Most organisations maintain a detailed fixed asset register in their ERP or accounting software. However, maintaining a register and maintaining an accurate register are two different things.
During physical verification assignments, one issue is encountered quite frequently. The fixed asset register shows an asset, but the asset cannot be physically located. In practice, these are often referred to as “ghost assets”—assets that continue to exist in the books even though they are no longer available with the organisation.
In many cases, this situation does not arise because of fraud or negligence. It develops gradually over a period of time.
A machine may be shifted from one plant to another without updating the asset location in the register. Old computers may be disposed of by the IT department, but the accounting records may never be updated. Employees may resign without returning laptops or other equipment. During office relocations, mergers or restructuring, asset records are often migrated from one system to another, and inaccuracies continue to remain in the register for years.
Since these changes usually happen over a long period, they often go unnoticed until an independent physical verification is carried out.
The financial impact of ghost assets is generally underestimated.
If an asset has already been disposed of but continues to appear in the fixed asset register, depreciation may continue to be charged on that asset. Insurance coverage may also continue for assets that no longer exist. Management may assume that certain equipment is available and postpone replacement decisions, only to discover later that the asset cannot be traced.
From an audit perspective, inaccurate asset records also create avoidable reconciliation issues.
Clause 3(i) of the Companies (Auditor’s Report) Order (CARO), 2020 requires the auditor to comment on whether the company has carried out physical verification of its Property, Plant and Equipment at reasonable intervals and whether any material discrepancies have been properly dealt with in the books of account. A physical verification exercise often brings such discrepancies to light.
A common misconception is that if the fixed asset register is maintained in an ERP such as SAP or Oracle, the information must be correct. In reality, the ERP reflects the transactions recorded in the system. It cannot independently confirm whether an asset physically exists at the recorded location. If a disposal, transfer or write-off is never recorded, the asset will continue to appear in the register.
The only reliable way to identify ghost assets is through a systematic physical verification followed by reconciliation of the physical inventory with the fixed asset register.
Assets that are available physically but missing from the register should be investigated and recorded appropriately. Likewise, assets appearing in the register but not found during verification should be examined, supported by proper documentation and, wherever necessary, written off after obtaining the required approvals.
The objective of physical verification is not merely to satisfy an audit requirement. It is to ensure that the fixed asset register reflects the actual assets owned by the organisation. An accurate register supports reliable financial reporting, better asset management and informed business decisions.
In my experience, organisations that conduct periodic physical verification and timely reconciliation are able to maintain significantly better control over their fixed assets than those that rely solely on system records.
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