Asset Misappropriation: Types, Detection, and Prevention

Introduction to Asset Misappropriation

Asset misappropriation schemes are frauds in which perpetrators use trickery or deceit to steal or misuse the resources of an organization. When asset misappropriation occurs, the specific assets of the organization are taken directly for the benefit of the person committing the fraud. Those who commit asset misappropriation can be employees within an organization, vendors, customers, or individuals entirely unrelated to the victim organization. A distinguishing element of asset misappropriation is that the assets are taken through deceitful or deceptive means rather than by force. The actual acts of asset theft, concealment, and conversion must all be present. Asset misappropriation is a major problem in organizations around the world. Research suggests that organizations lose almost 7% of their total annual revenues to asset misappropriation (Albrecht, Kranacher, & Albrecht, 2010).

When asset misappropriation occurs, there are no winners. Those involved are almost always caught and end up suffering professional and personal embarrassment. They lose their jobs and careers, and the matter ends up in court where they face legal consequences. The organization also loses: in addition to having its assets stolen, it must spend money on legal fees and endures negative publicity. In most cases, the culture and morale of an organization are adversely affected, leading to a loss of productivity, an increase in employee turnover, and frequent absenteeism (Albrecht, Kranacher, & Albrecht, 2010).

Types of Asset Misappropriation Schemes

This paper examines an organization that was a victim of asset misappropriation, highlighting the specific type of scheme involved and assessing the factors that contributed to it. It also considers the legal mechanisms that could be employed to recover the assets, management's responsibility to share breach-related information with stakeholders, a review of AICPA Statement on Auditing Standards (SAS) No. 99, and a review of the organization's corporate governance and fraud prevention plans.

Steel World Automobile is an organization that was subjected to asset misappropriation carried out by its finance manager. The type of misappropriation involved was fraudulent disbursement, executed through several schemes. He made payments based on false invoices for personal purchases — a classic billing scheme. He also tampered with company checks by altering or forging them for his own personal use. Additionally, he submitted false claims for fictitious business expenses, constituting fraudulent expense reimbursement. All of these actions reduced the organization's income, meaning that additional revenue would be required simply to restore net income to what it would have been had the theft never occurred (Coenen, 2012).

It can be difficult to understand how these schemes went unnoticed within the organization. Asset misappropriation schemes typically start small and grow larger as perpetrators build confidence in their ability to avoid detection. The finance manager clearly faced challenges from internal and external audits that threatened his concealment and probably caused the scheme to be suspended temporarily. However, once that threat passed, he resumed the scheme until the fraud was ultimately detected. The dollar amount stolen tends to increase over time, and the sums the finance manager took in the early days of the scheme gradually grew beyond the initial amounts.

Legal Mechanisms Used to Recover Assets

In this case, poor management was a key enabler of the scheme's success. The fact that the perpetrator held the role of finance manager itself signals deficiencies in the organization's oversight structure. With a stronger management system in place, no one — particularly someone in a position of financial authority — would have had the opportunity to carry out such a scheme unchallenged. Poor management meant that activities within the organization were not properly followed up; each manager was left to oversee their own domain without general oversight or cross-checking. This environment gave the finance manager the space to operate. Ultimately, weak internal controls played the central role in enabling the asset misappropriation to take place.

Once fraud is detected, the perpetrator should be referred to the justice system, where they can be charged and the organization can seek to recover its assets. Many organizations, however, choose not to prosecute — preferring to dismiss the perpetrator quietly without civil or criminal action in order to avoid the bad publicity that comes with a court case. This is a mistake. The civil and criminal justice system is the most appropriate avenue for addressing fraud, because charges are supported by evidence and the perpetrator cannot easily escape accountability. When a case is brought before the courts, the organization has a genuine opportunity to recover its stolen assets, whereas a quiet dismissal provides no basis for such a claim. Courts can order perpetrators to return assets to the organization.

Moreover, pursuing the case through the civil or criminal system sends a warning to other employees who might be considering fraudulent activity. When perpetrators are dismissed in silence, others have little reason to be deterred — the worst consequence they observe is dismissal. Public prosecution changes that calculus significantly (Peltier-Rivest, 2011).