his section contains two dozen controls that can be applied to the acquisi­tion, valuation, and disposal of fixed assets. Of this group, 13 are consid­ered primary controls and are included in the flowchart in figure “System of Fixed Asset Controls”. The remaining 11 controls either do not fit into the various fixed asset transaction flows or are considered secondary controls that can bolster the primary con­trols as needed.

In essence, the system of controls for an asset acquisition requires that initial funding approval come from the annual budget, as well as additional approval through a formal capital investment form just prior to the actual ac­quisition. There should also be a post installation analysis of how actual project results compared to the estimates shown in the original capital in­vestment form. The key controls used once an asset is installed are to tag it, assign specific responsibility for it, and ensure that any asset transfers are approved by the shipping and receiving managers. Finally, asset disposition controls call for regular disposition reviews to ensure that dispositions occur while assets still retain some resale value, a formal disposition approval process, and proper tracking of any resulting receipts.

System of Fixed Asset Controls

The controls noted in the flowchart are described at greater length next, in sequence from the top of the flowchart to the bottom for each of the three types of fixed asset transactions.

• Obtain funding approval through the annual budgeting process. The annual budgeting process is an intensive review of overall company operations as well as of how capital expenditures are needed to fulfill the company’s strategic direction. As such, capital expenditure requests should be included in the annual budget, thereby ensuring that they will be analyzed in some detail. Expenditure requests included in the ap­proved budget still should be subjected to some additional approval at the point of actual expenditure, to ensure that they are still needed. How­ever, expenditure requests not included in the approved budget should be subjected to a considerably higher level of analysis and approval, to ensure that there is a justifiable need for them.

• Require a signed capital investment approval form prior to purchase. Given the significant amount of funds usually needed to acquire a fixed asset, there always should be a formal approval process before a pur­chase order is issued. An example is shown in figure below. Depending on the size of the acquisition, a number of approval signatures may be required, extending up to the company president or even the chair of the board of directors.
• Use prenumbered acquisition and disposal forms. If the company uses a manual system for fixed asset acquisitions and disposals, then it should acquire a set of prenumbered acquisition and disposal forms. By doing so, it can keep track of form numbers to ensure that none is lost prior to completion. This is also a good way to ensure that employees do not attempt to submit multiple acquisition authorization forms for the same asset, allowing them to order duplicate assets and make off with the extra items. For this to be a fully functional control, someone must be as­signed the task of storing the forms in a secure location and monitoring which form numbers have been released for use.
• Require return on investment calculation prior to approval. Given the considerable size of some fixed asset investments, a reasonable control is to calculate the estimated return on investment to see if the invest­ment exceeds the corporate hurdle rate. The return calculation can in­volve a variety of approaches, such as the payback period, net present value, or internal rate of return. All three calculations are included in the capital investment proposal form shown in figure below.
• Conduct a postcompletion project analysis. Managers have been known to make overly optimistic projections in order to make favorable cases for asset acquisitions. This issue can be mitigated by conducting regular reviews of the results of asset acquisitions in comparison to ini­tial predictions and then tracing these findings back to the initiating managers. This approach can also be used at various milestones during the construction of an asset to ensure that costs incurred match original projections.

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• Compare fixed asset serial numbers to the existing serial number data­base. There is a possibility that employees are acquiring assets, selling them to the company, then stealing the assets and selling them to the company again. To spot this behavior, always enter the serial number of each acquired asset in the fixed asset master file, and then run a re­port comparing serial numbers for all assets to see if there are duplicate serial numbers on record.
• Independently review fixed asset master file additions. A number of downstream errors can arise when fixed asset information is entered in­correctly in the fixed asset master file. For example, an incorrect asset description can result in an incorrect asset classification, which in turn may result in an incorrect depreciation calculation. Similarly, an in­correct asset location code can result in the subsequent inability to lo­cate the physical asset, which in turn may result in an improper asset disposal transaction. Further, an incorrect acquisition price may result in an incorrect depreciation calculation. To mitigate the risk of all these errors, have a second person review all new entries to the fixed asset master file for accuracy.
• Affix an identification plate to all fixed assets. If a company acquires assets that are not easily differentiated, then it is useful to affix an iden­tification plate to each one to assist in later audits. The identification plate can be a metal tag if durability is an issue, or can be a laminated bar code tag for easy scanning, or even a radio frequency (RFID) tag. The person responsible for tagging should record the tag number and asset location in the fixed asset master file.
• Assign responsibility for assets. There is a significant risk that assets will not be tracked carefully through the company once they are ac­quired. To avoid this, formally assign responsibility for each asset to the department manager whose staff uses the asset, and send all managers a quarterly notification of what assets are under their control. Even bet­ter, persuade the human resources manager to include “asset control” as a line item in the formal performance review for all managers.
• Use a formal transfer document to shift asset locations. If the preced­ing control is implemented that assigns responsibility for specific assets to department managers, then the transfer of an asset to a different de­partment calls for the formal approval of the sending and receiving de­partment managers. Otherwise, managers can claim that assets are being shifted without their approval, so they have no responsibility for the assets.

• Conduct regular asset disposition reviews. Fixed assets decline in value over time, so it is essential to conduct a regular review to determine if any assets should be disposed of before they lose their resale value. This review should be conducted at least annually, and should include representatives from the accounting, purchasing, and user departments. An alternative approach is to create capacity utilization metrics (which is most easily obtained for production equipment) and report on uti­lization levels as part of the standard monthly management reporting package; this tends to result in more immediate decisions to eliminate unused equipment.
• Require a signed capital asset disposition form prior to disposition. There is a risk that employees could sell off assets at below-market rates or disposition assets for which an alternative in-house use had been planned. Also, if assets are informally disposed of, the accounting staff probably will not be notified and so will continue to depreciate an asset no longer owned by the company, rather than writing it off. To avoid these problems, require the completion of a signed capital asset dispo­sition form, such as the one shown in figure below.
• Verify that cash receipts from asset sales are handled properly. Em­ployees may sell a company’s assets, pocket the proceeds, and report to the company that the asset actually was scrapped. This control issue can be reduced by requiring that a bill of sale or receipt from a scrapping company accompany the file for every asset that has been disposed of.

The preceding controls were primary ones required as part of the basic fixed asset transaction flows. In addition, the next ancillary controls either are general controls that operate outside of any specific transaction or are designed to provide additional risk mitigation.

• Segregate responsibilities related to fixed assets. If the person pur­chasing an asset also receives it, there is a considerable risk that the person will alter the purchasing documents to eliminate evidence of the receipt and then steal the asset. The same concern applies to several as­pects of fixed assets transactions. A control over this situation is to seg­regate these types of responsibilities:
  • Fixed asset acquisition
  • Fixed asset transaction recording
  • Custody of the fixed asset
  • Fixed asset disposal
  • Reconciliation of physical assets to accounting records

Capital Asset Disposition Form

Step 2: Check one of the action categories listed below (limit of one):

• Restrict access to the fixed asset master file. The fixed asset master file contains all baseline information about an asset and is the source doc­ument for depreciation calculations as well as asset location information. If people were to gain illicit access to this file, they could make modi­fications to change depreciation calculations (thereby changing finan­cial results) as well as modify locations (possibly resulting in theft of the assets). To avoid these problems, always use password controls to restrict access to the fixed asset master file.
• Restrict facility access. If the company owns fixed assets that can be easily moved and have a significant resale value, there is a risk that they will be stolen. If so, consider restricting access to the building during nonwork hours and hire a security staff to patrol the perimeter or at least the exits.
• Install an alarm system to detect RFID-tagged assets. If the company has especially valuable fixed assets that can be moved, then consider affixing a RFID tag to each one and then installing a transceiver near every building exit that will trigger an alarm if the RFID tag passes by the transceiver.
• Reconcile fixed asset additions with capital expenditure authoriza­tions. A good detective control to ensure that all acquisitions have been authorized properly is to periodically reconcile all fixed asset additions to the file of approved capital expenditure authorizations. Any acquisi­tions for which there is no authorization paperwork are then flagged for additional review, typically including reporting of the control breach to management.
• Increase the capitalization limit. A key problem with fixed asset track­ing is that it involves a considerable amount of additional paperwork as well as ongoing depreciation calculations, which may so overwhelm the accounting staff that they are struggling to keep up with the paper­work rather than focusing on proper control of the assets themselves. This recommended control may seem counterintuitive, but increasing the capitalization limit reduces the number of assets designated as fixed assets, thereby allowing the accounting staff to focus its attention on the proper approval, tracking, and disposition of a smaller number of large-dollar assets. Thus, oversight of smaller assets is abandoned in favor of greater inspection of large-dollar asset transactions.

• Conduct a periodic fixed asset audit. The internal audit staff should schedule a periodic audit of fixed assets, reconciling the on-hand in­ventory to the accounting records. Given the considerable quantity of fixed assets that many companies maintain, it is acceptable to focus on the 20 percent of fixed assets that typically account for 80 percent of the invested cost of all fixed assets. An example of a report suitable for a fixed asset audit is shown in figure below.
• Verify the fair value assumptions on dissimilar asset exchanges. Ac­counting rules allow one to record a gain or loss on the exchange of dissimilar assets. Since this calculation is based on the fair value of the assets involved (which is not stated in the accounting records), the pos­sibility exists for someone to artificially create an asset fair value that will result in a gain or loss. This situation can be avoided by having an outside appraiser review the fair value assumptions used in this type of transaction.

Fixed Asset Audit Report

• Test for asset impairment. There are a variety of circumstances under which the net book value of an asset should be reduced to its fair value, which can result in significant reductions in the recorded value of an asset. This test requires a significant knowledge of the types of markets in which a company operates, the regulations to which it is subject, and the need for its products within those markets. Consequently, only a knowledgeable person who is at least at the level of a controller should be relied on to detect the presence of assets whose values are likely to have been impaired.
• Verify that correct depreciation calculations are being made. Though there is no potential loss of assets if incorrect depreciation calculations are being made, it can result in an embarrassing adjustment to a com­pany’s financial statements at some point in the future. This control should include a comparison of capitalized items to the official corpo­rate capitalization limit to ensure that items are not being inappropri­ately capitalized and depreciated. The control should also include a review of the asset categories in which each individual asset has been recorded, to ensure that an asset has not been misclassified and there­fore incorrectly depreciated.
• Verify that all changes in asset retirement obligation assumptions are authorized. A company can artificially increase its short-term profitabil­ity by altering the assumed amount of future cash flows associated with its asset retirement obligations. Since downward revisions to these as­sumptions will be reflected in the current period’s income statement as a gain, any changes to these assumptions should be approved prior to implementation.

Tags: asset controls, fixed assets