By Ivette Campos
Asset misappropriation is a distortion of financial information that alters balance sheets and affects decision-making. In my experience in the accounting field, I have seen different cases of asset misappropriation, from document falsification or impersonation to the manipulation of accounting records to conceal an improper withdrawal of assets. In some situations, these frauds have gone unnoticed for years, generating a financial impact that only became evident when the company faced liquidity problems or when an external audit revealed inconsistencies.
What is most concerning is that these types of frauds are not always carried out by outsiders. In many cases, they are committed by employees and executives with privileged access to information and knowledge of weaknesses in internal controls. I have observed cases where a simple accounting adjustment concealed the diversion of funds or where seemingly legitimate documents supported fictitious transactions that justified the disappearance of assets. These fraudulent schemes can include:
Theft of cash or inventory.
Payments to fictitious employees or false suppliers.
Improper use or misappropriation of company assets (e.g., vehicles or equipment).
Manipulation of accounting records to conceal the diversion of resources.
Given this reality, accounting and auditing play a crucial role in detecting and preventing these practices.
Accounting Regulation and Auditing in Asset Misappropriation
From an accounting perspective, asset misappropriation is a distortion of financial information that alters the presentation of financial statements and affects decision-making. In Costa Rica, the Commercial Code requires companies to keep organized and truthful accounting records, ensuring they reflect the company’s economic reality, backed by the requirement to keep books under IFRS according to the Tax Authority. However, in practice, I have seen how some companies discover internal fraud only when they review their financial statements in greater detail or when an audit reveals inconsistencies.
Asset misappropriation is classified under the Criminal Code under figures such as breach of trust, theft, fraud, and embezzlement. For example, Article 216 of the Costa Rican Penal Code defines and sanctions the crime of fraud, which may apply in cases where deception is used to misappropriate company assets or money.
In this regard, the International Standard on Auditing (ISA) 240 defines fraud as an intentional act carried out by one or more individuals from management, those responsible for corporate governance, employees, or third parties, involving deception to obtain personal gain. Within this definition, asset misappropriation is a common form of fraud, as it involves the diversion or improper use of an organization’s resources for personal benefit.
Additionally, ISA 315 emphasizes the importance of evaluating internal controls to identify fraud risks and avoid material misstatements. A common failure I have seen in many companies is the lack of segregation of duties. When a single person has control over an entire accounting process, such as recording and authorizing payments, it becomes easier to conceal irregularities. To reduce this risk, it is crucial to establish cross-checks and ensure that no transaction goes unsupervised.
Accounting Standards Applicable to Asset Misappropriation
To prevent fraud and ensure transparency in financial information, International Financial Reporting Standards (IFRS) establish clear guidelines for the proper presentation of financial statements.
Accounting standards are not just a guide for presenting financial statements; they are a key tool for maintaining control over assets and detecting irregularities. When a company has well-structured and supervised financial records, it is more difficult for fraud to occur without a trace. On the other hand, when there is little discipline in applying these standards, the door opens to conceal fund diversions, inventory manipulations, or unjustified asset adjustments.
How to Identify and Prevent Asset Misappropriation
Over the years, I have learned that fraud rarely occurs by chance. Most of the cases I have seen share certain patterns that can serve as warning signs for the company. Among the preventive measures, I suggest the following:
Bank reconciliation oversight: Comparing accounting records with bank transactions helps detect unusual differences.
Review of accounts receivable and payable: A sudden increase in these accounts may indicate fictitious or inflated invoices used to justify fund withdrawals.
Monitoring inventories and fixed assets: Periodic controls and physical verification of assets help identify irregularities before they become a major problem.
Implementation of internal audits: I have seen how companies that conduct frequent internal audits manage to detect fraud before it results in significant losses.
Asset misappropriation is a real problem that can affect any company. In Costa Rica, compliance with accounting and auditing standards is essential to prevent and detect these practices. Based on my experience, fraud is not always obvious, and in many cases, it is only discovered when companies strengthen their internal controls and analyze their financial information with greater rigor.
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