Theft of Capital Assets in Local Governments

By Charles Hall | Asset Misappropriation

Theft of Capital Assets

In businesses, nonprofits, and governments, the theft of capital assets happens often. Today I explain how these thefts occur and how you can prevent them.

A USA Today article began with, “Stolen and sensitive U.S. military equipment, including fighter jet parts wanted by Iran…have been available to the highest bidder on popular Internet sales sites.” The article went on to say that the equipment, “purchased with taxpayer money,” was available for purchase on eBay and Craigslist and included “components from F-14 fighter jets” and “used Nuclear Biological Chemical protective suit.”

Capital assets often go missing because no one is paying attention, and the thief knows it. Such assets can be stolen with the intent to sell and convert to cash or simply for personal use.

The thefts often occur when employees place equipment or other capital assets in their vehicles and drive home. If the employee wants to cover their tracks, they might complete accounting paperwork for disposal of assets (saying the equipment was junked). More often than not, however, the asset is just stolen because the employee knows that no one will notice, or, if someone does, he can say, “I don’t know what happened to that piece of equipment.”

Long-term employees realize that the external auditors seldom audit existing capital assets. Yes, the auditor will examine an invoice, but how many auditors physically inspect plant, property and equipment?

Capital Asset Control Weakness

The main enabling factor is usually a lack of accountability. Many companies, nonprofits, and small governments do not perform periodic fixed asset inventories. Often equipment is purchased and added to the depreciation schedule, but no one–at a later date–compares this master list of fixed assets to what is (or should be) physically present.

Correcting Capital Asset Control Weakness

Performing periodic inventories is the key to lessening the threat of capital asset theft.

First assign each capital asset to a person (usually a department head or a supervisor); let this person know that he or she is personally responsible for the item. Then have someone external to each department perform periodic inventories of departmental assets.

Also, install security cameras to record all activity.

See my article: Auditing Plant, Property, and Equipment.

Check-for-Cash Fraud: Easy Theft

By Charles Hall | Asset Misappropriation

The Theft: Check-for-Cash

The check-for-cash fraud scheme is a simple yet effective way for employees to steal. Today I explain how this type of theft occurs and how you can prevent it.

Kelly is a receipts clerk in the City of Whosville. She usually collects about $25,000 each day with $8,000 of this being in cash and the remainder in checks. Kelly, based on city policy, receipts all monies she receives, but she does not note on the receipt whether the payment is cash or check.

Kelly also opens the mail and receipts those checks. Each month the city receives about a dozen alcohol tax checks–each made out to the City of Whosville–in the range of $3,000 to $6,000 each. These payments are paid by the alcohol distributors based on their sales, so the revenue is recognized upon receipt (and no receivable is accrued before payment).

Kelly wants to take a trip overseas, but she needs about $15,000 which he doesn’t have. But then she has a novel idea.

Since she opens the mail, she can steal cash in the following manner:

1. Don’t receipt a check received in the mail (e.g., an alcohol tax check for $4,503)
2. Place that check in her cash drawer
3. Take $4,503 from her cash drawer and place it in her purse

The $4,503 in cash came from legitimate collections. Receipts were written for the payments, but Kelly did not note whether cash or checks were received. 

Over a three month period, Kelly steals $17,505, and no one notices.

The Internal Control Weakness

Though receipts are issued, the type of payment (cash or check) is not noted. No one (such as a supervisor) is reconciling the composition–total cash and total checks–to the receipts.

Preventing Check-for-Cash Theft

As receipts are issued, require collection personnel to note the type of payment received (whether cash or check). A supervisor should reconcile the amount of cash and checks in the collection drawer to the receipts. If total cash and total checks don’t reconcile to the receipts, then the check-for-cash fraud might be occurring.

Compare the budgeted alcohol tax amount to the total received.

Also, consider installing a camera to record cash collections activity and do not allow purses or other bags in the collections area.

Yep, check-for-cash theft is an easy way to steal. Make sure you’ve got the right controls in place to keep this from happening in your business. 

Ghost Employee Fraud: Payroll Theft

By Charles Hall | Asset Misappropriation

In this article I explain ghost employee fraud and what you can do to prevent it.

The Theft: Ghost Employee Fraud

Last year I received a phone call. The payroll clerk of a local business had been monkeying around with the company’s direct deposits. As employees left the business, the payroll clerk left them in the system. Why? To steal those continuing payments. Auditors refer to this as ghost employee fraud–the employees are in the system, but they are not real.

Knowing no one was paying attention, the clerk changed the terminated employees’ direct deposit bank account numbers to her own. The result?She received multiple direct deposits each payroll. The clerk was able to steal over $800,000 before the theft was detected. 

Also, the payroll clerk had not filed tax returns, so the Internal Revenue Service rubbed salt into the wound by levying fines.

The Control Weakness

The owners trusted the payroll clerk too much and did not monitor her work. The clerk performed all payroll services with no supervision. While the owners were aware of the lack of segregation of duties, they took no steps to prevent the theft. (Even when a business doesn’t segregate its accounting duties, there are ways to lessen the threat of theft.)

Fixing the Control Weakness

Export all direct deposit bank account numbers along with employee names into an Excel spreadsheet and sort the bank account numbers. (The bank account numbers should be in one column and the employee name in a separate column.) Sort the bank account numbers, and the duplicate numbers will appear in adjacent rows. So once you sort the bank account numbers, see if there are any duplicates. If there are, see why.

Another fix is for the owners to review a list of all employees paid (just request a list of all employees paid for one or more payrolls). Since the owners normally know which employees have left, they will know if payroll payments are made beyond the departure dates.

Ghost employee fraud has been and continues to be a significant threat in most businesses. Make sure you consider this potential in your company. 

See my related post Auditing Payroll: The Why and How Guide.

Wire Transfer Fraud: Prevent It

By Charles Hall | Asset Misappropriation

The Theft: Wire Transfer Fraud

In one of the simplest thefts I’ve read about, a nonprofit administrative officer wired $6.9 million from an Ohio bank account to a private Austrian account. In this post, I’ll show you how wire transfer fraud occurs and how to prevent it.

Stealing a Cool $6.9 Million

The nonprofit administrator originated with the wire with a fax, taking less than an hour. Since the officer was authorized to make wire transfers, no one at the bank questioned the transaction–until it was too late. 

The fraudster landed in Austria, called his wife and said, “I’m not coming home.” Interestingly, the wife called the police and turned in her husband. He later came back to the states of his own volition. I guess, after a few boat rides down the Danube, he missed his family. Did he go to jail? Yes.

The Internal Control Weakness

The nonprofit entity did not establish appropriate controls over cash wire transfers. One person (by himself) could move funds.

Preventing Wire Transfer Fraud

The fix for this weakness is to require (at least) two persons to consummate all wire transfers.  

As you think about wire transfers, consider that they can originate with:

• Faxes,
• Phone calls,
• Personal visits to banks, and
• Computers

Determine how your bank handles wire transfers, and craft your internal controls accordingly.

Prevention Steps

Organizations should do the following to mitigate wire transfer fraud:

• Require the bank to limit daily wire transfer amounts (e.g., $25,000 per day for each employee)
• Require two persons to consummate all wire transfers to external parties (an essential control in my opinion)
• If the wire transfer request is made with a phone or fax, require the bank to call your organization back before the wire transfer is consummated
• The bank should require the use of unique passwords to access wire-transfer software; consider using a bank that provides bank token keys (small hand-held devices that generate unique identification numbers; these numbers are required to make wire transfers)
• Restrict bank accounts so that wire transfers can be made only to bank accounts of the organization (e.g., transfer from operating bank account to payroll bank account)
• Have someone peruse the daily bank account activity (using online access); at a minimum, reconcile bank statements in a timely fashion (large organizations should consider reconciling bank accounts more frequently than once a month; some reconcile daily)
• Require sufficient documentation for all wire transfer journal entries; require a second-person review of these entries
• Consider using a dedicated computer for all wire transfers; do not use this machine for any other purpose (malware is often picked up by computers as users visit tainted websites)
• Use all bank-provided wire transfer controls
• Any transactions over a certain high dollar amount (e.g., $50,000) must have the approval of the business owner/CEO

If you’re an auditor, consider–as you audit cash–whether these controls are in place.

As you can see, wire transfer fraud can be extremely damaging. Consider whether you have sufficient controls to prevent this theft. 

Skimming Cash Payments: Prevent It

By Charles Hall | Asset Misappropriation

Skimming cash payments is a common theft, especially if receipting controls are lax. Here’s how the theft occurs and how you can prevent it.

The Theft: Skimming Cash Payments

Your cash clerk is skimming cash as it comes across the counter. He does so by:

1. Not issuing a cash receipt, or
2. By using a second cash receipts book

In the first instance, the clerk knows which customers expect a receipt and which ones don’t. By not issuing a receipt he (the clerk) can put the cash in his pocket and–at the end of the day–walk out the door. He is careful to write off any related receivable (making an adjustment in the accounting system to reduce the customer’s receivable balance). As a result, the customer receives no bill for nonpayment. The clerk knows that no one–such as a supervisor–monitors receivable adjustments. Also, the business has no security camera.

In the second instance, the clerk has two physical receipt books, one for checks and one for cash (though everyone in the business thinks he has just one). The checks are deposited by the clerk into the business’ checking account and the cash is stolen. The customer receives a receipt whether he pays by check or cash and is unaware of the two receipt books. Again, the collections clerk writes off–by making an entry in the receivable software–the customer receivable. The result? The customer has a $0 balance and the clerk skims the cash.

The Internal Control Weakness

In the first instance (no receipt is issued), no one is monitoring the adjustments to the receivable accounts. And no one is tracking the receipt books issued (or being used). Also, the business has not installed a security camera to record the theft of funds by the clerk.

In the second instance (use of two receipt books), again, no one is monitoring the adjustments to the customer receivable accounts. And, again, there is no camera to record the use of the second receipt book.

Prevention of Cash Skimming

Have someone, such as a supervisor in the collections department or the controller outside the department, monitor daily adjustments to customer receivable accounts. The clerk should know that his receivables work (including any adjustments to receivables accounts) is being monitored. If the business is small, the owner should request a daily or weekly printout of all adjustments to the receivable accounts.

Install a camera to record all actions of your cash collection clerks.

These simple steps will greatly reduce the threat of clerks skimming cash payments.