Asset Misappropriation Fraud

Asset misappropriation fraud is fraud involving theft or misuse of company assets. It remains the most common type of fraud although it is not as expensive as the less frequent but much more costly financial statement fraud. It occurs in every type of organization from nonprofit to governmental to for profit and from small to large. It can occur repeatedly unless steps are taken to prevent it from happening and the controls put in place are maintained.

The estimate of annual losses resulting from fraud was 5% of an organization’s revenues. Clearly, fraud takes a significant bite out of profits. For small organizations, a major fraud occurrence can result in the business having to close its doors. Most small businesses cannot afford any fraud loss.

Because of this significance, it is important for managers to understand what asset misappropriation fraud is and how to prevent it within their organizations. According to the Association of Certified Fraud Examiners, asset misappropriation or theft is the most common type of fraud, accounting for 80% of all cases.

An organization has the most control over the “opportunity” to commit fraud. As such, internal audit has the opportunity to provide value-added services by recommending internal controls to management to reduce the risk of fraud. Some areas for organizations to consider to help deter fraud include:

• Conflict of Interest Disclosure - An organization should establish a process for employees to complete an annual conflict of interest statement.
• Conflict of Interest Policy - Senior leadership should periodically review the current conflict of interest policy to ensure it addresses relevant risks, including corruption.
• Conflict of Interest Training - Conflict of interest training should be provided to new employees and periodic refresher training should be required for relevant employees.
• Fraud Training - An organization should provide fraud training to appropriate employees, including activities that are deemed unacceptable by the organization, associated potential disciplinary actions, and possible restitution.
• Report Suspected Fraud - Employees should feel comfortable reporting suspected fraud to their supervisor, the internal audit department, or the organization’s hotline. The hotline, administered by an independent party (i.e., third party or internal audit), should be promoted to employees so they are made aware to report any suspicious activity.
• Review and Oversight - A review of expenditures for goods and services should be conducted. Additional reviews or approvals should occur for purchases over certain dollar thresholds.
• Risk Assessment - Management, in conjunction with internal audit, should collaborate during the audit planning process to identify areas of highest risk to an organization and to review and establish internal controls. In addition, internal audit should consider the possibility and impact of fraud while conducting audits.
• Segregation of Duties - Separation of duties should be established for approving transactions, recording transactions, and custody of assets. If a segregation of duties conflict exists, management should establish a monitoring and oversight process with the assistance of the appropriate department (e.g., Procurement, Accounting, Internal Audit) to reduce the risk of fraud.
• Vendor List Review - An organization’s designated department should compare employees’ names, addresses, tax identification numbers, and other information with those of vendors to identify potential conflicts of interest or fraudulent vendors.