What We Can Learn from The Article: 10 Life Lessons

Summary Of Article “If Asset Misappropriation Is So Common, Why Do So Few Public Companies Disclose It?” 

Texts containing professional standards and auditing information normally define fraud in two distinct ways. Fraud is seen as either being asset misappropriation or financial statement misrepresentation. Good examples of financial statement fraud are the WorldCom and Enron scandals that saw the top management use dishonest reports which not only misled the firms, shareholders but creditors, and everyone else who saw the firm's financial reports. Asset misappropriation, on the other hand, deals with a perpetrator taking the organization's assets to benefit them. Asset or cash misappropriation can be done by conducted by any shareholder of an organization. The article explains the various methods through which asset misappropriation can occur from inventory theft to embezzlement and payment scams. Asset misappropriation is a rampant issue that faces organizations despite traditional auditors neglecting to pay more attention to the issue. A survey conducted showed that about 67% of organizations were victims of asset misappropriation within a period of one year before the research was conducted, while another study showed that between 5-7 percent of revenues to fraud (Tinkelman & Song, 2012).

The GAAP does not mandate organizations to reveal asset misappropriations, although they must disclose the material items affecting their income. It becomes evident that only a handful of organizations disclose their asset misappropriations. In the study conducted over 21 years of recorded accounting trends and techniques, the researchers only found one example of a disclosure of assets misappropriation (Tinkelman & Song, 2012). Moreover, among 500 public company fillings in two years, only six disclosures depicted asset shrinkage that showed asset misappropriation (Tinkelman & Song, 2012). Organizations are likely not to detect the fraud because many things can lead to asset shortages, while some fail to disclose even after detecting the misappropriations to prevent their shareholders from perceiving them as losing control. The accounting practice has also discouraged reporting of fraud losses, and the SEC has no rules that apply to the misappropriation of funds.

Lessons Learned from The Article 

While reading the article, I got to better understand why, although asset misappropriations might be common, instances of reported cases are little or close to none. I have learned that the extent of asset misappropriation reporting is close to 0.4 percent in the firm's financial statements (Tinkelman & Song, 2012). The phenomenon can be explained by various reasons which were identified in the article. First, organizations would rather not report the fraud to reduce the problems and embarrassment that comes with fraud issues. The management would not want to appear to be lax or shed a negative light that they are losing control of their business (Tinkelman & Song, 2012). This then fuels their need to keep fraud issues unreported. From this, I have learned the importance of business ethics since if the management and owners of the firm could choose to report on all fraud cases, the phenomenon would significantly reduce as it would become evident that cash misappropriation is a serious issue.

I also learned that the SEC and the business environment could perpetuate the occurrence of negative behavior among organizations. The SEC lacks rules that apply to the issue while the traditional auditors neglect the cash misappropriation (Tinkelman & Song, 2012). When organizations realize the enforcing bodies cannot address the issue, the business environment changes to accommodate the problem. Moreover, when the GAAP does not mandate the reporting of asset fraud, a culture of negligence is likely to form, thus increasing the fraud instances (Tinkelman & Song, 2012). The relevant authorities should, therefore, be serious on how they enforce the law and come up with laws for dealing with every likely phenomenon to reduce issues like this that lead to deceiving shareholders and the loss of profits among the existing organizations.

Another challenge to reducing asset misappropriation in the business environment is the firm's failure to detect the fraud. The main issue that facilitates this is the fact that asset shrinkage can be due to numerous issues; thus, separating the losses becomes almost impossible (Tinkelman & Song, 2012). Firms will, therefore, not the fraud but account for it under the cash over and short account. From this, I learn the importance of having stricter principles, methods, and laws. If the governing bodies and business scholars come up with new principles, they may find a novel way to identify the fraud and the factors that allow the firm to experience such issues to reduce its occurrence.

Reference 

Tinkelman, D. P., & Song, Y. (2012). If asset misappropriation is so common, why do so few public companies disclose it?  Journal of Forensic Studies in Accounting & Business, 4(1).