Misappropriation of Assets

Misappropriation of assets is exploiting the business resources at the entity’s cost. 

For example, the company director uses business vehicles for personal work. Considering his position, none of the business workers or employees questioned this. 

It’s nothing but taking undue advantage of the authority.

Who will be performing this Misappropriation of assets?

• Employees
• Managers
• Directors or 
• Any others working within the company.

Misusing assets is a fraudulent act. 

What’s the Root Cause for Misappropriation of Assets?

Pressure

Financial Pressure is the most significant motivating factor for anyone to commit these frauds. There is always an incentive at each step of the business job. 

For Instance, consider a bank employee, Mr. Greed, who sanctions credit facilities.  Mr. Greed habitually asks for a monetary favor as a percentage of the total loan sanction from borrowers. 

Borrowers who want to get things done will only bother giving a small percentage of the loan.

This approach to Misappropriating assets results in defaming the bank’s reputation. In this case, the ultimate hit is for the Employer or bank.

Justifiable deeds

Humans commit fraud. Everyone needs to answer to themselves, and these fraudsters are no exception. They come up with a rationalization for performing fraud.

Let’s continue the above example.

Mr. Greed was due for a promotion and a two-year raise, but his manager disregarded him and promoted a peer employee. So, he felt disheartened and convinced himself that asking for financial favors from borrowers is not wrong at an entity where there is a lot of work politics. 

So, fraudsters justify themselves and keep going on.

Availability of Opportunity

The presence of opportunity itself is an appealing factor in committing fraud. For example, consider an employee, Mr. Zero, who is in charge of the administrative department in a service company. His work involves approving the business expenses employees submit after validating the purpose. He utilized the opportunity to submit his bills as business expenses as he was the approving authority. This fraud is done infrequently, and bill amounts are of lower value. So, there is a remote chance of being caught. 

Nowadays, people are becoming smarter with the increased resources (books, courses, and movies) and technology (YouTube, Instagram, and software) available.

So, fraudsters are planning to Misappropriate assets after conducting thorough research on Google and using the above-mentioned resources and technology.

Examples of Misappropriation of Assets:

Suppliers Fraud

Accounts Payable is one of the critical areas of the business. Ensuring timely payments to suppliers helps build healthy business relationships. 

Employees (not all) are looking for innovative methods of stealing their own Employer’s pocket. It’s a sawing the branch you are sitting on.

A couple of Known Frauds are below:

1. They create fictitious vendors and enter into fake contractual arrangements, which leads to false payments that move to the fraudster’s wealth bag.
2. Arrangements with Real Vendors by entering into agreements with inflated purchase prices of goods, materials, or other supplies or services. These contract prices usually exceed the market prevailing price.

Expenses Fraud

Submitting fake bills purportedly as business expenditures. These frauds are mostly performed when the organization’s employees are allowed to get reimbursement for business expenses incurred. For example, the Employer reimburses the monthly Internet/WIFI charges. These expenses enable employees to work uninterrupted from home.

Data Theft

Data theft is stealing through unauthorized access from the organization’s database and servers. That’s the most significant challenge for any organization.

Data is a priceless asset. Loss of such data affects the reputation and credibility of the business empires. 

Data theft can occur due to not establishing systems with access restrictions to sensitive data, not using multi-factor authentication, not using anti-virus applications, not keeping the applications up to date, etc.

Employees working in the IT environment can sell the organization’s data for personal benefit. Without good data-sensitive practices, data theft can cause severe financial damage to the entities.

Assets Exchange

Entities need to cater to the rapidly changing technology to sustain their business operations.  So, businesses must upgrade with new applications, infrastructure, assets, etc.

The Fixed Asset department handles asset purchases and exchanges and can dispose of assets at a value less than their worth, so there is a chance of fraud here.

The above methods are just a few, and they occur more frequently. So, what should business entities do to reduce their losses?

Cutting down these practices can be challenging, especially when fraudsters find new techniques daily. But every problem has a solution. Here are a few ideas worth practicing.

Ways to curb the Misappropriation of Assets

1. Understand the Business:

Each entity or business is different. Focus on understanding the industry and its peers to find out where there are gaps. Once we uncover the disruptions, it’s easy to find a solution. For example, consider Hygienic Hotels, which is in the Food business. The biggest challenge is sourcing economical yet quality raw materials like vegetables, fruits, and meat. 

If procurement of these inputs is a concern, then some good controls will be used.  For Instance, these controls will be to 

• Perform various quality checks by different teams, 
• Ensure there are different teams for purchase, 
• Transport and finance department to handle the payments and 
• Do a market survey to check the responses of its customers to the pricing and quality of the foods in hotels compared with other peers.

2. Periodic Inspection

Perform periodic monitoring of all activities with internal inspections and external audits to check on uncovered frauds. Often, having someone review or inspect the work or activities itself triggers self-discipline.

3. Implement innovative Application

Various applications are employed in the business to cater to diversified needs.  These applications handle things like 

• Providing reports where there is a backdated entry are posted
• Ensures there is proper segregation of duties
• Report unusual transactions, such as the purchasing department authorizing transactions relating to indirect expenses.
• Reports the data breach

4. Establishing Controls

Establish proper controls and internal checks. One good example is that there shall be guidance or a policy document that governs the flow of transactions in all the entity’s departments. These are called standard operating procedures.

5. Adequate Training to Employees:

Ensure all temporary and permanent employees get adequate training about the potential consequences of legal penalties for engaging in such wrongful acts and how being ethical to the entity will help them be successful.

6. Whistle Blower Policy

Establish whistle blower mechanism where the employees are to be encouraged to report unethical or wrongful acts.

7. Transparent Performance based Rewards Policy

Financial incentives drive most frauds. However, implementing a strong and transparent employee evaluation process is necessary to reward employees with Salaries, bonuses, awards, etc. These above steps will help reduce fraud or its intensity. However, it is nearly impossible to eliminate these wrongful acts

Misappropriation of Assets Summary

Misappropriation of Assets results in either monetary or goodwill loss or both. Some examples are creating fictitious vendors, charging expenses as business expense frauds, skimming, teaming, and lading. Sometimes, the wrongful acts are purported as standard or customary practices. Employees will not generally question these, considering those acts have been followed for some ages.

Entities shall understand the potential issues or procedural deficiencies to build a solid plan to unearth those.