Chapter 2 Introduction to Asset Misappropriations
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