What is the Most Common Form of Asset Misappropriation?

Using assets appropriately is essential for any business. Whether it’s a small, local business or a major corporation, monitoring how assets are used is a vital part of ongoing operations. When controls are not in place, asset misappropriation will often follow, and the results can be disastrous.

It’s easy for business owners and managers to think of employee fraud as a rare, unlikely occurrence – but that is simply not the case. Asset misappropriation happens regularly, and it takes on many different forms. In this article, we are going to not only answer the title question of this article regarding the most common type of asset misappropriation, but we will also look at many other types and how they can be tracked and exposed by certified fraud examiners.

Do you suspect that asset misappropriation is currently taking place in your business? Or are you simply wanting to establish some solid internal controls to make sure it doesn’t become a problem moving forward? Either way, Space Coast Forensics should be your first call. We can work with you to stamp out any asset misappropriation fraud and determine a system to keep these kinds of issues away from your business in the future. Contact us at your convenience to get started.

A Quick Definition

Before we get into the details of types of asset misappropriation, we should first stop to make sure we are on the same page with this discussion. For a definition of asset misappropriation, we can use the following –

Asset misappropriation is the act of using the assets of a company or client for personal gain.

So, when an employee of a business takes some type of asset that has been entrusted to them and uses it in a manner that benefits them personally rather than benefitting the company, that’s asset misappropriation. Perhaps the simplest form of this type of misappropriation would be when an employee steals cash out of a till in order to buy some lunch. That’s a small crime, sure, but it’s still an act that fits into this category.

Likewise, if the owner of a business retains a client and then uses the client’s money in a way that is not consistent with their agreement, that too could fall under the same umbrella. This category is a big one, and if you were to sit around and think of all the ways assets could be misappropriated by people who have access to them, you’d likely be left with hundreds of possibilities.

The Leading Threats

Although the title of this article talks about the “most common form for asset misappropriation”, it’s difficult – if not impossible – to identify a single winner in this discussion. That’s because different types of businesses are more likely to face certain types of fraud than others. The dangers that exist for a small business are very different than the threats faced by a large corporation, for example. So, it will be helpful to look through this list of asset misappropriation fraud possibilities and you can think about which ones are most likely to apply in your situation.

Cash Skimming

For businesses that deal in cash, perhaps the easiest way of committing fraud within that business is for employees to skim cash off the top before it even hits the books. This can be executed in a number of ways, but often it is simply taking cash from a customer but failing (intentionally) to report the sale. This type of asset misappropriation fraud can be tough to spot because the money or sale is never recorded, and there is no paper trail to follow. However, if a specific employee consistently comes up short on inventory counts, or doesn’t record as many sales as expected during a given time period, further investigation may be warranted. Also, some settings are suitable for the use of security cameras to monitor cash handling and spot theft in action.

Payroll Scams

Payroll is one of the biggest expenses for most businesses. Paying people to do their work day after day can make up for around 50% of the costs of running a company, which means a lot of money flows out in the form of paychecks every couple of weeks. Without good controls in place and careful monitoring on an ongoing basis, payroll fraud is a type of asset misappropriation that can cause serious trouble.

As with most types of workplace fraud, there are plenty of different ways for payroll fraud to occur. On a simple level, it could be timesheet fraud that is perpetrated to artificially inflate the number of hours that a worker has put in during the pay period. One way this is done manually is through co-workers teaming up to clock in for each other when the other person is not actually present. This way, each person could wind up clocking in for more work than they perform, and they’ll wind up misappropriating payroll funds as a result.

The way an employee steals through a payroll scam can also be more advanced. A commissioned employee might fraudulently alter the rate of their commission, or manipulate the system to claim commissions on sales that they didn’t actually create. Fraud occurs fairly often through payroll since it is such a routine, high-volume process, so it’s important to catch any fraud perpetrator before too much damage is done.

Expense Reimbursement Fraud

At this point, you might be noticing a theme – any activity in a business that has money flowing in and out regularly is an opportunity for fraud to occur. So far, we’ve talked about cash skimming and payroll scams, which are both places where plenty of money is moving around frequently. The same can be said of this next form of asset misappropriation fraud – expense reimbursement schemes.

All businesses have expenses, and there is likely a system in place for how those expenses are approved and paid. It’s particularly important for bigger businesses to have such systems in place, as there simply wouldn’t be time for a single owner or manager to go through and manually approve all of the necessary payments.

Given the volume of expense payments going out, it can be relatively easy for asset misappropriation fraud to be committed in this area. People within the organization who regularly charge expenses back to the company are the most likely offenders here, such as salespeople who are out on the road trying to close deals and secure new clients. The expenses that they bill to the business might be inflated through various means, or even completely fabricated.

It’s important for businesses to stick to strict protocols with regard to expense reimbursement to make sure there is minimal opportunity to commit fraud. In some cases, personal relationships will be leveraged to make a scheme effective – a salesperson could ask for personal trust on expenses while claiming they lost some of the receipts that would normally be produced. If a solid system is in place to prevent fraudulent disbursements, and that system is respected regardless of circumstances, fraud will be much more difficult to perpetrate.

Billing Schemes

With expense schemes, the goal is to get the company to issue fraudulent payments internally, such as to salespeople who are submitting falsified reports. A billing scheme is also targeting fraudulent disbursements, but in this case, the money is headed outside of the organization from the start. Businesses receive invoices for goods and services all the time, and each of those invoices should be properly processed and reviewed before being paid. If that doesn’t happen, the accounting system might wind up issuing payments to a shell company that didn’t actually deliver any products or render any services.

It’s easy enough for someone to create a shell company as a fake entity to collect payments from a business. Then, a fraudulent invoice can be issued, and if proper controls are not in place, a payment may be put through and sent out to the fraudster. This is a relatively low-effort scam that can be effective if the perpetrator knows at least the basics of how the accounting department works and what checks are used to verify invoices.

Beyond using completely fake invoices to attempt to secure payments, a fraud perpetrator could also alter real invoices to raise the amount of the payment beyond what is called for based on the goods or services provided. Often, the success of this and other schemes comes down to exploiting holes in the control systems or laziness on the part of the accounting team. Invoices should be checked and verified before being paid, as this will catch and prevent much of what would have otherwise been successful billing fraud.

Detecting and Preventing This Crime

If there is already asset misappropriation going on in your business, it is important to work on detecting it accurately and then putting systems in place to prevent it from happening again. You don’t want to keep seeing signs of these issues popping up in your financial statements – you’d rather get ahead of the game and wipe out opportunities for asset misappropriation fraud so none of your employees have the chance to do you wrong. No system is perfect, and you’ll never be 100% safe from asset misappropriation, but most organizations can make big improvements in this area with minimal time or investment required.

Watching for Red Flags

Dealing with asset misappropriation should be a proactive activity within any organization. You don’t want to be playing from behind in this part of your business. By consistently checking for issues that could be red flags highlighting trouble within the accounting system, you might be able to catch any fraud before it advances to a damaging level. Cash shortages are a clear example of a red flag that could not be ignored. Other signs that something is going on include an unusually high number of transactions for a given time period, or surprisingly high invoice totals from a given client or customer. Patterns are a big element in accounting, and using patterns to spot anomalies for further inspection is a valuable best practice.

Solid Internal Controls

Another way to steer clear of too many asset misappropriation issues is to have internal controls in place and in use. Many of these are just the basics of financial control in an organization, but they will go a long way toward tripping up potential fraudsters. In fact, if you have internal controls that are working well, you might even prevent an employee or other individual from bothering to try a fraud scheme in the first place.

Some of the core concepts behind internal financial controls include segregating accounting duties so no one person has too much power, and requiring multiple people to approve payments over a certain threshold. It’s important for internal controls to be customized to the needs of each organization so they closely match how that company operates.

Create a Pathway for Whistleblowing

Despite your best efforts in the two areas above, you still might find that some fraudulent activity takes place in your business. If that should happen, it’s important for people who know something about the fraud to feel like they can come forward safely to report that information. Establish a channel where people can comfortably – and perhaps anonymously – file a report that can then be reviewed and investigated further.

Impact of Asset Misappropriation on Businesses

To understand the impact that asset misappropriation can have on a business, you really only need to stop and think about just how hard it is to succeed in business under good circumstances. Even when no one is stealing from you and every last dollar is accounted for properly, it’s still tough to make ends meet. So, when you throw an additional complication into the mix in the form of occupational fraud that robs money directly from the bottom line, the challenge only gets that much bigger.

It’s no exaggeration to suggest that asset misappropriation threatens the very existence of a business. Sure, asset misappropriation fraud can be minor, but it often escalates to a point where the losses are significant and the business may have trouble continuing on. And, even if it doesn’t reach that point, the lack of internal controls over the daily operations that are represented by ongoing occupational fraud presents a major concern.

When viewed through the lens of just how serious this situation can be, it makes sense that a business should invest actively to prevent workplace fraud. It should be made as difficult as possible for someone to commit fraud within the business, and company funds should be managed and controlled as tightly as possible. Everyone from company directors on down to new hires should face adequate internal controls to avoid having one person or one small group of people be able to take advantage of holes in the system.

Don’t Let Money Slip Away

It’s hard enough to compete in business when everything is operating as it should. If you find yourself fighting an uphill battle because of asset misappropriation issues, life as a business owner is going to be even more challenging. Employee fraud has the potential to bring down a business, or at the very least, cause it to fall short of what it should be. Get in touch with Space Coast Forensics today to uncover any asset misappropriation schemes in your business and make sure every last dollar is accounted for properly.

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