Employee Fraud

2007

When expenses go wrong

NOVEMBER 2007: In the moral maze that is the modern office, it seems the expense claim is still something of a grey area. Travelodge surveyed 4000 employees and found that 22% of workers admitted to regularly fiddling their company expense claims, which would mean a staggering 6.3 million Britons are on the take. All the survey was relatively small, it still found claims for items as spurious as helicopter re-sprays, pregnancy testing kits and a vet’s bill for neutering a cat. (Read more...)

No work, great pay: an account manager siphons payroll distributions through a delayed employee termination scheme

JUNE 2007: THE PAYROLL DEPARTMENT CAN BE AN organization's biggest source of potential fraud. For Ashmont Cleaning Co., what started as a simple employee complaint regarding a missing vacation check developed into the discovery of the largest payroll fraud in the company's history. (Read more...)

Fraud at the top: a prominent executive, aided by several employees, embezzles US $500,000 over a 10-year period

APRIL 2007: AFTER 27 YEARS OF EMPLOYMENT WITH Scout's, a large retailer, Tom Carter had risen through the ranks to vice chairman--the second highest position in the company--and was also a board member. He was a protege of the company's late founder. Carter had witnessed firsthand the massive growth of the company. His vast experience and long tenure made him a larger-than-life figure within the organization.

During his final year of employment, Carter's salary was more than US $3 million. He also owned US $20 million in company stock, plus options, and was eligible for a substantial retirement income. His impressive career at Scout's ended when he retired as vice chairman and was forced to resign from the board after he was accused of embezzling US $500,000. (Read more...)

Fraud in the audit department: a CAE looks to restore his team's credibility after a member of the staff is caught embezzling company funds

APRIL 2007: BILL IS THE CHIEF AUDIT EXECUTIVE (CAE) for Namnetics, a publicly traded medical supply company in central California with annual revenues approaching US $1.5 billion. The company has manufacturing and distribution facilities in five U.S. states and in Mexico. Namnetics' audit department consists of Bill, two managers, and eight staff auditors.

One of Bill's worst nightmares has just come true: A member of his audit team has just been arrested for fraud and embezzlement. The suspect, Cheryl, is internal auditing's most senior manager and has been with the department for nine years. Before moving to auditing, she was a supervisor in accounts payable (AP). (Read more...)

2006

Lapping up the profits: deficient controls enable an accounting director to fleece approximately US $350,000

DECEMBER 2006: STEFAN WINKLER HAD WORKED FOR Mogel's Inc., a beverage company in Florida, for nearly two decades. As controller and director of accounting, Winkler touched the money that came into and out of the company at every stage, though he was particularly focused on the incoming money.

Mogel's collected money from customers in two ways: either the delivery drivers brought in cash or checks from the customers on their route, or credit customers sent their checks by mail. The cash and checks from drivers were counted and put in the bank as route deposits; the checks arriving by mail from credit customers were filed as office deposits. Drivers gave their daily collections to a cashier who filled out the route deposit slip and sent it to Winkler.

Any checks from office mail came directly to Winkler, who verified that the money was received according to the customer's payment schedule--30 days for some customers, 60 for others, and so on. Part of Winkler's job was to combine office and route deposits for the final accounting before a bank deposit was made. Theoretically, Mogel's had two revenue streams, both of which converged at Winkler's desk and poured smoothly into the bank. (Read more...)

The patient embezzler: nonexistent segregation of duties and unlimited access to cash entice a long-time employee to raid the company's coffers

OCTOBER 2006: NINA, A CASHIER AT AN INDONESIAN automotive dealership, handled the cash management system at one of the dealership's branch offices. The system recognized and differentiated between two types of cash flows--bank transactions and cash transactions--and was set up to receive credit card payments that were recorded as bank transactions. When a customer paid with a credit card, the bank charged the company a merchant fee for the transaction. This fee averaged about 3 percent of the total payment and was deducted directly from the amount of the payment deposited; thus, only the net amount of the deposit appeared on the bank statement. (Read more...)

Are Your Staffers Stealing?

OCTOBER 2006: Alan Bridges never thought it would happen to him. But since he founded Allpoints Equipment in Tampa in 1992, he's been robbed on almost 50 occasions--by his own employees. One staffer in accounting paid part of Allpoints' utility bills each month, then set aside a few hundred bucks to cover her home electric bill. A top finance executive included his family vehicles on Allpoints' auto insurance plan. And another worker stole $24,000 worth of tools, equipment, and scrap metal from a job site; he was caught hawking some items at a pawnshop. (Read more...)

Personal Purchase Fraud

OCTOBER 2006: According to a 2004 commentary by ABC News’ John Stossel, the General Accounting Office reported that government employees had used government credit cards to purchase computers, digital cameras, women’s lingerie, jewellery, engagement rings, Elvis photos from Graceland, and escort services in New Jersey.

Another government employee used government funds to buy his girl friend breast implants.

Personal purchases fraud occurs when the fraudster purchases goods or services for personal use and then tricks his/her employer into paying for them. (Read more...)

Fraudulent overtime: access to the company's time recording system enables a local site manager to commit fraud

JUNE - 2006: JAMES BELL, THE AUDIT MANAGER AT Ashmont Cleaning Co., received a tip from the finance department regarding procedural breakdowns in accounts payable at one of the company's job sites. Although he did not identify any specific indications of fraud, there was enough anecdotal evidence to warrant a trip to the customer's Georgia manufacturing plant to investigate. Under the guise of a standard operational audit, the audit manager arranged a three-day review of back-office functions at the plant. (Read more...)

Ghost Employees

When fraud emanates from the top of the organization, it usually spreads throughout the organization like a cancer. Once the lower ranks discover that those above them are perpetrating fraud, many of them decide to perpetrate their own schemes as well.

For example, while AIC while top management was busy bilking unsuspecting inventors out of millions, Lisa Boulerice was busy duping AIC out of over $235,000 in fraudulent disbursements.

Lisa Boulerice’s fraud scheme is called a ghost employee scheme. (Read more...)

When the Boss Trumps Internal Controls

FEBRUARY 2006: What a difference a hotline, a routine audit and the right reporting chain could have made.

When a college was so broke it couldn’t even afford copy paper, toner and other inexpensive supplies, it took some sleuthing to find the reason. This article summarizes the heroic efforts of one CPA, without pay or outside staff (or experience in fraud detection), who helped bring down a powerful and arrogant college president. (Read more...)

Fictitious Vendor Schemes 

In fictitious vendor schemes, the fraudster establishes a ‘shell company’ that exists on paper only, but provides no goods or services to the victim organization. The shell company periodically submits invoices to the victim organization, which then pays for the services or goods never received. (Read more...)

2005

Audits That Keep Fraudsters Guessing

NOVEMBER 2005: Scratch the surface of many audit plans and you’ll find predictable elements that someone bent on fraud can anticipate and foil. That’s why SAS no. 99, Consideration of Fraud in a Financial Statement Audit, requires auditors to incorporate elements of unpredictability into their procedures. Here’s how. (Read more...)

The troublesome teller: a bank employee takes advantage of numerous lapses in controls to help herself to money from the vault

OCTOBER 2005: LAURA HAD BEEN WORKING as a bank teller in Nashville, Tenn., for five years when she was transferred to a new branch and promoted to head teller. As a teller, Laura wasn't making much money, and her credit card bills were mounting. She owed about US $14,000. With her new position and increased authority, Laura saw an opportunity to wipe out her debt with one fraudulent act. (Read more...)

On-Book vs. Off-Book Fraud Schemes

OCTOBER 2005: For obvious reasons, cash is the asset most often stolen by dishonest employees. Fraudsters will steal either the incoming cash receipts or the outgoing cash disbursements via a variety of fraud schemes. When conducting fraud investigations, one must first understand the controls and procedures in place for processing cash flowing through a business. If controls over incoming cash receipts are inadequate and those incoming cash flows are substantial, then dishonest employees will attempt to divert some of that cash flow into their own pockets. (Read more...)

Focus on fraud: internal controls, audit policies--and a tough stance--can help deter fraud.

SEPTEMBER 2005: Typically, fraud occurs in the shadows. While a bank robber steals with a gun in front of employees and customers, the person who steals by committing fraud generally goes unseen.

Three conditions characterize fraud: incentive or pressure, opportunity and rationalization. Examples of incentive or pressure include greed, living beyond one's means or personal financial losses. Opportunity may be found in acts such as taping passwords to computer monitors or leaving signed checks in unsecured areas. Rationalization is demonstrated by attitudes or comments such as "they owe me" or "they have more than enough money to spare." (Read more...)

Drying out fraud: an anonymous tip leads auditors to a former employee who used fictitious contracts to steal from the company

AUGUST 2005: AN ANONYMOUS LETTER WAS sent to the internal audit department of a natural gas public utility company indicating that something "strange" was happening in the sales department of the company's specialty division. In addition to providing natural gas service, the organization had a separate division that sold gas appliances under the name the Home Energy Center (HEC).

As a public utility, most of the company's operations were subject to regulation by a state utility commission. However, the HEC sales division operated as a retail outlet and, as such, was a part of the unregulated segment of the company. The letter indicated that appliances were being delivered out of the warehouse using sales contracts that were described as "suspect." No other details were provided. (Read more...)

When You Suspect Fraud

JUNE 2005: The new general manager of a small manufacturing company knew something was amiss. Each time he asked the chief financial officer for critical cost information he got the runaround. “We don’t have a cost accounting system that can produce that information,” the CFO would say. Or, “I’m sure we have those data somewhere. Let me get back to you.” But he never did. (Read more...)

Advance to go, collect $800,000: a controller's embezzlement scheme almost destroys an established manufacturing company

JUNE 2005: DAVE HAS OWNED A SMALL, successful manufacturing company for more than 50 years. Until recently, business had been booming, but current year sales had fallen dramatically, leaving the company barely profitable. Cash flow had become a major problem, and the company was borrowing from its line of credit almost weekly to keep operations running smoothly. Because Dave was so focused on decreasing sales and earnings he failed to consider the real reason his cash was shrinking--embezzlement. (Read more...)

A proactive approach to combating fraud: seven pre-emptive measures can help internal auditors deliver a first-round knockout to fraudulent activity

APRIL 2005: INTERNAL AUDIT PROFESSIONALS SHOULD PLAY AN integral role in their organization's fraud-fighting efforts. In fact, evidence shows that organizations fare better in terms of fraud when internal auditors are present. In its 2004 Report to the Nation, the Association of Certified Fraud Examiners states that the median loss for organizations with an internal audit department was $50,000 less than in organizations without an audit department.

The report also indicates that fraud schemes were identified by internal audits at more than twice the rate of external audits, despite the fact that victim organizations in the study were more likely to have external audits. (Read more...)

Achilles’ Heel - Management Override of Internal Controls a Weak Link in Fraud Prevention
 

Grounds for dismissal: a controls breakdown enables a coffee company's IT manager to perpetrate a lucrative fraud

FEBRUARY 2005: MARY DOE BEGAN WORKING AT The Coffee Co. in November 1999 as an application manager in the Information Technology (IT) department. Her job responsibilities included managing and implementing IT projects. She supervised approximately a dozen employees.

Within a few weeks of her hiring, Doe, on behalf of The Coffee Co., signed a consulting services agreement with Fictitious Consulting Company (FCC). To begin doing business with a vendor such as FCC, Doe was required to obtain written approval of the contract from a supervisor. Instead, Doe forged her supervisor's signature. (Read more...)

2004

The Quarter-Million-Dollar Caper

NOVEMBER 2004: Let’s face it—conducting a routine audit of a good, stable client can be boring and repetitive. Every year seems much like the last: tracing and vouching, reconciling, ticking and footing, examining documents and ledgers, evaluating controls. But despite the humdrum, good auditors are always on the lookout for abnormalities. The following case study reveals how alert auditors uncovered a fraud and, by behaving with professional integrity, turned a potentially bad situation into a positive one. (Read more...)

Anatomy Of A Fraud

Most fraud victims clam up. In this check-tampering case, the victim-a small-business owner-decided to speak out. The resulting cautionary tale offers a rare, detailed look into the mechanics and psychology of fraud. And its aftermath. Unfortunately, this time the perpetrator wasn't the only one who wound up in court. (Read more...)

Tips on Preventing Employee Theft

SEPTEMBER 2004: The most common employee theft: The one trusted person in a small business takes high or extra pay checks, or writes checks to him or her self, to "cash," to personal creditors, to an accomplice, or to a bogus company creditor that is actually the trusted person.

These employees:

• Have check signature authority or

• Get blank checks signed by the owner or

• Forge the owner's signature on checks or

• Alter the check after the owner has signed it (Read more...)

The Case of the Pilfering Purchasing Manager

MAY 2004: One way to deter dishonest employees: Make vacations mandatory.

Chris, we have a problem,” said the voice on the other end of the line. “Our purchasing manager, Bruce, is on vacation and we think we have discovered some irregularities.” Chris Rosetti, CPA, swung into action.

Rosetti—a partner with BST Advisors LLC in Albany, New York—had done limited work for the client, a state agency, in the past. This time, he quickly discovered the agency had two key internal control deficiencies. The first was that Bruce hadn’t been forced to use his vacation time in three years. Rosetti, a veteran adviser in at least 100 fraud cases, had seen this situation many times: Once employees start committing fraud, they can’t take time off because they need to constantly cover up what they’re doing.

The second deficiency was that Bruce was allowed to approve new vendors. So, not only was he approving the purchases, but he also was selecting the vendors—a serious breach of separation of duties. When he was forced to take time off to attend to his sick wife, the agency received requests for payment on three invoices for which there were no vendor files. They were later located in Bruce’s desk. That’s when Rosetti was called in. (Read more...)

Management left unchecked: a hole in a company's internal controls enables a plant manager to institute a fraud scheme using customer returns

APRIL 2004: BRAD THOMAS WAS THE AUDIT risk manager for Retail Inc., a large multinational corporation. Monthly, he was responsible for reviewing division financial statements and clearing abnormal variances. The review was a manual process until four months ago when a new audit software program was installed. Since then, Thomas, with assistance from division controllers, has been able to explain all but one questionable variance. The variance was from a plant and warehouse located a couple thousand miles from corporate head-quarters. His analysis indicated that costs of sales, particularly customer credit dollars, were very large and increasing.

To better understand what was happening, Thomas examined a sample of processed credits and supporting documentation. It quickly became apparent that receiving records supporting customer returns were not prepared and that return goods authorizations were often prepared after customer returns were received. Thomas reviewed this schedule with the credit department manager. The manager reported that Greed had told receiving employees they did not have time to prepare receiving records. Also, receiving employees were instructed to accept customer returns without an approved returned goods authorization as a customer accommodation and to reduce freight expense. (Read more...)

Employee Dishonesty

2003

Trouble in travel

DECEMBER 2003: AMANTHA, A UNIVERSITY auditor, was assigned to review the travel records for the coaches and recruiters in the school's athletic program. As Sam delved into the many files and papers associated with her task, she found problems typical of most travel forms: a lack of sufficient documentation for expenditures, the occasional use of first class or luxury rental vehicles, and a few instances of disallowable expenditures such as beer mixed in with a gas bill or a movie on a hotel bill. There was really only one point she was going to make in her report, so as she was preparing to wrap up, she decided to discuss the potential finding with the athletic department's director. (Read more...)

How An Honest Employee Crossed the Line

NOVEMBER 2003: Fraud experts have told me that most employee frauds are committed when one or more elements of the “Fraud Triangle” apply to an individual. Those elements are financial pressure…rationalization…and opportunity. In my case, all three were present. I allowed myself to see embezzlement as a way out from a huge debt burden that resulted from child support attachments (I owed my ex-husband $20,000 in child support)…arrearages attached on my earnings by my ex-husband and other factors. (Read more...)

A Thief Within

MAY 2003: If Patty Preston hadn't taken a vacation in March 2000, it might have taken her bosses some time to realize that she'd been stealing from them. Preston was a bookkeeper at Graff-Pinkert Inc., a family-run business in Oak Forest, Ill. Owned by brothers Lloyd and Jim Graff, the company buys and sells machines that make metal components. It was Jim, the company's vice president and treasurer, who discovered that something was amiss. (Read more...)

Beyond the obvious: often, those who commit one fraud have no qualms about continuing the practice.

APRIL 2003: Further investigation into the inner workings of one insurance company leads to a compendium of wrongdoing

THURSDAY, 2:00 P.M., XYZ INSURANCE. Audit Manager Lou Wilcox and Senior Auditor Randy Starr are called to the office of Larry Gabor, vice president of Group Insurance Operations at XYZ Insurance Company.

"We have a problem," Larry says. "We just got a call from Bill Parks in the Eastern Region. He says he can't pay the insurance premiums he owes us. (Read more...)

2003: Businesses today rely heavily on computers to cut costs, increase transaction speed, create competitive advantages and store vital information. This embrace of computer technology often means moving to large systems and networks. Although these systems and networks come with built-in controls, such as segregation of duties, they can never replace honest management. In this case, a manager under financial pressure used his influence over his employees to bypass the system controls. He was able to embezzle money until one employee courageously stood up to his questionable procedures. (Read more...)

The Padding That Hurts

FEBRUARY 2003: Davenport, an independent auditor, had a hot potato on his hands. He had just learned from Robert, his client’s internal auditor, that an employee had reported to him possible expense account abuses by one of the company’s managers. Robert said that this employee accompanied Murphy, a senior vice-president, on many business trips. The employee said Murphy had some curious habits: When getting out of a taxi, he would ask for extra blank receipts, and in restaurants, he would often do the same. (Read more...)

2002

Keep Ghosts Off the Payroll

DECEMBER 2002: Turner, a payroll specialist for a large Florida nonprofit organization, was a sick man. Most employees who steal do so out of greed, but Turner had a different motive—he was HIV-positive and needed expensive drugs to control the disease. Complicating matters, he hid his illness from his employer and health insurer. Over the course of two years, he embezzled $112,000 to cover his medical costs. Although Turner needed the extra cash, there were alternatives to stealing. But he couldn’t bring himself to reveal his sickness and ask for help. (Read more...)

Billing Schemes, Part 4: Personal Purchases

OCTOBER 2002: This is the final instalment in a four-part series on identifying false invoices and their issuers.

Most business owners enjoy their leadership role. But wearing the boss’s hat means shouldering diverse responsibilities, and many entrepreneurs don’t have time to manage human resources and other important administrative functions. So they often hire someone to do these jobs for them. If at first all goes well, the boss may no longer check to see if his or her managers follow proper supervisory procedures. That’s when trouble brews. (Read more...)

Billing Schemes, Part 3: Pay-and-Return Invoicing

SEPTEMBER 2002: This is the third article in a four-part series on identifying false invoices and their issuers.

A philosopher once said the road to hell is paved with good intentions. As all fraud examiners know, given the right circumstances—for example, a personal financial crisis coupled with weak internal controls on the job—many otherwise law-abiding employees will rationalize their way into stealing from the companies they work for. (Read more...)

Billing Schemes, Part 2: Pass-Throughs

AUGUST 2002: This is the second article in a four-part series on identifying false invoices and their issuers.

Ben, a recent accounting graduate, was on his first real auditing assignment at a West Virginia manufacturer of prepackaged cement. Because Ben was a rookie, his supervisors naturally assigned him tasks they didn’t want to perform. That explains why he was standing atop one of the company’s seven huge cement silos on the morning of December 31, his teeth chattering in the cold wind as he observed employees taking inventory. As workers sounded, or measured, each silo’s contents, Ben watched dutifully and then double-checked every measurement they made. (Read more...)

Billing Schemes, Part 1: Shell Companies That Don’t Deliver

JULY 2002: This is the first article in a four-part series on identifying false invoices and their issuers.

As he left the county clerk’s office, Stanley, a creative writer at a large advertising firm, gazed at the paper he’d just obtained and smiled to himself. For $35, it was easily the best investment he had ever made. Stanley pocketed the document and drove straight to his bank. Less than 30 minutes after presenting the paper to an official, he opened a business account in the name of SRJ Enterprises—a title that reflected his initials. The simple document—known as a fictitious-name or DBA (doing business as) certificate—was the key to his grand plan to defraud his employer. (Read more...)