Investment and Fixed Asset Frauds
In this month's article, part of a series written on employee frauds, I examine typical investment and fixed asset fraud schemes. Investments are especially vulnerable to fraudulent schemes involving "borrowing" or using company assets for their own use. Fixed assets, on the other hand, can be prone to employee theft. Assets that are easily removed from the premises are especially subject to employee theft. Employees at any level of an organization can perpetrate thefts.
Borrowing company assets involves pledging the asset as collateral for a loan or other personal financing arrangement. If the lender or financier does not require actual possession of the asset, this type of fraud may be difficult to detect. An officer of a non-profit organization, who had control over the corporation's investments, pledged one of the non-profit's certificates as collateral for his personal home mortgage loan. The non-profit organization was required to repurchase his home in the event of his death. The officer violated his fiduciary duty to the organization by placing its assets in risk of loss for his own benefit.
Another scheme involves borrowing the company's compensating balances by transferring funds from one bank account to another to conceal the borrowing. The purpose of this scheme is not to take the initial funds but to use the use the earning ability of the monies for short periods of time. A Company maintained cash reserves at various banks throughout the United States. The company's senior accountant placed these cash reserves in short-term loans, with the interest payments being diverted to an investment club that he had established. The fraud was uncovered when a banker called to renew one of the short-term notes while the accountant was on vacation. The company lost approximately $300,000 in potential interest earnings.
Another scheme is where company officials use company assets, in particular highly liquid assets, to cover other losses or expenses that they have incurred. In one case, one particular loan of a savings and loan was restructured in an effort to avoid recognizing additional loan loss reserves. The borrower was unable to make the interest payments on the newly, restructured loan. The bank officers conspired to assign the interest earnings form the savings and loan's own investments to the borrower. The borrower would then have the cash necessary to pay the interest on his own loan. The savings and loan personnel attempted to conceal the fraud by inflating the expenses related to the same investments. Over a four-year period, approximately $2.5 million in interest earnings was given to the borrower. In another case, a Pittsburgh investment manager was able to remove four checks from a retirement fund whose investments he managed to cover expenses and investment losses that his own company incurred. One real estate property manager was able to use the cash reserves of one of the properties he managed as collateral for his own company's loans. When the loans became due and payable, the reserve accounts were used to pay off the loans and the balance of the collateral was returned to the property manager. The loss was approximately $25,000.
Thefts of fixed assets is far less common than those of inventory primarily because fixed assets are either undesirable or of no use to the employees. Personal use of fixed assets and their actual theft does occur especially for assets that are easily removed from the company's premises. A maintenance crew manager at a major airport "borrowed" a hydraulic jack from the construction site. An employee on the crew called the investigator to report the theft. Following up this tip, a scheme was uncovered to defraud the airport of more than $400,000 in fixed assets, primarily equipment. Once a fixed asset has been fully depreciated and removed from service, its disposal should be carefully monitored because even though the asset may not have any economic impact on the company, it's loss may represent lost opportunity for gains and other resources. A security guard was convicted of stealing office equipment from the building he was "guarding".
Assets of a business consist of more than furniture and equipment and investments. They also consist of, for example, customer lists, trade secrets, patents, and copyrights. A service man stole blank checks from a corporation and cashed them. The blank checks were kept in an unlocked storeroom along with the automatic check-signing machine. The storeroom was accessible to everyone in the company and to any visitors. The corporation did not maintain a log of the numbered checks nor restrict access to any one person. The amount of the checks presented to and paid by the bank was in excess of $1.5 million. The service man succeeded in disappearing with the entire amount in cash.
Businesses can minimize the likelihood of frauds and thefts through strengthening its internal controls. There are numerous methods to detect investment and fixed asset frauds and thefts so if a business finds itself a victim of a fraud, it should consult its legal counsel, accountant, and a competent fraud examiner.
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