Question

Give two examples of employee fraud, and explain how the thefts might occur. 

Answer 1

Employee fraud or frauds by non-management employees are generally designed to directly convert cash or other assets to the employee’s personal benefit. Employee fraud usually involves three steps: (1) stealing something of value (an asset), (2) converting the asset to a usable form (cash), and (3) concealing the crime to avoid detection. 

 

Examples:

CHARGES TO EXPENSE ACCOUNTS. The theft of $50,000 cash could be charged to a miscellaneous operating expense account. The loss of the cash reduces the firm’s assets by $50,000. To offset this, equity is reduced by $50,000 when the miscellaneous expense account is closed to retained earnings, thus keeping the accounting equation in balance. 

LAPPING. The employee first steals and cashes a check for $5000 sent by Customer A. To conceal the accounting imbalance caused by the loss of the asset, Customer A’s account is not credited. Later (the next billing period), the employee uses a $5000 check received from Customer B and applies this to Customer A’s account. Funds received in the next period from Customer C are then applied to the account of Customer B, and so on.