Keeping money and ideas safe from outsiders is relatively easy. But what happens when you have to keep them safe from insiders? Asset misappropriation is a type of fraud that employees commit in their organizations, usually taking advantage of their position. This makes it not only harder to prevent but also difficult to identify if you don’t have the right systems in place.
In this article, we’ll talk about what makes asset misappropriation so common and what steps you can take to prevent it. Be ready to take some notes.
What is Asset Misappropriation?
Asset misappropriation is a specific type of insider fraud that takes place when someone steals or uses company assets without permission for their own benefit. These resources can be money, supplies, inventory, or even equipment.
The term asset misappropriation has been formally used since the mid-20th century when accountants and auditors started working on more sophisticated methods to detect (and hopefully even avoid) this form of workplace fraud.
What makes asset misappropriation especially dangerous is that, unlike cyber threats and hacking, this is an insider risk that can be progressive and almost undetectable. For example, asset misappropriation can look like an employee in a small business taking a small amount of products each time they make a sale. This is subtle and harder to detect than a direct threat from an outside person, but it is not less damaging.
How Does Misappropriation of Assets Happen?
According to the ACFE’s 2024 Report to the Nations, asset misappropriation schemes are the most common form of occupational fraud, occurring in 89% of cases and resulting in a median loss of $120,000. But how does this happen exactly, and why?
Well, there are two main factors: motivation and opportunity. Employees who commit asset misappropriation have a clear, personal reason to do so and know that the company’s systems are not solid enough to detect it. When you combine a good reason with little to no possibility of getting caught, that’s when assets are misappropriated.
The 8 Types of Asset Misappropriation
Now you have a better idea of the conditions for asset misappropriation to happen, but there’s more to know about it. Asset misappropriation comes in all shapes and forms, and each of them requires different abilities and circumstances.
1. Data Theft
Let’s start with one of the most common forms of asset misappropriation: data theft. Between March 2021 and February 2022, at least 42 million records were compromised due to data breaches. This happens when someone enters a company’s systems without permission and takes sensitive information such as customer information, financial records, company data, or even secret business plans.
Data theft can be done by outsiders, but it is often facilitated by people inside the company who have special access to the information. These are also known as malicious insider threats. Also, the motives behind it can vary significantly, going from personal financial gain to revenge.
2. Payroll Schemes
Payroll schemes happen when someone in charge of payroll cheats the system to take extra money for themselves. This can include making up fake employees or even saying they worked more hours than they did.
Payroll schemes can happen in any company, but they are twice more likely to happen in small businesses than in large corporations. A well-known example of this is Rita Crundwell from Dixon, Illinois, who stole over $53 million over many years by creating fake invoices and putting city money into her accounts.
3. Embezzlement
When trusted employees create fake records or makeup companies to hide what they’re doing, they are committing embezzlement. This kind of fraud can include anything from falsifying financial statements to creating fake vendors for personal financial gain.
Embezzlement might involve a clerk, a manager, or even an executive. Anyone with access to company funds can commit this type of employee fraud.
These types of frauds usually start small but they have the time to escalate and become more problematic. Most embezzlement frauds go on for 16 months before getting discovered.
4. Expense Reimbursement Fraud
A few years ago, Tyco International executives were caught claiming personal luxuries like a $6,000 shower curtain on the company’s dime. This is called expense reimbursement fraud. This common type of fraud happens when employees submit false or modified expenses to pretend that personal expenses are work-related.
They might make up receipts or claim more expenses than they really had. Expense reimbursement schemes are a common type of fraud in companies that don’t perform regular audits of expense claims and bank accounts, leaving a lot of room to manipulate information.
5. Billing Schemes
Some employees go beyond expense reimbursement scheme and they decide to set up fake companies or work with outsiders to create bills for things that never happened. This is called a billing scheme. This kind of fraud happens when there are holes in how a company buys things and pays for them, so employers decide to exploit that for personal gain.
Billing schemes are not only damaging in terms of bank statements but also when it comes to reliability. If this goes on for a long time, people outside the organization have reasons to believe any transaction can be a fraudulent one. This will damage the company’s reputation, which can cost even more than the actual fraudulent disbursement.
6. Check Tampering
Check tampering takes place when someone changes a company check to take money illegally. They might fake signatures, change who gets paid, or even alter the amount at some point. This insider fraud can’t be done by anyone, and will often happen in finance or accounting departments where people handle checks. For example, one of Kross Corporation’s executives took over $34 million by changing company checks to pay for personal purchases.
Even when it can be highly damaging, check tampering is easy to mitigate: all companies need to do is implement efficient electronic payment systems. If this is not an option, they can improve their internal controls to make sure there are systems in place to verify where company checks come from.
7. Skimming
Skimming is a common asset misappropriation fraud a lot in places that use cash a lot, like small stores. In this type of fraud, people take cash before it goes into the company’s accounting system, leaving those profits outside of accounting records. To achieve this, a seller might not record all the sales they make or take cash payments for themselves.
When kept small, skimming can go unnoticed for a long time. A good example of this is the old McDonald’s Monopoly scam, where an employee stole winning game pieces over many years, accumulating millions in value.
8. Intellectual Property (IP) Theft
Asset misappropriation is not exclusive to money or monetary resources: it can also affect information and ideas. IP theft refers to taking a company’s ideas or inventions without permission. This could be stealing trade secrets, patents, or even software resources. It’s often done by employees who have access to important information.
Even when it doesn’t affect bank statements directly, losing ideas is a big deal. Companies can lose a lot if their secrets get out, including reputation and reliability. One of the most known examples of IP theft happened back in 2018 when a former Coca-Cola employee stole trade secrets worth approximately $119 million to start her own company.
How To Prevent Asset Misappropriation with Teramind
So, asset misappropriation fraud is a huge deal and companies have to do something about it. But, how can they do that?
There’s no one-size-fits-all solution, but using specialized tools can go a long way. In this section, we will talk about how you can use Teramind to prevent fraudulent disbursements.
- User activity monitoring: Finding problems before they even arise is a good way to prevent internal fraud. With Teramind, you can track and record user activity to identify unauthorized actions, like accessing files they shouldn’t have access to. This feature provides a detailed log of all interactions, helping you spot any suspicious activity or crooked employees involved in asset appropriation fraud.
- Data loss prevention (DLP): Data is one of the most valuable resources any company can have, so taking care of it should be a priority. You can use Teramind’s DLP to ensure that information doesn’t leave your organization inappropriately, which is a common way corporate fraud schemes happen.
- Anomaly detection: You can also use Teramind’s anomaly detection to stay on top of any deviations from normal patterns, such as unusual access times or unexpected data transfers. This will help you be ahead of any fraudulent activity and reduce the risk of fraud without even trying.
- Screen recording and keystroke logging: With Teramind, you can also record and save screen activity. This can be especially helpful when dealing with federal fraud investigators, as it will help you provide concrete proof of fraudulent activity.
- Real-time alerts: Last but not least, Teramind offers customizable real-time alerts to help you stay on top of activities that might indicate employee fraud. This information helps you act as soon as possible and minimize any consequences.
FAQs
What is an example of asset misappropriation?
An example of asset misappropriation is when an employee embezzles funds from their company for personal gain, such as a cashier pocketing cash from the register. This type of fraud involves the unauthorized use or theft of company assets.
What are the three major classes of asset misappropriation?
The three major classes of asset misappropriation are theft of cash, fraudulent disbursements, and theft of inventory or other physical assets. These forms of misappropriation involve the unauthorized acquisition or disposal of company assets for personal gain.
What are the characteristics of asset misappropriation?
The characteristics of asset misappropriation include unauthorized use or theft of company assets, manipulation of financial records, and concealment of fraudulent activity.
Conclusion
Remember that keeping your assets safe requires not only the capacity to respond to potential Risks of Asset Misappropriation but also the right internal control systems to make sure you can spot any unusual activity and respond to it as soon as possible.
Now you know everything you need about asset misappropriation, including how to use Teramind’s features to prevent it. The right specialized tool will help you save time without sacrificing good results, which is essentially any company’s dream.
