Occupational Fraud: Misappropriation of Assets by an Employee

OCCUPATIONAL FRAUD Occupational fraud is defined as "The use of one's occupation for the personal enrichment through the deliberate misuse or misapplication of the employing organization's resources or assets" [Association of Certified Fraud Examiners (ACFE), 2014 Report to the Nation on Occupational Fraud and Abuse (Report); Wells, 2004]. Occupational fraud is fraud against the employee's organization (Albrecht, Albrecht, Albrecht, & Zimbelman, Fraud Examination, 5th Ed., 2015). In such cases, the employee steals either directly or indirectly from the employer. Occupational fraud, fraud against organizations, includes asset misappropriation, corruption, and fraudulent financial statements. Asset misappropriation includes theft or misuse of an organizations assets; corruption is where a person uses their influence to obtain an unauthorized benefit contrary to the person's duty to their organization; and fraudulent financial statements is the fabrication of an organization's financial statements to make the company appear more or less profitable than actual (ACFE Report, 2014). Of the three types of occupational fraud, asset misappropriation is the most common and occurred in approximately 85% of the cases of the study, but is the least costly of the three types of occupational fraud with a median loss of $130,000 (ACFE Report, 2014). The two main categories of asset misappropriation are: (1) cash and (2) inventory and all other assets. Cash misappropriation include: larceny, fraudulent disbursements, and skimming. Inventory and all other assets include the misuse of an organizations assets and larceny. In the ACFE Report (2014), they identified and collected data on nine sub-categories of asset misappropriation. The following includes frequency and median loss of each scheme: 1. billing 22.3% ($100,000); 2. Non-cash 21.0% ($95,000); 3. Expense reimbursements 13.8% ($30,000); 4. cash on hand 11.9% ($18,000) 5. Skimming 11.8% ($40,000); 6. Check tampering 10.9% ($120,000); 7. Payroll 10.2% ($50,000); 8. cash larceny 8.9% ($50,000); and 9. register disbursements 2.8% ($20,000). The median fraud losses that small businesses suffer are larger per case generally due to the lack of internal controls, predominantly with respect to the segregation of duties. The median loss suffered by organizations is $154,000 per scheme, which is 28% higher for organizations with less than 100 employees. Median losses due to fraud significantly increase when collusion is involved (ACFE Report, 2014). FRAUDULENT ASPECTS OF THE CASE In this case, the problem was discovered by the "part-time" Chief Financial Officer (CFO)/consultant with Satellite Manufacturing Company (SMC). The CFO served as an advisor to SMC for a number of years and was paid as an independent contractor. His functions were to review the accounts receivable, accounts payable, and internally generated financial statements and consult with the principals. Accordingly, he had familiarity and experience with the company and its operations. Though the CFO was confident that the company was profitable, he believed that the company's cash flow was insufficient given existing operating results. Since labor costs were one of the largest expenditures of the company, the CFO and one of the principals performed an initial review of the company's payroll register and related summaries. Their suspicions grew deeper as they discovered that approximately $15,000 to $20,000 had been misappropriated by Jerry Smith, one of the company's trusted employees. They compared the payroll for Jerry Smith in the current year with the same period in the prior year and discovered that Jerry Smith had taken more than the requisite number of checks in the year. Upon learning of the additional checks to the perpetrator, one of the principal owners contacted his employment attorney who subsequently contacted the forensic accounting consulting firm to set up an initial meeting to be briefed on the facts of the case. …