Asset Misappropriation

Asset Misappropriation – Theft and Fraud in the Workplace

Table of Contents

What is Asset Misappropriation?

Asset misappropriation is a term used to explain illegal activities within the workplace. It occurs when a person steals from your business. It can be a small business or a large corporation. It occurs when an employee or third parties abuses their position to steal using fraud or theft. 

Offenders can be company directors, senior personnel, or general employees. Any other person entrusted to manage the assets and interests of the company may also offend. This may include but not be limited to external accountants, consultants, or contractors. 

There is also the potential for external suppliers to steal either in company with an employee or by themselves. The latter may include providing inferior goods and/or service. 

Theft in the workplace – Common Asset Misappropriation Schemes

Theft can occur in many ways within a workplace. Here are some common asset misappropriation schemes:

Skimming

This occurs where an employee steals cash before it enters into the accounting system of the company. These are “off book” frauds as there are no entries in the company’s accounts. It is difficult to identify these schemes as there is no direct audit trail.

This can occur at any point where cash is paid to the business. This scheme is open to sales staff, employees in restaurants – anyone who receives cash from a customer.

Offsite skimming

This can occur where an employee is “offsite” – working unsupervised in a remote location. The employee can treat transactions as “off-book” transactions and keep the payments. Some employees create duplicate receipt books and other documents to give the impression the company received the funds.

Employees stealing money

Sales also offers another avenue for theft within the workplace. Employees can pocket cash and not record the sale so there is no record of payment. They may also understate the amount of the sale and pocket the difference.Petty cash is a risk area where employees provide false receipts or justification for reimbursement.

Employees who have access to cash receipts/payments can also falsify documents to cover theft.

False discounts

In these cases, the employee with the authority to provide discounts to customers will charge the full amount and register the sale/service at a discounted keeping the difference.

Theft of goods

The employee steals the goods. This generally applies to personnel involved in warehousing, inventory, or shipping. It can also occur within the office with employees stealing paper, pens, and other items (home office supplies).

It can also occur in production lines. A vehicle manufacturing plant in South Australia was concerned about loss of items during production. A police investigation identified an organised group within the company was stealing numerous items including engines and taking them out of the company gates without being challenged.

Warehousing or goods received

This is another area where theft can easily occur. The person responsible for itemising incoming goods reduces the number of items received. Instead of 100 items being listed as received the records show 90. The “missing” 10 are stolen by the employee. Documentation is altered to cover the “loss.”

Lapping

This is the classic robbing “Peter to pay Paul” – customer A pays so employee steals the payment. However, there is a need to ensure customer A does not complain when a statement is issued so employee takes money from customer B to offset the amount outstanding. There will a problem with B when the statement is issued so the employee offsets the debit from customer C. The merry-go- around continues the scheme is discovered or a standalone audit is done on all accounts potentially identifying the account with the improper debit.

This requires the employee to maintain records of his/her activities so there is a strong likelihood of a second accounting procedure to ensure the activities can continue.

Employment fraud

Ghost employees

This occurs when an employee (normally in HR or payroll) creates a false entity. The entity becomes an employee on the company records and receives all the benefits of salary etc. The money is paid into an account set up by the offender.

Another method is to keep an employee on the company books but change the bank details so payment goes to the offender’s accounts.

Other methods of payroll fraud
Payment of unwarranted benefits occurs when the employee improperly increases allowances or paygrades to an accomplice or the employee. The other employee (accomplice) shares the fraudulent payments.

Shell company

This can occur in the procurement process where the employee sets up a fictitious supplier and awards contracts to this supplier. The company appears legitimate (ASIC registered) and payments are made for goods/services allegedly received.

Expense Account fraud

This relates to employees fraudulent claiming expenses without verification or with false verification. The most common frauds involve mischaracterised expenses, multiple entries for same expense (dates differ), overstated expenses, false claims, and use of false documentation to substantiate the expense.

Misuse of assets

An employee can misuse an asset of the company – this may include the misuse of company vehicles, computers, supplies and other office equipment.

The employee may use a company asset while working. Some examples are use of computer for personal purposes, using a photo copier (each sheet costs money), using the company vehicle for personal use, and then filling up with fuel at company expense.

There have been instances of employees using company equipment for their own businesses. An example I investigated involved a supervisor coming to the company during a weekend and “borrowing” chain saws and other equipment to use in his tree trimming business. He would return the equipment on the Sunday evening. He would then arrange for it to be serviced and sharpened during the week so he could take it out again the following weekend.

Using company equipment for personal use during working hours affects the company because of the loss of productivity as well as the cost of any consumables.

How to Protect your Business from Theft and Fraud

The offenders typically target money, payments made to company, false invoicing, or expense related fraud.

Fraudsters may target your business because your lack procedures such as due diligence on CVs enabling persons into the company. You can also encourage theft and fraud by not segregating duties. If the same person can order items, approve purchase order, record delivery of goods and authorise payment then it is only a matter of time before fraud occurs. 

History indicates offenders will “try” a scheme first to see if the fraud is discovered. They then increase the size and regularity of their fraudulent actions. The result can be a loss of millions.

There is also the impact on the reputation of your business – the offender is identified and goes to court. The fraud and subsequent court process can affect on the morale of employees as there is often disbelief the person “fooled” them.

Review of Contractual Obligation

Companies regularly enter into contracts for the supply of goods or services as part of normal business activities.

However, there is a lack of general monitoring of the provision of the goods or services. Did you receive the specific service/goods that you requested and agreed to in the contract? The Review can occur during the contract period or after delivery of goods or services. The Review is linked to a probity audit of the contract process.

ACCA can provide assistance in this area by examining the contractual obligations and then conducting a review of what was provided.

Third Party Due Diligence

Actions of a third party can expose your company to criminal and civil litigation.

What do you know about third parties acting on your behalf? Transparency International and OECD highlight the high risk of using third party agents because of the risk of corruption as well as fraud against your company.

The international trend towards supply chain integrity can also expose your company to litigation. You need to ensure there are no issues relating to the manufacture of any goods to avoid action against your company under Modern Slavery Laws.

Summary

The risk of theft and fraud in the workplace can be reduced through planning and introducing internal controls. Positive actions must be taken if any breaches are identified – it is pointless dismissing the employee. All that does is tell other employees they will not be “punished”- OK, they lose their position but go onto another firm and repeat the process because they now know how they were caught. Call the police, demand criminal action and take civil action to recoup your losses.

How can ACCA help?

ACCA can assist you in determining if your company is potentially exposed to fraud. We can assist with reviewing your physical security (data access, access to key areas). We can also review your policies and advise on activities such a fraud and corruption prevention, job rotation, segregation of duties, independent reconciliation of accounts, and auditing of processes and policies to ensure compliance. 

We can also assist with training of employees and suppliers to ensure they know their responsibilities with a particular emphasis on fraud awareness and reporting of concerns. We can also assist with developing a response plan if fraud is suspected.;

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