inventory detects shrinkage
- Altered inventory records: one of the simplest ways to conceal shrinkage is to change the perpetual inventory records to match the physical count, known as “forced reconciliation.”
- Fictitious sales and accounts receivables: where the fraudster creates fake sales and fake receivable accounts to conceal the theft of inventory. Sometimes they even charge the fake sales to real accounts receivable customers whose account balances are so high that the addition will go unnoticed.
- Write off inventory and other assets: writing off inventory and other assets is a common way for fraudsters to remove assets from the books before or after they are stolen.
- Physical Padding: a concealment scheme in which fraudsters try to create the appearance that there are more assets on hand in a stockroom or warehouse than there actually are. This can be done by stocking empty boxes to make it look like there is extra inventory.
Misappropriation of Intangible Assets (2 types)
- Misappropriation of information: -Includes theft of competitively sensitive information (e.g., trade secrets, customer lists, marketing strategies, new products)
- Can undermine value, reputation, and competitive advantage
Controls to prevent misappropriation of intangible assets
- Limited access
- Firewalls
- Confidentiality agreements
- Background checks
Misappropriation of Securities
Where a fraudster sells securities, without being authorized to do so, and keeps the proceeds for himself.
Controls to prevent misappropriation of securities
-Proper internal controls over the investment portfolio need to be maintained, such as separation of duties, restricted access to investment accounts and periodic account reconciliations.
5 Categories of Tangible Non-Cash Misappropriations
1 Misuse 2 Unconcealed Larceny 3 Asset Requisitions and Transfers 4 Purchasing and Receiving Schemes 5 Fraudulent Shipments
Negative Effects of Non-Cash Asset Misuse
Inventory Shrinkage
Lost Productivity
Diversion of Capital for Inventory Replacement
