13 Noncash Misappropriations

Noncash Misappropriations

FRAUDSTERS PREFER CASH SCHEMES because they do not involve the added steps of conversion that are required for noncash-misappropriation schemes. However, organizations are more aware of the risk of losing cash and normally have stricter controls over cash than noncash assets. Noncash assets that are commonly misappropriated include inventory, supplies, equipment, and proprietary information.

Misappropriation of these types of assets is simple to do as employees in the normal course of their duties must have access to these items. The theft is easy but the concealment of the theft is difficult where there are good internal controls. Even with the best of internal controls, infrequent misappropriations may not be noticed or are accepted as normal business losses or shrinkage.

Inventory comprises large-dollar amounts in retail business and also in manufacturing concerns. Retail sales staffs require access to the merchandise inventory and employees in the manufacturing sector need access to material inventory as part of their jobs. Though not as common as cash schemes, inventory is very susceptible to theft.


There are various forms of noncash misappropriation that include misuse, abuse, unconcealed misappropriations, transfer of assets, and proprietary information. There is no direct involvement of cash at the point of misappropriation from the organization.

Misuse and Abuse

Misuse of the organization’s assets does not usually involve theft but rather the use of the asset without proper authorization. The asset may be borrowed and then returned. Typically, the direct cost to the organization is relatively minor if the asset is returned in good condition. There would be only regular wear and tear from the short-term use.

Most people do not view borrowing assets as a serious fraud and certainly not a criminal action. However, they do not see the potential downside, as people never anticipate bad things happening.

The risk and expense to the organization are potential legal liability and loss of reputation. At times the organization’s borrowed asset or equipment may be used to compete with the organization. An employee may borrow equipment to perform side jobs for himself rather than for his employer.

Suppose a company van was borrowed by an employee to use for a weekend side project. The signage on the van would have the company’s logo and name. If something goes wrong with the job, the customer would seek corrective actions from the company, as they believe it was authorized. In the event of an accident involving the company vehicle, the company’s insurance would get involved. Coverage may be an issue depending on the insurance policy.

Unconcealed Misappropriations

This type of theft of assets is the easiest to perform. Just take the goods and walk away. There is no attempt to adjust the books and records to conceal the action. A variation of this is to short-ship goods to customers. A short shipment is when items are listed in the shipping document but not included in the shipment and not received by the recipient.

When an accomplice is involved, there could be false sales made. The employee does not enter the sale in the register and just gives the goods to the accomplice. There may be a nominal amount of money paid or appeared to be paid with a credit card so that the sale transaction looks normal to observers or security cameras. Another use of an accomplice is to return merchandise for refunds of good stolen by the employee.

Unconcealed misappropriations can occur during regular business hours in plain sight of other employees. Most people would assume that their coworker is removing the asset or merchandise as part of their duties, especially if perpetrated by long-time, trusted employees. Even if some suspect that the action is not legitimate, they might not interfere for a number of reasons.

  • It is merely a suspicion.
  • Poor employee–management relationship.
  • Lack of a whistleblowing process.
  • The perpetrator holds a senior position.
  • Employees do not want to get involved as they feel it is not their responsibility.

Transfer of Assets

The employee requests material to be used in a project. The project may be a fabrication where the employee can then keep all the requested material. If it is for a legitimate project, an excess amount may be requisitioned and the difference needed for the job is retained by the employee. This type of scheme requires no inventory record concealment as the requisition authorizes the reduction of inventory on hand.

Falsified transfer authorizations forms would allow for the removal of goods from the stockroom or warehouse area. The physical removal process can be done in plain sight as this is part of the normal work flow.

Proprietary Information

Intangible assets such as proprietary information are subject to misappropriations also. This type of asset is difficult to protect because restricting access prevents employees from doing their jobs. Unlike tangible assets where people have an idea of the value of the assets, people do not normally see any dollar value attached to information and may not handle it with care like cash. Likely, the information is only valuable to competitors. Sensitive information includes customer information, formulas, trade secrets, marketing strategies, products, and expansion developments.