NonCash Assets

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Chapter 9

• Non-Cash Assets

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Inventory and All Other Assets
Larceny
Misuse
Asset Req. Transfers
False Sales Shipping
Purchasing Receiving
Unconcealed Larceny
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Frequency of Asset Misappropriations
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Median Loss of Asset Misappropriations
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Dollar Loss Distribution for Non-Cash Schemes
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Non-Cash Cases by Type of Asset Misappropriated
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Median Loss by Type of Asset in Non-Cash Schemes
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Detection of Non-Cash Theft Schemes
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Perpetrators of Non-Cash Theft Schemes
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Median Loss by Perpetrator Position in Non-Cash
Schemes
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Size of Victim in Non- Cash Theft Schemes by
Number of Employees
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Median Loss by Number of Employees in Non-Cash
Theft Schemes
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Non-Cash Misappropriations

• Misuse
• Larceny
• Unconcealed larceny
• Asset requisitions and transfers
• Purchasing and receiving schemes
• Fraudulent shipments

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Misuse of Non-Cash Assets

• Typical misuse
• Company vehicles
• Company supplies
• Computers
• Other office equipment
• Doing personal work on company time
• Running side businesses

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The Costs of Inventory Misuse

• Loss of productivity
• Need to hire additional employees to compensate
• Lost business if employees business competes
• Unauthorized use of equipment can mean additional
  wear and tear sooner or more often

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Misuse of company asset cases

• Example 1 Jack, a computer programmer was
  terminated for using his computer to visit adult
  internet sites while at work
• Example 2 John, an employee made personal use of
  a company vehicle. The employee provided false
  information, both written and verbal regarding
  the use of the vehicle
• Example 3 Perpetrator used his employers
  machinery to run his own snow removal and
  excavation business

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Unconcealed Larceny Schemes

• Greater concern than misuse of assets
• Most schemes are not complex
• Some employees know their co-workers are stealing
  but refrain from reporting it
• Many of the employees who steal company property
  are highly trusted
• Assets misappropriated after-hours or mail to
  themselves

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The Fake Sale

• Needs an accomplice
• Sale is not rung up but the accomplice takes the
  merchandise
• Accomplice may return merchandise for cash

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Inventory larceny examples

• Example 1 Perpetrator stole several computers
  and related computer equipment for his personal
  use
• Example 2 Dock worker and route driver were able
  to steal 300,000 over a six-month period through
  collusion
• Example 3 A long-term employee of a contractor
  was given the keys to the companys parts room.
  He stole high-value items and sold them to
  another contractor
• Example 4 An employee had an accomplice who
  would enter the store and buy merchandise at
  the employees register. Employee did not ring
  or only partially rang these transactions on the
  register fake sales

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Preventing and Detecting Larceny of Non-Cash
Assets

• Segregate the duties of requisitioning,
  purchasing and receiving
• Segregate the duties of payables, purchasing and
  receiving
• Maintain physical security of merchandise
• Track those who enter secure areas through access
  logs
• Install security cameras and let their presence
  be known

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Preventing and Detecting Larceny of Non-Cash
Assets

• Conduct inventory counts on a periodic basis by
  someone independent of the warehousing functions
• Suspend shipping and receiving activities during
  physical counts
• Investigate significant discrepancies
• Establish confidential whistleblower mechanism

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Asset Requisitions and Transfers

• Facilitates misappropriations by enabling
  non-cash assets to be moved from one location to
  another
• Internal documents are used to gain access to
  merchandise that they may not have had
• Basic scheme is to requisition materials to
  complete a work-related project but steals the
  materials
• Inventory stored in multiple locations creates
  opportunities

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Examples Fraudulent Requisitions and Transfers

• Example 1 Fraudster requisitioned excess
  material for the construction site and took the
  excess home in his pick-up truck
• Example 2 Manager requested merchandise from a
  company to be displayed on showroom floor. The
  pieces never made it to the showroom.
• Example 3 A 19 year-old shipping clerk in a
  computer manufacturers warehouse stole more than
  1 million of computer chips by adding extra
  merchandise to his cart as he transferred
  materials from the building where the chips were
  manufactured to the building where they were
  stored.

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Purchasing and Receiving Schemes

• Assets were intentionally purchased by the
  company but misappropriated
• Falsifying incoming shipments
• May also reject portion of the shipment as being
  substandard
• Keeps the substandard merchandise

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False Shipments of Inventory and Other Assets

• False shipping documents and false sales
  documents are created to make it appear that the
  inventory was sold
• False packing slips can allow the inventory to be
  delivered to fraudster or accomplice
• To hide the theft a false sale is created
• Receivable is aged and written off
• Legitimate sale is understated

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Examples Shipments

• Example 1 Perpetrator worked in sales office and
  generated false sales orders and then destroyed
  completed documents that evidenced shipment
• Example 2 Corrupt manager took assets and
  concealed them as false sales. The receivable
  was then written off to an expense account
• Example 3 Fraudster had shipping tickets
  forwarded to him for further for extra work
  before going to invoicing department. His extra
  work consisted of reducing the quantities shipped
  and hence the amount billed to his accomplice

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Other Schemes

• Assets are written off in order to make them
  available for theft
• Assets are declared as scrap and given to the
  employee
• New equipment is ordered for the company to
  replace old new equipment is sent to employees
  home leaving old equipment in place

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Concealing Inventory Shrinkage

• Key concealment issue is shrinkage
• Inventory shrinkage is the unaccounted-for
  reduction in the companys inventory due to theft
• Since shrinkage signals fraud, the fraudster must
  prevent anyone from looking for the missing
  assets
• Physical count of inventory detects shrinkage

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Concealing Inventory Shrinkage

• Altered inventory records
• Forced reconciliation
• Deleting or covering up the correct totals and
  entering new totals
• Fictitious sales and accounts receivable
• Charge sale to existing account
• Write-off to discounts and allowances or bad debt
  expense

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Concealing Inventory Shrinkage

• Write off inventory and other assets
• Eliminates the problem of shrinkage
• Physical padding
• Make it appear that there are more assets present
  that there actually are

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Preventing and Detecting Non-Cash Thefts
Concealed by Fraudulent Support

• Separate the duties of
• Ordering goods
• Receiving goods
• Maintaining perpetual inventory records
• Issuing payments
• Match the invoices to receiving reports before
  payments are issued
• Match the packing slip to an approved customer
  order

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Preventing and Detecting Non-Cash Thefts
Concealed by Fraudulent Support

• Match outgoing shipments to the sales order
  before the merchandise goes out
• Investigate shipments that cannot be traced to a
  sale
• Check out unexplained increases in bad debt
  expense

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Preventing and Detecting Non-Cash Thefts
Concealed by Fraudulent Support

• Compare shipping addresses to employee addresses
• Review unexplained entries in perpetual inventory
  records
• Reconcile materials ordered for specific projects
  with actual work done
• Perform trend analysis