NOT-FOR-PROFIT ASSET MISAPPROPRIATION IN SOUTH CENTRAL PENNSYLVANIA.

• Author: Robinson-Fish, Gabrielle

INTRODUCTION

Fraud has proven to be a significant problem in all industries, resulting in a 5% loss of revenues annually (Kummer, Singh, & Best, 2015). However, not-for-profit (NFP) organizations are especially susceptible to fraudulent activity due to underdeveloped governance practices, an environment of trust, and a lack of internal controls. Research has demonstrated that of the three forms of occupational fraud, financial statement fraud, corruption, and asset misappropriation, NFPs experience asset misappropriation most commonly (Archambeault, Webber, & Greenlee, 2014; Bradley, 2015; Kennedy, 2018). Because there is limited research regarding this topic, conducting studies that identify asset misappropriation occurrences and detection within NFPs is vital (Harris, Petrovits, & Yetman, 2017).

In this study, the principal investigator sought to determine the most commonly perpetrated asset misappropriation fraud within the study location, discover how long the frauds lasted, and identify the opinions of participants regarding how fraud detection can be improved to lower future fraud risk. This study contains an extensive examination of peer-reviewed research regarding fraud topics, with an emphasis on asset misappropriation. The project was a case study design, interviewing fifteen participants to achieve data saturation. Recruitment included purposive sampling and snowball sampling.

LITERATURE REVIEW

The following section contains a discussion of the main topics related to the research conducted in this study. Specifically, the literature review is separated into two sections: a thorough description of asset misappropriation and the prevalence of, and effects of, asset misappropriation on NFP organizations.

Asset misappropriation

Asset misappropriation is defined as the theft or misuse of company assets (Le & Tran, 2018). According to the Association of Certified Fraud Examiners' (ACFE) 2018 report to the nations, 89% of the 2,690 cases studied involved asset misappropriation (ACFE, 2018). These statistics demonstrate that asset misappropriation is the most common occupational fraud. The three forms of asset misappropriation are described by the ACFE using a tree (Figure 1). The three branches of the tree are theft of cash receipts, fraudulent disbursements of cash, and other schemes (ACFE, 2019). Due to the various types and sizes of asset misappropriations, duration varies by occurrence.

Schemes involving asset misappropriation typically begin with minor thefts and increase over time as the perpetrator gains confidence (Albrecht, Kranacher, & Albrecht, 2008). Approximately two-thirds of asset misappropriation cases involve one perpetrator, however, research from the ACFE reveals that losses can be four times higher when collusion exists. Employees become involved in asset misappropriation schemes for different reasons: pressure from financial struggles, a negative attitude, or relationship with the company, temptation from poor internal controls and easily accessible assets, or the belief that they deserve what they steal (LaVine, 2018). The environment of trust and lack of internal controls makes organizations such as NFPs especially susceptible to asset misappropriation (Harris, Petrovits, & Yetman 2017).

Although asset misappropriation is the most common occupational fraud, there are indications if it is occurring (Self, et. al., 2016). The varying forms of asset misappropriation have different warning signs. For example, receiving invoices from vendors with consecutive invoice numbers suggesting the organization is the vendor's only customer is a red flag for a billing scheme (Kramer, 2015). Because asset misappropriation enables the perpetrator to gain financial benefits more quickly than other forms of fraud, it is important to be conscious of any unusual changes in employee behavior and/or lifestyle (Albrecht, Kranacher, & Albrecht, 2008). However, this responsibility is not just an auditor's or a manager's, research has proven that tips are the most common form of detection (Kramer, 2015).

Because of the general definition, the ACFE separates asset misappropriation into nine sub-categories that make up three main categories (Kennedy, 2018). The three categories are theft of cash receipts, fraudulent disbursements of cash, and other schemes. Each of the categories is delineated further to discuss the specific forms of asset misappropriation: skimming, cash larceny, billing schemes, expense reimbursement schemes, check tampering, payroll schemes, cash register disbursements, misappropriation of cash-on-hand, and non-cash misappropriations.

Theft of Cash Receipts

Theft of cash receipts is the fraud tree's first branch under asset misappropriation (Figure 1). It involves stealing customer payments and other receipts (Forensic Accounting Services, LLC, 2008). The basic definition of theft of cash receipts is, stealing cash (Wells, 2007). Unlike other forms of fraud, theft of cash receipts does not require the perpetrator to create false documents or forge signatures (Wells, 2017). The two most common forms of theft of cash receipts are skimming and cash larceny.

According to ACFE (2018), skimming involves taking cash from an organization before recording it in the accounting system. Because of ease of execution, skimming is a common occupational fraud, occurring in 11% of cases. As further noted, skimming can take 18-24 months to detect and causes companies approximately $50,000 in loss annually. This form of theft of cash receipts can involve sales and accounts receivables (ACFE, 2018). The simplest form is skimming of sales, which involves a customer sending payment and the employee taking the payment without recording it on the books.

Skimming receivables is more complex as the record of sale exists; taking the payment leaves the account overdue forcing the perpetrator to alter account balances or lap payments to hide the stolen funds. Because skimming can occur whenever funds enter the company, anyone who manages payments has ability to skim (Wells, 2017). Skimming is difficult to trace from audit trails because the payment never enters the accounting system (ACFE, 2018). Detection techniques include investigating complaints from customers about payments not being posted to accounts, performing physical inventory counts, comparing the dates of payments to their posting dates to search for lapping, investigating uncollectable accounts with high balances, and reviewing employee bank accounts for similar names to the company's (ACFE, 2019).

The second form of theft of cash receipts is cash larceny, the stealing of cash receipts from an entity after recording it in the accounting system (McGee & Byington, 2012). Although cash larceny is a problem for businesses to be cognizant, it has proven to "...occur twice as often in small businesses" (Verschoor, 2014, p. 11). The ACFE report to the nations shows between 2014 and 2018 that cash larceny was becoming more prevalent (ACFE, 2018). In 2014, 8.9% of the 1,483 cases studied involved cash larceny (ACFE, 2014). However, in 2018, 11% of the 2,690 cases involved this fraud (ACFE, 2018). Cash larceny lasts approximately 18-24 months and costs the organization an average of $75,000 per year.

According to ACFE (2016), the two main forms of cash larceny are theft of cash from the register, and cash larceny from deposits; theft of cash from the register, which involves opening the register and taking cash, is the simplest form. Cash larceny from deposits occurs when an employee takes cash or checks from an organization's deposits before depositing them into the bank (McGee & Byington, 2012). Companies can take precautions to lower risk and detect cash larceny more quickly by analyzing deposit slip books, using surveillance, investigating unusual deposits in transit, and following up on questions and complaints from customers about payments not being posted (ACFE, 2017).

Fraudulent Disbursements of Cash

Another branch of the fraud tree is fraudulent disbursements of cash (Figure 1). This form of asset misappropriation is the most common (ACFE, 2017; Wells, 2017). Andon, Free, and Scard (2015) revealed that 132 of the 192 cases of fraud studied involved fraudulent disbursements of cash. ACFE (2018), separates fraudulent disbursements of cash into five sub-categories: billing schemes, payroll schemes, expense reimbursement schemes, check and payment tampering, and register disbursements.

Billing schemes cause an employer to issue payments by submitting false, inflated, or duplicated invoices, or invoices for personal purchases (Kramer, 2015). Sow, et al. (2018) discovered that billing schemes are the most prevalent fraud in small businesses. According to the ACFE (2018), billing schemes are involved in 20% of fraud cases and cost organizations approximately $100,000 per year. Additionally, billing schemes go undetected for approximately two years (ACFE, 2014; ACFE, 2016; ACFE, 2018). Billing schemes are easily perpetrated by an employee who has access to billing and accounting functions (Anand, Dacin, & Murphy, 2015).

One common billing scheme involves a fake company used to bill the victim for goods or services never received (Lowe Pope, & Samuels, 2015). Employees could also create a fictitious organization that acts as an intermediary between a legitimate company and the victim company earning profits on payments to the real vendor (Lehman & Weidenmier, 2005). Common warning signs include vendors' name matching employee's initials, vendor addresses matching employee's address, vendor data missing, high-volume activity for new vendors, invoices that are lacking fold marks, or invoices being numbered consecutively (ACFE, 2017; Kramer, 2015; Lehman & Weidenmier, 2005). Investigating warning signs, and conducting unannounced reviews of vendor websites, vendor activity, duplicate purchase orders, sequential invoices, refunds distributed, and...