Non-Cash Asset Fraud Schemes

Occupational fraud and abuse comes in many forms. One form of occupational fraud is called asset misappropriations. Asset misappropriation, as defined by The Complete Idiot’s Guide to Frauds, Scams, and Cons, is, “when your employees take your stream of revenue and divert some of it into their own pockets.” (Swierczynski, 2003)

Asset misappropriations can be broken down into two different silos, cash and non-cash assets. According to the 2006 National Fraud survey, conducted by the Association of Certified Fraud Examiners (ACFE), states that cash assets have a higher frequency of misappropriations with 87.7% of all asset misappropriations. Although cash misappropriations are more frequent then non-cash assets, non-cash asset schemes are more costly to the company.

The ACFE also states that the cash asset median loss is $150,000 dollars compare that to non-cash assets at $200,000 dollars. (ACFE, 2006) Non-cash misappropriations schemes can be broken down into five categories. The five categories are misuse, unconcealed larceny, asset requisitions and transfers, purchasing and receiving schemes, and fraudulent shipments. Of the five categories of non-cash misappropriations schemes, I will be taking a closer look into unconcealed larceny schemes and how they can be prevented.

Unconcealed larceny is one of the most basic types of thefts as employees simply walk out with the company’s assets without trying to cover up the accounting books or records. As you can assume, larceny of the company’s inventory can be very costly for employers. If an ongoing larceny scheme goes unnoticed over a period of time, the damage can easily be estimated in the millions. One such story of unconcealed larceny that went unnoticed for five years cost one New York based jewelry store an estimated $3 - $12 million dollars of lost inventory. (Huff, 2009)

Teresa Tambunting worked for the jewelry store for over twenty-eight years and was thought to be a trusted employee. However, somewhere along the way Teresa got sticky fingers. During the last five years that Teresa was employed with the jewelry company she began to stuff some of the jewelry into her purse as she walked out. Over a five year span, Teresa amassed a mountain of gold by patiently carrying out her scheme one gold nugget at a time.

From the fraudster’s point of view, the main problem with unconcealed larceny is the absence of cooking the books or manipulating the records to account for the missing inventory. Eventually, the store realized that between $3 and $12 million dollars worth of inventory was missing and conducted an investigation. Teresa returned one suitcase full of jewelry while authorities found another 447 pounds of gold in her house. As you can see, unconcealed larceny can be very costly to unsuspected employers.

Companies put in a lot of hard work to produce and stock inventory for their company and customers. It should also be important to not let someone walk-off with that hard worked inventory. Joseph T. Wells, CFE is a well known author on fraud and Mr. Wells has a few ideas on how you can prevent and detect larceny of non-cash assets. (Wells, 2008)

First, separation of duties between requisitioning, purchasing, and receiving should be maintained. Further separation of duty would include accounts payable with accounts receivable and purchasing. These separations of duty are set in place to make it harder for one employee to commit fraud without having to include an accomplice.

Physical security is another way to stop larceny of your company’s inventory. Keeping the company inventory behind locked doors will keep most employees from being able gain access to the inventory while maintaining a log on all personnel that do have access will provide you with a list of employees encase inventory does go missing. If the employee believes that there is a high chance for them to be caught, the employee will most likely not commit the fraud according to Richard C. Hollinger and the Hollinger-Clark study. (Wells, 2008)

To exploit this technique of perception, the installation of surveillance cameras can aide in the deterrence of larceny of inventory. The security cameras should not be hidden but placed in a dominant spot for all to see. To prevent the loss of inventory over an extended period of time, you should conduct physical inventory counts on a frequent basis to determine if your inventory control system is the same as your physical count of the inventory.

Your company’s life line lies within the health of your inventory. When your employees start to steal from your inventory, the company will slowly become sick as profits are being lost. To keep the company healthy proper internal controls that allow you to deter and detect non-cash asset schemes from occurring will help keep the company doctor away.


By: Joseph Dustin

Reference

Wells, J. T. (2008). Principles of Fraud Examination 2nd edition. Hoboken, New Jersey: John Wiley & Sons, Inc.

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