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Occupational Fraud Series

What is it?

Asset misappropriation can be defined as using company or client assets for personal gain. This is also known as “stealing.” There are two main categories of asset misappropriation: cash and noncash. Although the average loss of each fraud case is low, asset misappropriation is the most common type of occupational fraud committed. Some of the more popular methods used by employees on the company or corporate asset side of misappropriation are skimming, larceny, check tampering, billing fraud, payroll fraud, expense reimbursement fraud, misuse of assets and theft of assets. Some of the popular tactics on the client asset side include embezzlement, larceny, and Ponzi schemes.

Who commits it?

All levels of personnel are guilty of committing asset misappropriation; however, individuals in accounting departments are most commonly guilty of performing the fraud as they are closest to the financial data and typically have access to company funds. For corporate assets, asset appropriation is most commonly conducted by lower level employees or managers while conversely, for client assets, it is performed by higher level trusted positions such as lawyers and financial advisors. The longer an employee has been with a company and the higher the employee’s education, typically, the larger the loss suffered by the company as a result of the fraud.

Why do they do it?

The three main motives for committing asset misappropriation are pressures/incentives, opportunity and rationalizations. Pressure/incentives can be created by personal financial struggles or negative relationships between the company and its employees; while opportunities result from large sums of cash on hand or easily convertible assets. Rationalizations can be created by a company’s disregard for monitoring or risk reduction or employees who feel wronged by the company.

What are the warning signs?

Employees who commit asset misappropriation can display many behavioral red flags such as: living beyond their means, unwillingness to share duties or take vacations, irritability or defensiveness, unusual close relationship with vendor(s), and addiction issues.

How do you prevent/detect it?

The risk of asset appropriation fraud can be mitigated in a number of ways. Two effective methods are a fraud risk assessment and/or the implementation of adequate internal controls. A fraud risk assessment can clearly identify areas of the organization that are most susceptible to fraud. As a result of this, an organization can implement or strengthen their internal controls more confidently. Organizations who lack segregation of duties, physical safeguarding, asset reconcilement, management review and personnel competency are the most susceptible to fraud. At the very least, if your organization has segregation of duties in place, there will be collusion required between employees to execute fraud. Companies should review their internal controls to determine whether their controls are adequate to mitigate the risk of asset misappropriation before becoming a victim of asset appropriation fraud.

This is part 1 of a 3-part series on occupational fraud. Please watch this space for parts 2 and 3.

Mr. LaVine specializes in Process Risk and Technology Solutions. He assists clients in various industries, providing a host of internal audit and risk services.

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