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Chapter 2

Introduction to Asset Misappropriations


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



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)

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 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

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 + 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


The Accounting Entry for Fraud
Debits Credits
Expense Cash
Asset Cash
OR:
Revenue
Liability Cash
Equity
Concealing Asset Misappropriations
False debits
Omitted credits
Out-of-balance conditions
Forced balances

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

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 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


Frequency of Asset Misappropriation
Schemes
Occupational Fraud
Asset
Mis
80%
Fraud Stmt
4%
Other
1%
Corrpt.
14.6%
Asset Misappropriations
are by far the most
common form of
occupational fraud.
1,224 asset
misappropriation cases
were reported in the
Associations 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
Larceny
Skimming
Fraudulent Disbursements
Cash
Misuse
Larceny
Inventory
ASSET MISAPPROPRIATION
Asset Misappropriation Cases Cash v.
Non-Cash
Cash
86.8%
Non-
Cash
13.2%
Of 1,224 asset
misappropriation
cases in the
Associations 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 Hand
From the Deposit
Other
LARCENY
Billing Schemes
Payroll Schemes
Expense Reimbursements
Check Tampering
Register Disbursements
FRAUDULENT DISBURSEMENTS
Sales
Receivables
Other
SKIMMING
CASH
Cash Schemes
Breakdown of Cases
Fraud
Disb
67%
Larceny
4.1% 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
Tamp
24.5%
Payroll
16.5%
Expense
14.9%
Register
2.7%
Billing
33.3%
Other
8.1%
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