Detecting and Deterring Business Asset Misappropriation

Funny vintage detective looking through a magnifier
Employee theft of inventory and supplies and the unauthorized use of equipment, although not as recurrent as cash theft, can be a major damage to many small businesses. In some cases, a non-employee conspirator may be involved, including a dishonest vendor. Although cash is the ideal target for employee theft, supplies, inventory and all sorts of bookkeeping equipment are alluring as well. These frauds range from a box of paper clips to the unauthorized use of expensive furniture and/or equipment. The following are common types of employee misconduct relating to non-cash properties:

Unauthorized Use of Equipment Can Cause Major Losses

Employee unauthorized use of equipment can be a major loss for many small businesses.

The Fraud: How about that great snow blower the company bought to clear sidewalks and the parking lot for customers? Employee Joe David decided it was better to “borrow” the company’s new tool to do his own driveway than to buy or rent one of his own. While doing his driveway, his neighbors wanted to hire him to do theirs as well. Why not? So Joe, the potential entrepreneur, ran that thing all weekend, using up all of the fuel and eventually breaking the machine. There was no way the boss could clear the sidewalk and parking lot for his business Monday morning as he couldn’t get that new snow blower started.

The Flaw: Trusting employees. Leaving keys or easy access to valuable equipment. No formal policy stated or enforced.

The Fix: Set strict policies and limits for employees and enforce them. Physically secure valuable equipment. Employees may not only misuse your business equipment but may make your assets prudently “disappear.”

Inventory Shrinkage Can Be Reduced

Dealing with employee theft of inventory, supplies, and equipment can be an on-going struggle, depending on the type of workforce and turnover present in your organization.

The Fraud: Inventory can shrink due to plain old robbery, phony receiving reports, and unauthorized write-offs of old (and fake) accounts receivable.

The Flaw: Depending on the industry you’re in, there is guaranteed to be some natural shrinkage in inventories over time due to minor errors of one sort or another. But large inconsistencies are almost always due to fraud. Even during a physical count, a fraudster employee can use empty boxes, etc., to fool an auditor into thinking there are more units on the shelf than there actually are.

The Fix: As with other types of employee fraud, a formal policy of segregation of duties, strict supervision, voucher accounting, and all relevant internal controls must exist and be enforced at all times.

Physical counts should be recurrent and detailed, sometimes on a surprise basis. Nothing should be taken for granted. Reconciling bookkeeping records with sales invoices periodically is a good way to test the records. Frequent assessment of the perpetual inventory records is a must. Examination of financial statements to mine for margins, turnover rates, increases in costs of goods sold, and criminal receivables should be done monthly. Another type of employee fraud is committed to fake sales or purchases and often requires the support of an outside accomplice.

Protect Against Fake Sales and/or Purchases

Fake sales made by impostor employees may go to a phony customer or a real one who is an accomplice.

The Fraud: The property could be “sold” to a fake company with a phony purchase order and invoice and shipped right out of the warehouse to a storage facility that the fraudster employee rented to receive them. The goods can later be sold for cash, the invoice voided, and the inventory record doctored. Or, perhaps an employee is in a unique position to manipulate purchasing and receiving systems.

The Flaw: As is commonly the case when it comes to fraud, the reason these frauds happen is attributable to the lack of separation of duties, lack of supervision, and lack of overall internal controls.

The Fix: It bears reiterating that a formal policy of separation of duties, strict supervision, voucher accounting and all relevant internal controls must exist and be enforced at all times.


Unfortunately, fraud is inevitable in many organizations. Regardless of the size of the fraud allegation or the individual involved, the organization should consider having a documented policy of how fraud allegations will be investigated and resolved. 

Check out America's Best Bookkeepers
About Complete Controller® – America’s Bookkeeping Experts Complete Controller is the Nation’s Leader in virtual accounting, providing services to businesses and households alike. Utilizing Complete Controller’s technology, clients gain access to a cloud-hosted desktop where their entire team and tax accountant may access the QuickBooks file and critical financial documents in an efficient and secure environment. Complete Controller’s team of  US based accounting professionals are certified QuickBooksTMProAdvisor’s providing bookkeeping and controller services including training, full or partial-service bookkeeping, cash-flow management, budgeting and forecasting, vendor and receivables management, process and controls advisement, and customized reporting. Offering flat rate pricing, Complete Controller is the most cost effective expert accounting solution for business, family office, trusts, and households of any size or complexity.