Enemies Within: Asset Misappropriation Comes in Many Forms. (the Fraud Beat)
Sometimes, the truth isn't very pretty. Consider, for example, the American workforce. Although regarded by many as the finest in the world, it has a dark side. According to estimates, a third of American workers have stolen on the job. Many of these thefts are immaterial to the financial statements, 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 provide additional services by suggesting a periodic examination of the cash account only. Although "internal theft" and "employee fraud" are commonly used, a more encompassing term is "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. 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. [ILLUSTRATION OMITTED] The reasons should not be surprising: Cash is fungible, has a specific value and is easily transported. Inventory--except for 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. THE BRANCHES On the branches of the fraud tree are three main ways to embezzle cash: skimming, larceny and fraudulent disbursements. Skimming can be described as the removal of cash prior to its entry into the accounting system. Here are some examples: * The manager of a movie theater skimmed $30,000. During the theater's slow times, when he thought he was not being observed, the manager would print a viewer's ticket but keep it for himself and allow the customer to enter the movie without a ticket. Then during busy times, he would resell the tickets he had withheld and pocket the cash. The manager was caught by an alert employee who happened to pass by and saw what he was doing. * In a legendary story, the manager of a retail store with six cash registers brought in his own register and set it up in an empty checkout lane. All sales going through the seventh register went directly to the manager! Although you would think someone would notice, this scheme reputedly went undetected until a physical count showed huge inventory shortages. * A government mail-room employee skimmed more than $2 million in taxpayer refund checks that had been returned by the post office for bad addresses. The employee, with the help of several outside accomplices, was able to deposit the stolen checks into various banks and withdraw the proceeds. The scheme was uncovered when a taxpayer caned about an overdue refund and found out that his check had already been cashed. Larceny is the removal of cash from the organization after it has been entered into the accounting records. Most of these schemes are detected through bank reconciliations and cash counts. Larceny is therefore not one of employees' favorite illicit methods; it accounted for only 3% of the cases in the study and 1% of the losses. …