Question

Cash is always a concern when it comes to fraud. Cash is a very mobile asset - easily stolen or misappropriated and hard to trace. But the control of cash is not the only concern when it comes to the concept of misappropriation. The purchasing process and the acquisition of fixed assets, including contracting to build or create new fixed assets, is as an area that could be targeted by white collar criminals and should be of concern to management and auditors. Please explain why this is the case and how an executive or staff member might extract cash from a fixed asset related event or events, how fixed assets can be misused for the benefit of an unethical staff member, and what can be done to minimize fixed asset fraud.

Answer 1

Extract cash from a fixed asset related event or events and fixed assets misuse for the benefit of an unethical staff member

Recognition of fictitious assets

The employee may extract the cash from the organisation by recognising the fictitious asset. Suppose an employee raises a bill for the purchase of an asset however if there is no check on the physical verification of the asset then they will make out the cash by raising the bill and no actual presence of asset.

Misrepresentation of asset value

Suppose an employee purchases an asset for $5,000 and if there are no proper check to cross verify the authenticity of the transaction, the employee cash easily raise a fake bill for $10,000 and extract an extra cash of $ 5,000 from the organisation.

Stealing of Assets from the organisation

This is what is commonly known as theft of assets which happens when employees abuse their position to steal from the company. A person with the higher authority is generally not questioned and he has easy access to assets, so he can easily take the assets out of teh organisation

There are various ways by which the asset fraud can be minimised, below are the points for the same:

Physical counts

A complete fixed asset count should be performed every year, to check if the fixed assets shows actually exists or not.

Analysis of unusual patters

Another useful control to prevent and detect frauds is the analysis of unusual patterns in the value of the fixed assets.

For example, the depreciation schedule could be checked to identify any unusual pattern in the depreciation amounts

Fixed assets procedure

A clear fixed assets procedure should be in place to cover fixed assets accounting and reconciliations, fixed assets additions and disposals, and fixed assets physical counts.

Approval of additions and disposals and related documentation

The approval chain should include at least two level of approvals and rules around additional approvers should be considered for fixed assets with higher value.

Reviews and random spot-checks

A senior/reliable person should periodically review the additions and disposals and spot-check the supporting documentation to assess its completeness and trueness

Assets tags

Each fixed asset should be tagged and should be recorded in a fixed asset register to ensure traceability.

Evaluation of assets’ condition

During the inventory count the conditions of the assets should be evaluated as well.The value of damaged or deteriorated assets which are not going to be used again, should be adjusted to reflect the current condition

Physical controls

CCTV systems can be used as deterrence for frauds, however they might involve privacy issues.

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