Cheap Cars Court Trouble

Disposal of assets can be a magnet for fraud if appropriate policies and practices aren't in place.

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Kentucky's state auditor is reviewing how the state's court system manages its finances in the wake of an attorney general's investigation into the system's "employees only" sale of surplus vehicles, the Herald-Leader reports. According to news reports, the Administrative Office of the Courts (AOC) sold four vehicles during the 2014 sale for prices that were 70 percent below their value. One vehicle was later resold for more than three times the price the employee had paid for it. The AOC has not released information on its employees only sales, which began in 2013, and the courts are not covered by the Kentucky Open Records Act.

Lessons Learned

That Kentucky's AOC has requested an audit of its financial operations is to be commended. A more narrow audit of its disposal of surplus assets might not have been sufficient to completely identify all of the root issues and recommendations needed to fully address the abuses identified in this story. However, I will focus more specifically on some of the main failings that can be exploited by fraudsters in the area of disposal of surplus assets and what can be done about them.

An asset disposals policy and related processes are a must. These should cover several internal control best practices that can help prevent frauds in the assets area:

  • Physical counts performed at least yearly.
  • Analysis of unusual patterns in the value of fixed assets. For example, the depreciation schedule should be checked to identify any unusual pattern in the depreciation amounts. The disposals schedule is used to analyze write-offs and scrap sales transactions, which might hide fraudulent activity. Reviewing the acquisition schedule can assess whether new assets acquired are legitimate and meet the requirements to be capitalized.
  • Fixed assets procedures. This review should at least cover accounting and reconciliations, additions and disposals, and physical counts.
  • Approval of additions, disposals, and related documentation. This should include details of the approval steps required for new and obsolete fixed assets, and an approval chain with at least two levels of approvals. Additional approvals should be considered for fixed assets with higher value.
  • Reviews and random spot checks. A senior finance person and auditors should periodically review the additions and disposals, and spot-check the supporting documentation to assess its completeness and accuracy.
  • Asset tags. Each fixed asset should be tagged and should be recorded in a fixed asset register to ensure traceability. Typically, companies with large amounts of fixed assets use barcode systems for this.
  • Up-to-date fixed assets register. Including descriptions and cost and location details of each asset, updated regularly.
  • Reconciliations with the general ledger to ensure accuracy of the financial statements. This should be performed monthly and be accompanied by a review by supervisory/management staff.
  • Periodic evaluation of assets' condition, including adjustment to the value of damaged or deteriorated assets.
  • Physical controls such as closed-circuit television systems.

A good example of an asset disposal policy that integrates fraud prevention, but does not address roles and responsibilities, is maintained by the University of Wollongong Australia.

Halt "employees only" asset sales. More specifically related to this story, the AOC's management should reconsider the use of "employees only" auctions to dispose of assets such as automobiles. Not only is this practice inherently more susceptible to employee fraud, if the AOC made certain improvements in its practices, it could increase the amount of revenue it earns from the sale and disposal of surplus assets and better ensure that certain assets are valued appropriately when they are disposed of. For example, the AOC could generate additional revenue if it sold surplus assets on the internet, as many states and municipalities do. The AOC may be prohibited by state law from using the internet to sell surplus assets, but permission could be sought.

Minimum bids based on assessment of the current value of assets being disposed of also should be implemented. A further related consideration is the decision to sell at a minimal price versus selling for scrap. Frequently, the latter choice will yield better revenue results than selling at a low price. Of course, documentation of assessments is needed to support decision-making and to avoid the fraudulent territory of deliberate over, under, or misrepresentation of value.

Art Stewart
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About the Author



Art StewartArt Stewart<p>​Art Stewart is an independent management consultant with more than 35 years of experience in internal audit, financial management, performance measurement, governance, and strategic policy planning.​​​</p>


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