Chapter 2Introduction to Asset Misappropriations

History of Asset Misappropriations

• The Acts of Enclosure – England – Prohibited pilfering company assets

• The Carrier’s Case – Southampton, England (1473) – Defendant took bales of wool and textile products– Precedent setting embezzlement case

History of Asset Misappropriations• The Norton Warburg Group Ltd.

– London, England (late 1970’s) – Investment management firm– Primary client/business partner - Pink Floyd– Pink Floyd pulled out assets (₤860,000) – Deceived clients and embezzled investor funds (₤4.5

million)

• London, Inggris (1970's terlambat; almarhum) • Manajemen investasi dengan teguh • Mitra client/business utama -Floyd Merah Muda • Floyd Merah Muda mencabut aktiva-aktiva (£860,000) • Klien-klien ditipu dan jo dana pemodal yang digelapkan (£45 juta)

History of Asset Misappropriations

• The United Way of America (early 1990’s)– President William Aramony– $1.2 million for lavish lifestyle and a girlfriend

• Andrew Bellucci – New York– “Pizza historian”– Had embezzled from law firm of Newman Schlau Fitch

and Lane– FBI caught him on a TV commercial

History of Asset Misappropriations

• Bank of Tokyo – (1996) – Hideki Nishiyama embezzled $9 million by forging loan applications

• Willis A. Carto – (1994)– Founder of a controversial revisionist group– Embezzled $7.5 million

What is a Misappropriation?• Misuse of a company asset for personal gain• Includes more than theft or embezzlement

– Use of company computer to surf the net– Company car for personal trips, etc.– Steal cash– False invoicing, etc.

Defining Assets • Assets = resources owned by the organization• Two categories:

– Intangible Assets– Tangible Assets

Intangible Assets

• Not physically identifiable• Usually represented by contractual right• Examples:

– Patents, trademarks, leaseholds– Goodwill– Trade secrets

Tangible Assets

• Five principal types: – Cash– Accounts receivable– Inventory– Plant and equipment– Investments

• Most asset misappropriations involve tangible assets (especially cash)

How Asset Misappropriations Affect Books of Account

• Assets = Liabilities + Owner’s Equity• Asset Misappropriation causes $ for $ set-off to owner’s

equity• Affects balance sheet via income statement• Revenue – expenses = profit• Asset misappropriation essentially an expense of doing

business• But we don’t know how big the expense is or when it occurs

The Accounting Entry for Fraud

Debits CreditsExpense CashAsset Cash

OR:RevenueLiability CashEquity

Concealing Asset Misappropriations

• False debits• Omitted credits• Out-of-balance conditions• Forced balances

Concealing Asset MisappropriationsFalse debits• To expenses (most common)

– Expenses are not tangible (can’t be inventoried)– Expense accounts closed to zero at end of year

• To assets – Commonly debit accounts receivable– Debit to asset easier to detect– Stays on books

Concealing Asset Misappropriations• Omitted credits

– Concealment technique for cash skimming– Pocket cash, no credit to sales

• Out-of-balance conditions– Asset removed from business (debit)– No corresponding credit– Perp hopes nobody notices

Concealing Asset MisappropriationsForced balances• Variation of out-of-balance technique• Instead of a false entry to cover loss, perp simply

adds wrong, carry false totals• Used by perps with access to the books

Frequency of Asset Misappropriation Schemes

Occupational Fraud

Asset Mis80%

Fraud Stmt4%

Other1%

Corrpt.14.6%

• Asset Misappropriations are by far the most common form of occupational fraud.

• 1,224 asset misappropriation cases were reported in the Association’s study.

*Represents size of misstatement

Median Loss for Asset Misappropriations

$4,000,000*

$440,000

$65,000

$0 $1,000 $2,000 $3,000 $4,000

Thousands

Fraud Stmt

Corruption

Asset Mis

• Asset misappropriation schemes had the lowest median loss of the three major occupational fraud categories. However, at $65,000 the cost of these schemes is still substantial.

Classifying Asset Misappropriation Schemes

Larcen y

Skim m in g

F rau d u len t D isb u rsem en ts

Cash

M isu se

L arcen y

Inventory

ASSET M ISAPPROPRIAT ION

Asset Misappropriation Cases – Cash v. Non-Cash

Cash86.8%

Non-Cash13.2%

Of 1,224 asset misappropriation cases in the Association’s 1993 survey, 1,062 cases involved the theft of cash.

Median Losses -Cash v. Non-Cash

$100,000

$60,000

$0 $20,000 $40,000 $60,000 $80,000 $100,000

Non-Cash

Cash

• Median cost of non-cash schemes was higher than that of cash schemes

• Non-cash schemes: thefts of inventory, equipment, proprietary information, etc.

Classifying Cash Schemes

Cash on Han d

F rom th e Dep osit

O th er

L ARCENY

Bill in g Sch em es

Payroll Sch em es

Exp en se Reim b u rsem en ts

Ch eck Tam p erin g

Reg ister D isb u rsem en ts

F RAUDUL ENT DISBURSEM ENTS

Sales

Receivab les

O th er

SKIM M ING

CASH

Cash Schemes – Breakdown of Cases

Fraud Disb67%

Larceny4.1% Skim

28.9%

• Two-thirds of cash schemes involve fraudulent disbursements.

• Examples: billing schemes, payroll schemes, check tampering

Cash Schemes -Median Losses

$75,000

$50,000

$22,000

$0 $20,000 $40,000 $60,000 $80,000

Fraud Disb.

Skimming

Cash Larceny

• Among cash schemes, fraudulent disbursements have the highest median loss.

• Larceny is both the least common and least costly method of cash fraud, on average.

Fraudulent Disbursements – Breakdown of Cases

Check Tamp24.5%

Payroll16.5%

Expense14.9%

Register2.7%

Billing33.3%

Other8.1%

• Fraudulent disbursements are the largest category of cash frauds.

• Billing schemes and check tampering are the two most common forms of fraudulent disbursement.

• Kecurangan pada pengeluaran adalah kategori paling besar dari penipuan tunai.

• Rencana biaya periklanan dan cek rusak/kosong adalah kedua wujud paling umum dari pengeluaran yang curang.

Fraudulent Disbursements -Median Losses

$140,000

$20,000

$22,500

$50,000

$96,432

$250,000

$0 $50,000 $100,000 $150,000 $200,000 $250,000

Other

Expense

Register

Payroll

Check Tamp

Billing