Intro to asset misappropriations for non-accountants

The stolen guitar and other assets


By Joseph T. Wells, CFE, CPA

Fraud Basics

This first part of a short primer on asset misappropriations begins with some definitions and the basics of an entity's accounting.  

What's the favorite target of occupational fraud offenders? The organization's assets, of course.

Let's assume you own a small business of restoring and selling electric guitars. And let's say your assets are $225,000, but you owe $75,000 on the business. Your equity in the business is then $150,000, the difference. One of your employees steals a rare 1954 Fender Telecaster, for which you paid $3,000, excluding $500 in parts, labor, and other costs to restore it. You were going to sell the restored guitar for $6,000.

So, how does this theft affect your books? Did you lose $3,000, $3,500, $6,000? We'll get back to that in a bit. Let's discuss definitions.

Definition of misappropriation
According to Black's Law Dictionary, "misappropriation" is the "act of misappropriating or turning to a wrong purpose; wrong appropriation, a term that doesn't necessarily mean peculation, although it may mean that. The term may also embrace the taking and using of another's property for sole purpose of capitalizing unfairly on good will and reputation of property owner." (1) 

The definition in Webster's is a little more pointed: "to appropriate wrongly (as by theft or embezzlement). (2) For our purposes, misappropriation includes more than theft or embezzlement. It involves the misuse of any company asset for personal gain. Therefore, employees using a company computer after hours for their own side business haven't stolen an asset, but they misappropriated it for their own benefit.

 

 

 

 


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