ASSET MISAPPROPRIATION SCHEMES

A clear definition of asset misappropriation is helpful in recognizing this type of fraud. The
term asset misappropriation can be difficult to articulate; fundamentally, asset
misappropriation is converting legitimate asset possession or influence into illegitimate
personal gain. The definitions that follow further expound the meaning of asset
misappropriation as used in this book.
Blacks Law Dictionary defines misappropriation this way:
The act of misappropriating or turning to a wrongful purpose; wrong appropriation, a term
that does not necessarily mean peculation, although it may mean that. The term may also
embrace the taking and using of anothers property for sole purpose of capitalizing unfairly
on good will and reputation of property owner.
The definition in Websters Dictionary is a little different, and more in line with the use of the
term in this book: to appropriate wrongly (as by theft or embezzlement). Joe Wells defines
misappropriation in this way:
[Misappropriation] includes more than theft or embezzlement. It involves the misuse of any
company asset for personal gain. By far, the most common frauds are asset misappropriations
per the 2008 RTTN (88.7 percent of all frauds involve asset misappropriation).
There are two subcategories (Cash and Inventory and All Other Assets), five microcategories
(see Exhibit 3.2), 5 categories under the microcategory Fraudulent Disbursements, and 18
different schemes under them. Altogether, a total of 32 different individual fraud schemes are
contained in this major category.
Cash
Cash schemes involve the taking of cash from ones employer. Cash schemes dominate the
asset misappropriations cases, according to the statistics from the ACFE. In its 2008 RTTN,
85 percent of all asset misappropriation frauds involved the misappropriation of cash. Cash
schemes, in the ACFE fraud tree, are divided into three groups: larceny, fraudulent
disbursements, and skimming.
Larceny
Joe Wells defines cash larceny as the intentional taking of an employers cash (currency and
checks) without the consent and against the will of the employer.7 Said differently, cash
larceny is the outright stealing of cash. Because the cash stolen by an employee in a cash
larceny scheme has already been recorded in the accounting system, the absence of the cash
ought to be more easily detectable than a skimming scheme, which is off the books. For an
employee to commit a cash larceny fraud, he or she must have been placed in a position in

direct contact with cash somewhere along the companys cash pathcash coming in and cash
going out. That also means the employee was considered trustworthy. Cash larceny schemes
fall into three groups: cash on hand, from the deposit, and other. According to the ACFE 2008
RTTN, 10.3 percent of all frauds are cash larceny, and the average loss was $75,000.
Fraudulent Disbursements
Fraudulent disbursement schemes are those in which a distribution of funds is made from
some company account in what appears to be a normal manner but is actually fraudulent. The
method for obtaining the funds may be the forging of a check, the submission of a false
invoice, the doctoring of a time card, and so on. The key difference between fraudulent
disbursement schemes and cash larceny schemes is in the former, the money is moved from
the company in what appears to be a legitimate disbursement of funds.
Fraudulent disbursement schemes fall into five groups: billing, payroll, expense
reimbursement, check tampering, and register disbursement. According to the ACFE 2008
RTTN, 63.9 percent of all frauds are fraudulent disbursements. The average loss in a
fraudulent disbursement scheme was about $100,000. These frauds occur much more often
than other types of cash misappropriation.
Billing Schemes Billing schemes use the companys accounting system to steal funds by
submitting bogus claims in one form or another. If a vendor is on the authorized vendor list,
and if an invoice has been approved by the proper person, the system will take care of the rest
it will generate and/or send a check for the perpetrator to intercept and cash. The same is
true of payroll checks and employees. Billing schemes include shell vendor schemes (phony
vendor), nonaccomplice vendor schemes, and personal purchases schemes. According to the
ACFE 2008 RTTN, 23.9 percent of all frauds are billing schemes. The average cost of a
billing scheme was $100,000.
Shell Company Schemes
A shell company scheme involves using a fictitious company, created for the sole purpose of
committing a fraud, to generate checks from the companys resources that will be directed to
the culprit, to her benefit. Usually the fictitious company has a fabricated name, and often the
address is a post office box. Sometimes the culprit will use a derivation of a legitimate
vendors name to confuse those who might see the checks or the fictitious vendors name. For
example, if ABC Corporation was a legitimate vendor, the fraudster might use ABC Co. as
the fictitious vendors name. A description of the shell company process follows. The
fictitious vendor must be added to the authorized vendor list, an invoice must be approved, a

check must be written to the shell vendor, and the check must be intercepted by the fraudster
or an accomplice. (This could be as simple as mailing it to the fraudsters post office box.)
Often the perpetrator is in a control position with the authority to add a vendor. Also, often
the perpetrator is in a position to approve the phony invoice. Or the perpetrator could be
depending on rubber stamping or inattention to approval review. The perpetrator often also
sets up a bank account in the name of the fictitious vendor, which is fairly easy to do. A
check is processed and mailed, probably to a post office box. The perpetrator intercepts or
receives the check, deposits it into the bank account, and writes checks out to whoever
desired.
Pass-Through Schemes
This scheme is a version of the shell vendor scheme in which the perpetrator sets up a
company, but in this scheme, he actually buys products through the pass-through vendor. The
perpetrator sells the goods to his employer, but at an inflated price. Paying excessive prices
for goods is possible because the perpetrator is in a position to approve invoices or vendors
for purchases. By marking up the prices to exorbitant levels, the perpetrator can siphon off
funds from his or her employer to the pseudo vendor.
Nonaccomplice Vendor Schemes
Unlike the previous two vendo schemes, the nonaccomplice vendor scheme involves a
legitimate vendor. However, the vendor is not an accomplice but rather an innocent party
being used by the perpetrator. The perpetrator could bill or overbill the company using the
vendors invoices, and either intercept the check for the invoice or send the check to the
vendor and ask for a refund from the vendor and intercept that check. Another version of the
scheme involves the perpetrator deliberately ordering merchandise not needed, returning the
merchandise for credit to a legitimate vendor, and intercepting the refund check from
the vendor.
Personal Purchases Schemes
A personal purchases scheme is simply purchasing personal items with the companys money.
With the advances in Internet technologies and purchase methods, it is much easier to
perpetrate this kind of scheme. The General Accounting Office (GAO) did an audit of its eprocurement (electronic procurement) system and found thousands of dollars that had been
misappropriated for everything from brothels to expensive country club memberships.

Payroll Schemes Payroll schemes are similar to billing schemes except instead of paying a
vendor, the company is paying an employee. These schemes can be perpetrated in several
ways: ghost employee, commission, false workers compensation, or falsified wages.
According to the ACFE 2008 RTTN, 9.3 percent of all frauds are payroll schemes. The
average cost of a payroll scheme was $49,000.
Ghost Employee Schemes
In a ghost employee scheme, someone receives a paycheck but does not actually work for the
victim company. The ghost can be fictitious or a real person in collusion with the perpetrator.
For example, a controller for a university in Texas set up several ghosts in the payroll system,
including her son and some of his friends. She would have them either bring her the checks or
split the money between them. She stole several hundreds of thousands of dollars in the
scheme over several months. The ghost employee process is similar to the shell vendor
process: The ghost must be added to the employee master file for payroll, a time card or
salary must be approved, a check must be written to the ghost, and the check must be
intercepted by the fraudster or an accomplice.
Commission Schemes
In the commission scheme, fraudsters use several methods: generate bogus sales, overstate
sales, increase the commission rate, or use some other means to gain more commission than
was legitimately earned.
False Workers Compensation Schemes
The false workers compensation scheme involves a worker faking an injury and collecting
payment from the victims insurance carrier.
Falsified Wages Schemes
Fraudsters have sometimes used the falsified hours and salary scheme to pay employees
enormous overtime or exaggerated pay rates.
Expense Reimbursement Schemes Expense reimbursement schemes are
simple schemes: Submit a falsified business expense and gain a fraudulent reimbursement
check from the victim company. According to the ACFE 2008 RTTN, 13.2 percent of all
frauds are expense reimbursement schemes. The average cost of an expense reimbursement

scheme was $25,000. Schemes that fall under expense reimbursement include
mischaracterized expenses, overstated expenses, fictitious expenses, and multiple
reimbursements.
Check Tampering Schemes
Check tampering schemes are unique among the fraudulent disbursement schemes because it
is the one scheme in which the perpetrator physically prepares the fraudulent check. In other
cases, the fraudster causes the company to generate a check by submitting some form of false
document to the victim company (e.g., invoice, time card). According to the ACFE 2008
RTTN, 14.7 percent of all frauds are check tampering schemes. The average cost of a check
tampering scheme was $138,000. This average figure makes this fraud scheme the most
costly scheme or group of schemes of all the schemes. Check tampering schemes include
forged makers, forged endorsements, altered payees, concealed checks, and authorized
makers.