Non-Cash Assets Fraud: The Real Internal Fraud (2024)

This form of asset misappropriation takes place on every continent ranging from 16,8% of all asset misappropriation crimes in the United States to 26,6 % in the Middle East, with medium losses up to $275,000 per reported incident. Losses in this magnitude can prove unbearable for small and mid-sized businesses, therefore prevention is very important.

Definition of Inventory and Non-Cash Assets Fraud

Inventory and non-cash assets fraud occurs when employees steal, misappropriate, or embezzle their company’s non-cash assets such as inventory, equipment, services, etc. One of the key issues of this form of crime is that it is not necessary that the dishonest employee physically steal the asset, they can use it without authorization for personal reasons.

Theft of Physical Assets

Physical assets can be misappropriated by employees in two ways. First is good old fashioned theft. The theft can occur as the result of opportunity or may be the result of premeditated criminal energy. In either case, the thief will use any weakness in property accountability and security to steal or misuse company property. Such non-cash assets are easy to abuse; perhaps that is why this type of crime is so common. The losses as the result of misusing company property are difficult to deduce, especially if the crime goes undetected for an extended period of time. Automobiles of all types, passenger cars, small and large trucks, manufacturing machinery, service machines have been misused in general everywhere. The cost of these abuses is very difficult to sum up, due to the complexity of the service and repair requirements of such devices. In short, all of the aforementioned company property requires routine scheduled maintenance and periodic repair. When dishonest employees use (borrow) company equipment, the cost of maintenance and repair will increase and there is no profit to the company associated with the use of the property. In addition, if the company property is damaged during unauthorized use, the dishonest employee will probably not report the abuse of the property, for obvious reasons.

Some examples of misuse of company property are:

• Company vehicles: Company delivery truck used to move a relative’s household.
• Construction materials: Stolen from the company and used to performed construction work for the employee’s customer.
• Company machinery used to complete private work of an employee.
• Company computer and time used to write a book.

All of the above referenced instances can also be used by employees in direct competition with their company, when the dishonest employee produces goods and services with company property that they then sell to the public in general or to company’s customers.

In addition, internal thieves often steal inventory from company warehouses or storage areas. This happens not just in retail and manufacturing, but in service companies as well. Sadly, employees who work in the company logistics, shipping, and receiving, have the most opportunity to commit this type of fraud. The most frequent methods of stealing inventory are:

• Stealing Items from Warehouse and Storage Areas (Items can be taken out of containers and empty containers used in inventory to conceal fraud)
• Stealing Company Property from Colleagues
• False Inventory Schemes
• False Shipments of Inventory and Other Assets (Company property is shipped to the wrong address and stolen there)
• Purchasing and Receiving Schemes

Case in point

Workers responsible for loading goods on a truck to be delivered at another company location saw a weakness in the company logistic system. They placed the ordered material on the loading platform which was checked by their supervisor. Because the material remained on the platform before loading for several hours, the fraudsters added more cases of product to the waiting approved load. The unaccounted for property was then loaded on the truck and delivered. Once delivered, an accomplice at the other end removed the extra boxes which they sold later and divided the proceeds with the workers at the other loading dock. In this manner the company lost $200,000.00. The truck drivers who were involved in this collusion would be contacted at home by one of the dock workers, and alerted that they had extra product on their trucks. The next day, the drivers would sell the extra product for cash and split the proceeds with their warehouse accomplices.

Detection and Prevention of Inventory and Non-Cash Assets Fraud

Detection and prevention of Inventory and Non-Cash Assets Fraud requires planning and discipline on the part of compliance, loss prevention, security (Physical and IT) and management. Again, referring to the Fraud Triangle), opportunity is the factor that the company can directly control. Therefore the primary methods of preventing and detecting this form of fraud must be centered on restricting the opportunity of fraudsters to steal. The ultimate challenge is finding the balance of removing the opportunity to steal, while not restricting company productivity.

Forms of Detection May Include:

• Statistical Sampling of Documents Used in Shipping, Receiving and Inventory
• Physical Inventory Counts
• Analytical Review
• Computer Generated Trend Analysis
• Detailed Audit Program

Forms of Prevention Include:

• Proper Documentation
• Segregation of Duties
• Independent Checks
• Physical Safeguards
• Crime Prevention Program
• Strict Internal Property Handling Policies
• Periodic Property Inventories
• Security Awareness Program
• Internal Fraud/Theft Reporting System

Conclusion

The harm caused to businesses in all industries by inventory and non-cash frauds is difficult to determine, but it should be apparent to all managers that prevention and detection efforts are important in keeping their companies profitable. Dishonest employees adjust to the security and crime prevention protocols of their employer, therefore the prevention and detection policies must be re-evaluated regularly to keep pace with thieves. Lastly, an atmosphere of loyalty and trust must be generated and maintained by senior management through strong leadership. Why - because a content employee is loyal, and a loyal employee will not steal.

German Summary

Der Diebstahl materieller Vermögenswerte ist ein gravierendes Problem-und zwarfür jeden Unternehmer in allen Industriebereichen. 26,6% aller Diebstähle fallen darunter. Diese Form von Wirtschaftsbetrug bezieht sich insbesondere auf Firmeneigentum wie z.B. Produktionsmaschinen, Kraftfahrzeuge oder Produkte.

Dementsprechend istes wichtig, dass Maßnahmen zur Prävention und Entdeckung von Missbrauch von Firmeneigentum entwickelt werden.

Beispiele vonbargeldlosemDiebstahl:

• Diebstahl von Firmenfahrzeuge, z.B. die Nutzung des Firmen-Lieferwagens für private Zwecke
• Nutzung von Baumaterial und Produktionsfirmen für eigene Zwecke und/oder Projekte
• Nutzung der Firmencomputer und Arbeitszeit, um z.B. ein Buch zu schreiben.

Gegenmaßnahmen:

• Einwandfreie Dokumentation
• Sicherheitsmaßnahmen
• Strenge Materialbehandlungsregeln
• Regelmäßige Inventur
• Sicherheitsbewußtseins-Training
• Internes Diebstahl-Meldungsverfahren

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