Chapter 2 Introduction to Asset Misappropriations

1. Chapter 2Introduction to Asset Misappropriations

2. 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

3. 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)

4. 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

5. 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

6. 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.

7. Defining Assets • Assets = resources owned by the organization • Two categories: • Intangible Assets • Tangible Assets

8. Intangible Assets • Not physically identifiable • Usually represented by contractual right • Examples: • Patents, trademarks, leaseholds • Goodwill • Trade secrets

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

10. 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

11. The Accounting Entry for Fraud Debits Credits Expense Cash Asset Cash OR: Revenue Liability Cash Equity

12. Concealing Asset Misappropriations • False debits • Omitted credits • Out-of-balance conditions • Forced balances

13. Concealing Asset Misappropriations False 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

14. 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

15. 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

16. 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 Association’s study.

17. 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. *Represents size of misstatement

18. Classifying Asset Misappropriation Schemes

19. Asset Misappropriation Cases – Cash v. Non-Cash Of 1,224 asset misappropriation cases in the Association’s 1993 survey, 1,062 cases involved the theft of cash.

20. 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.

21. Classifying Cash Schemes

22. Cash Schemes – Breakdown of Cases • Two-thirds of cash schemes involve fraudulent disbursements. • Examples: billing schemes, payroll schemes, check tampering

23. 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.

24. 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. • Kecuranganpadapengeluaranadalahkategori paling besardaripenipuantunai. • Rencanabiayaperiklanandancekrusak/kosongadalahkeduawujud paling umumdaripengeluaran yang curang.

25. Fraudulent Disbursements -Median Losses