Asset misappropriation.pdf

Asset misappropriation.pdf - cmies Within What is Growing 3...

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Unformatted text preview: cmies Within What is Growing 3 Times Faster Than General Accounting? “Subscribe I Joln AICPA I AICPA.0rg | AICPA Store SEARCH — 1997 to present. SUBSCRIBE ADVERTISE Enemies Within SLKQ ., ohns Asset misappropriation comes in many forms. 1.|.‘I"l\'l mm The Peter J. Tobin College of Business now offers two online R] master’s programs that can be _.i ometimes. the truth isn't very pretty. Consider. for example. the American workforce. Although compkfled m 35 “me as one year- regarded by many as the finest in the world, it has a dark side. According to estimates. a third of Learn how we can help you reach American workers have stolen on the job. Many of these thefts are immaterial to the financial statements. your career potential‘ but not all are—especially to small businesses. Regardless of the amounts. CPAs are being asked to play an increasingly important role in helping organizations prevent and detect internal fraud and theft. Responding to these demands requires the auditor to have a thorough understanding of asset misappropriation. CPAs with unaudited clients can i provide additional services by suggesting a periodic examination of the cash account only. Bruce 3 fi rm Although "internal theft" and “employee fraud” are commonly used. a more encompassing term is is prOductH/e “asset misappropriation." For our purposes. asset misappropriation means more than theft or embezzlement. An employee who wrongly uses company equipment (for example. computers and . software) for his or her own personal benefit has not stolen the property. but has misappropriated it. Pannerforfree Employees—from executives to rank-and—file workers—can be very imaginative in the ways they scam their companies. But in a study of 2,608 cases of occupational fraud and abuse. we learned that asset misappropriation can be subdivided into specific types; the most prevalent are skimming and fraudulent disbursements. THE FRAUD TREE Over the years. the asset misappropriation chart has become known as the "fraud tree" for its numerous branches. The tree's trunk consists of two major asset types: cash, and inventory and all other assets. Crooked employees clearly favor misappropriating the former—nearly nine in 10 illegal schemes in the study involved the cash account. The reasans should not be surprising; Cash is fungible, has a specific value and is easily transported. Inventorywexoepttor consumer goods—has limited usefulness to a thief; an employee in a ball bearing plant can have a hard time converting the loot into cash. And of course. many business enterprises don't have a physical inventory at all. NORl HWESTERN UNIVERSITY ONLINE ACCOUNTING ___CERTlFICAT§S_ $7 APPLY TODAY ""l‘aioment Fraud and Arm-M . . y. ration http://www.journalofaccountancy.com/lssues/ZOOI/Dec/EnemiesWithin.htmlS/l9/2014 3:47:14 PM] nemics Within Additional research of 732 fraudulent disbursement cases showed they can be subdivided into at least six specific types: check tampering, false register disbursements, billing schemes, payroll schemes. expense reimbursement schemes and other fraudulent disbursements. Following are a few common examples: IA purchasing agent for a major corporation set up a vendor file In his wife’s maiden name. then wanton to approve more than $1 million in companypayments to her. The supporting documentation consisted of the wife's invoices for "consulting services' that were never rendered. Acierk in the purchasing department, suspicious of the agent's recent purchase of a new boat and car, caught on to the scheme and turned him in. I The CEO of a small nonprofit agency stole $35.0‘U0‘ from its coffers by'suomttling "check requests" to the accounting department. The checks were made payable to outside bank accounts the CEO controlled. The accounting personnel. fearful of angering the boss. made out the checks and delivered them to him. One accounting clerk finally had enough and alerted the outside auditors, who confirmed the disbursements were not legitimate. I A worker for one company submitted an expense reimbursement for a trip he supposedly took for business purposes. Actually, he took his girlfriend to. a bicycle rally and attempted to charge the expense to the-company. One problem: On his itinerary. the worker listed the independentauditor who was examining his expense reimbursement as his traveling companion—not a smart move. Employees who set up dummy companies for fraudulent disbursements often give clues to their activities. They will use their own initials for the company name. rent a post office box or mail drop to receive checks, or use a dummy company name and their own home address. CASE STUDY: TOO TEMPTING. TOO EASY Regardless of the method or the asset involved. all asset misappropriation has the same effect on the books of account Take the following actual case as an example: Kay Lemon, a seemingly prim<and«proper grandmother, stole $416,000 from a small Nebraska lighting store where she had been employed for 20 years as a bookkeeper. Lemon spent three years in the Nebraska Women's Correctional Institute after confessing that she‘d been hitting the books for eight years and had blown all the loot on herself and her family. Lemon‘s crime is typical of the risk to small business: The lighting store's CPA prepared only the company's tax returns. so the business was not audited. Lemon also acted as the store's “accounting department.” She made deposits, signed checks and reconciled the store‘s bank account. Although any entry-level accountant could'recognize this situation as an accident waiting to happen, the store's owner did not After 12 years of unrelenting temptation, Lemon finally gave in. Thereafter, for years, she systematically stole money from the lighting store using the same method. She would make out a company check to herself (in her own true name). sign it and deposit the proceeds in her personal checking account. To cover the theft. Lemon would do three simple things: First, she'd enter 'vold" on the check stub when she mote the check to herself. Next. she would add the amount of the then to the check stub when she paid for inventory. For example. ifahe took $5.000 and was paying a vendor $10,000, she would show $15.00t} on the vendor's chock stub. That way. the cash account would always stay in balance. Finally, when the checks paid to Lemon were returned in the bank statement. she would tear them up and throw them in the trash In looking at Lemon's inelegant scheme from an accounting perspective, one can see that she had her choice of three techniques to cover her tracks: false debits. omitted credits or forced balances, Early warning Signs of Cash Misappropriation , The three principle methods employees use to mlsépproprlate cash can show-up early in {an organization's books. CPAs should be alert to simple trends when determining a company's risk of material embezzlement. Consider one or more of the following: Skimmlng ‘ , _ I Decreasing cash to total current assets; . IA decreasing ratio of cash to credit card sales‘: I Flat or declining sales with Increasing cost of sales. I Increasing accounts receivable compared with cash. I Delayed posting of accounts-receivable payments. Larceny l Unexplained cash discrepancies. lAltered or forged deposit slips. , I Customer billing and payment complaints. I Rising "in transit" deposits during bank reconciliations.‘ Fraudulent Disbursements , . I Increasing 'soft" expenses (for example. consulting or advertising). tttp://www.journaiot'accounlancy.com/lssucs/ZOOl/Dec/EnemiesWithin.htmiS/i9/20l4 3:47:14 PM]...
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