Chapter 2: Introduction to Asset Misappropriations

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Chapter 2 Introduction to Asset Misappropriations
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History of Asset Misappropriations

• The Acts of Enclosure England
• Prohibited pilfering company assets
• The Carriers Case Southampton, England (1473)
• Defendant took bales of wool and textile products
• Precedent setting embezzlement case

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History of Asset Misappropriations

• The Norton Warburg Group Ltd.
• London, England (late 1970s)
• 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)

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History of Asset Misappropriations

• The United Way of America (early 1990s)
• 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

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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

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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.

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Defining Assets

• Assets resources owned by the organization
• Two categories
• Intangible Assets
• Tangible Assets

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Intangible Assets

• Not physically identifiable
• Usually represented by contractual right
• Examples
• Patents, trademarks, leaseholds
• Goodwill
• Trade secrets

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Tangible Assets

• Five principal types
• Cash
• Accounts receivable
• Inventory
• Plant and equipment
• Investments
• Most asset misappropriations involve tangible
  assets (especially cash)

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How Asset Misappropriations Affect Books of
Account

• Assets Liabilities Owners Equity
• Asset Misappropriation causes for set-off to
  owners equity
• Affects balance sheet via income statement
• Revenue expenses profit
• Asset misappropriation essentially an expense of
  doing business
• But we dont know how big the expense is or when
  it occurs

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The Accounting Entry for Fraud

• Debits Credits
• Expense Cash
• Asset Cash
• OR
• Revenue
• Liability Cash
• Equity

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Concealing Asset Misappropriations

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

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Concealing Asset Misappropriations

• False debits
• To expenses (most common)
• Expenses are not tangible (cant 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

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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

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Concealing Asset Misappropriations

• Forced 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

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Frequency of Asset Misappropriation Schemes

• Asset Misappropriations are by far the most
  common form of occupational fraud.
• 1,224 asset misappropriation cases were reported
  in the Associations study.

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Median Loss for Asset Misappropriations

• 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.

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Classifying Asset Misappropriation Schemes
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Asset Misappropriation Cases Cash v. Non-Cash

• Of 1,224 asset misappropriation cases in the
  Associations 1993 survey, 1,062 cases involved
  the theft of cash.

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Median Losses -Cash v. Non-Cash

• Median cost of non-cash schemes was higher than
  that of cash schemes
• Non-cash schemes thefts of inventory, equipment,
  proprietary information, etc.

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Classifying Cash Schemes
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Cash Schemes Breakdown of Cases

• Two-thirds of cash schemes involve fraudulent
  disbursements.
• Examples billing schemes, payroll schemes, check
  tampering

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Cash Schemes -Median Losses

• 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.

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Fraudulent Disbursements Breakdown of Cases

• Fraudulent disbursements are the largest category
  of cash frauds.
• Billing schemes and check tampering are the two
  most common forms of fraudulent disbursement.

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Fraudulent Disbursements -Median Losses