Employee Fraud - (Free content)

Control Cash-Register Thievery

JUNE 2002: I wish this was a story of crime and punishment, but things didn’t work out quite that way. It began with an embezzler diverting substantial funds from his employer to himself. It ended with several investigators trying to catch him but making big mistakes along the way. I’m one of those people who who were on his trail, and in the following pages, I’ll tell you how this real-life fraudster operated and what we should have done to nab him. Here’s what you the CPA can do to protect your clients against people like him. (Read more...)

Bartering assets: Sometimes, it takes a little auditor experience to recognize when the "norm "is just not right

APRIL 2002: THE TRANQUILITY OF THE New England Spring day was interrupted when Audit Manager Dan Wood received a call from his boss, General Auditor Bill Justice. Bill was calling to tell Dan that the employee hotline had come up with an item that needed his attention.

The caller alleged that crews from the company's road-building subsidiary had performed a considerable amount of free work at the personal residence of the district president. Although the details were fairly sketchy and the caller anonymous, Dan and Bill thought there was enough information to warrant follow-up. Because this particular district was scheduled for review in that year's audit plan, Dan put together a proposal to follow up on the allegation under the guise of a routine audit. (Read more...)

Lapping It Up

FEBRUARY 2002: Nelson, a computer programmer for a financial institution in New Orleans, sat across the desk from his boss. Nelson flinched when the boss told him the news that he, an 11-year company veteran, was in trouble with the home office in Dallas because of irresponsible behaviour.

More than a year ago, Nelson had accepted a promotion requiring a transfer to New Orleans from Dallas. The company extended him a $15,000 bridge loan, temporary funds to cover moving and household expenses. Nelson never paid back the loan, however, even after repeated requests to do so. (Read more...)

… And One for Me

JANUARY 2002: Roger had worked hard to earn his CPA. He had big dreams—he had planned to use his newfound financial expertise after college to build a fortune. But 10 years later, here he was, stuck as the controller for a midsize soft drink bottler and distributor in the South, going nowhere fast. It wasn’t fair, Roger reasoned. Besides, he thought his boss was ignorant and didn’t have a fraction of Roger’s accounting knowledge.

At the end of one particularly distressing day, Roger noticed a deposit slip with a math error: There was exactly $1,000 more in cash than reflected on the deposit. At first irritated at the notion of having to correct the mistake, Roger stopped and smiled. And then he put 50 twenty-dollar bills in the top of his desk drawer, locked it, went home and didn’t look back. Two years and $475,000 later, Roger still didn’t feel good about his job, he hated working in this company, and he despised the boss more than ever. (Read more...)

Financial fraud: Counting the cost for employer

The company was a great family-owned business and a wonderful place to work. In just 10 years it had grown into a thriving retail and wholesale distribution operation with sales exceeding $10 million.

Jack had worked with the company for seven years as the controller. Helpful and polite, he was always willing to learn more about different aspects of the company.

He never took vacations, came in early and, except for Bob, was almost always the last to leave the office. Because of his attitude, Bob gave him increasing responsibilities. Why hire another person when Jack was so willing to always do more? (Read more...)

2001

Bulldog gets the worm: In a case of missing inventory

DECEMBER 2001: YZ COMPANY'S AUDIT manager, Mark Wright, was troubled. Something didn't sit quite right with a recent investigation. If he was to believe the initial "facts," the manager of one of the organization's business units was a weak link, but Mark suspected this was not the case.

Mark's internal audit department and the company's security team had jointly investigated the disappearance of more than $2 million of the company's raw materials that had been sent to a third-party processor. Although the processor was billed for the loss, the plant declared bankruptcy shortly thereafter, leaving Mark's company with a $2.1 million write-off. Based upon the initial information, it looked as though the processor had duped the manager of the business unit out of the raw materials. But a second look started Mark down a trail that would eventually lead to Mexico. (Read more...)

Enemies Within

DECEMBER 2001: Sometimes, the truth isn’t very pretty. Consider, for example, the American workforce. Although regarded by many as the finest in the world, it has a dark side. According to estimates, a third of American workers have stolen on the job. Many of these thefts are immaterial to the financial statements, but not all are—especially to small businesses.

Although “internal theft” and “employee fraud” are commonly used, a more encompassing term is “asset misappropriation.” For our purposes, asset misappropriation means more than theft or embezzlement. An employee who wrongly uses company equipment (for example, computers and software) for his or her own personal benefit has not stolen the property, but has misappropriated it. (Read more...)

Easy come, easy go: An insurance agent uses company funds for personal investment

DECEMBER 2001: A NEW INSURANCE AGENT WAS depositing his collections to the company's trust account -- a central repository used by all agents in the state. Collections were deposited daily and credited to the policies of those insured. Because the new agent did not understand the breadth of the account, he was surprised to find that his deposit receipt showed an account balance of more than $900,000.

The agent couldn't resist the opportunity for personal gain. He decided to withdraw the entire balance and transfer it to another bank. After completing a counter withdrawal slip, he requested a cashier's check for the full amount. Because there was no block on the account to prevent miscellaneous withdrawals, the cashier was able to complete the transaction without any trouble. (Read more...)

Employee fraud: Perpetrators and their motivations

NOVEMBER 2001: The Association of Certified Fraud Examiners (ACFE) estimates that employee fraud costs $400 billion annually-or about 6% of an organization's total revenues. A 1998 KPMG LLP survey of 5,000 leading U.S. publicly held companies, not-for-profit organizations, and governments indicated that the average fraud loss per incident was $116,000. Furthermore, 62% of respondents reported losses due to employee fraud in the past year.

By any measure, employee fraud is an enormous and intolerable financial drain on business. The following were the costlier fraud schemes reported in the survey, and the annual loss attributable to them. (Read more...)

Ghost Goods: How to Spot Phantom Inventory

JUNE 2001: Just a hint of inventory fraud can be a frightening experience for an auditor of financial statements. Indeed, the list of freakish inventory manipulations companies have committed over the last 50 years reads like a rogue’s gallery: McKesson and Robbins, the Salad Oil Swindle, Equity Funding, ZZZZ Best, Phar-Mor. The tried-and-true schemes these and other companies pulled have always given auditors nightmares. A CPA who recognizes how these fraudulent manipulations work will be in a much better position to identify them. (Read more...)

Timing is of the Essence

MAY 2001: When companies get desperate to show earnings or reduce losses, sometimes they resort to fraudulent timing differences to show phony profits. By recognizing these often simple schemes CPAs can usually detect material financial statement frauds early, before they become catastrophic. (Read more...)

Rounding Up Fraud

APRIL 2001: A crafty controller takes liberties with currency conversions, and adherence to auditor-recommended controls at a bank office pays off.

WHILE PERFORMING A FINAN-cial audit at a small Philippine subsidiary, the auditor reviewed statements from two accounts held in a local bank. The subsidiary controller maintained one of the accounts in Philippine pesos to deposit funds collected locally. He held the other account in U.S. dollars and made what appeared to be transfers to it from the peso account on a biweekly basis.

The auditor found that each of the biweekly transfers was rounded to exactly the nearest thousand in both pesos and U.S. currency. (Read more...)

Why Employees Commit Fraud

FEBRUARY 2001: It is important for CPAs to understand what motivates people to commit fraud so they can better assess risk and assist employers or clients in implementing appropriate preventive and detective measures. One element common to most occupational fraud offenders, from the CEO to the rank-and-file employee, is that almost none of them took their jobs for the purpose of committing fraud—they are typically first-time offenders.

Facing that fact, one must ask the logical question: How do good people go bad? An obvious answer is greed. But many so-called greedy people do not lie, cheat and steal to get what they want. There are two separate but related theories about why employees commit fraud. The first is based on a 20-year-old Hollinger and Clark study of 12,000 employees in the workforce. It found that nearly 90% engaged in "workplace deviance," which included behavior such as goldbricking, workplace slowdowns, sick time abuses and pilferage. On top of that, an astonishing one-third of employees actually had stolen money or merchandise on the job. (Remember: Even top executives are "employees.") (Read more...)

No Friend Indeed - embezzlement

FEBRUARY 2001: Embezzlement indicators may be obvious to a knowledgeable auditor, but they are often missed by those closest to the thief.

THE EMBEZZLEMENT BEGAN with the aid of conspirators; one friend working as a credit union branch manager awarding loans to another friend. Although the friend was eligible for membership in the credit union, his adverse credit ratings, recent bankruptcy, and spotty employment history kept him from qualifying for a loan. Nevertheless, the brunch manager approved and disbursed $80,000 in unsecured loans to her friend, taking some of the proceeds for herself to pay over $20,000 in personal credit card debt. True to form, the friend was unable to make payments on the loans, and the bank manager became concerned that they would be discovered. To cover her deception, she set up a fictitious loan, using part of the proceeds to make payments on the first loan and taking the remainder as cash. (Read more...)

Prior 2001

Are You Teaching Your Employees to Steal

“Yes” is the right answer.

2000: Here’s a typical situation: You have an employee working out of town for several weeks. One evening, she has dinner and returns to the hotel room. Flipping through the TV channels, she watches a movie. What’s on the hotel bill when she checks out the next day? $5. For what? A pay-per-view movie. The employee submits her expense report for the week. The hotel bill is $500. What does your accounts payable clerk do? She crosses off the $5 movie charge and reimburses the employee $495 for the hotel bill. Why? Because movies are a personal expense, and against company policy. So what does the travelling employee do on the following week’s expense report? Records a fake charge -- for how much? Not $5. Maybe $15 or $20 or more (revenge -- the employee is mad). Any amount under the maximum that doesn’t require a receipt. (Read more...)

Signs of fraud

DECEMBER 2000: IN CONTEMPORARY BUSINESSES, THE HIGH COST of maintaining strict separation of duties and the integration of automated systems has led to a relaxation in the strict separation of duties doctrine.

The theft of goods and services by employees is a growing area of concern for companies of every size. Commonly, such activities are hidden through various fraudulent documents, including falsified accounting records. Rarely does analysis of accounting records alone lead to the discovery of frauds. Usually, discovery occurs because someone asks an innocent question for an unrelated purpose that starts unraveling the fabric of the fraud. Subsequent analysis of the records by a trained accountant can provide the details of the amount stolen, the methods used, and the extent of the cover up. The following five cases illustrate common elements of employee theft and fraud: (Read more...)

The Incentive to Defraud

OCTOBER 2000: Aligning employee performance goals with the organization's overall objectives is becoming more popular. However, unless carefully monitored, programs that link personal pay to nonfinancial measurements can prove problematic. (Read more...)

Whose Mercedes is That?

FEBRUARY 2000: Focusing too narrowly on behavioral indicators of fraud, such as extraordinary spending patterns, can lead auditors down the wrong path. (Read more...)

Internal fraud: Why it happens

JANUARY 1999: Any organization can be the victim of employee fraud. A survey by the Association of Certified Fraud Examiners indicates that losses to U.S. businesses due to internal fraud by employees exceeded $400 billion in 1995. The report estimates that nearly 6 percent of the annual gross revenues of U.S. companies are lost to fraud, and that the average business loses more than $9 per day per employee.

A more relevant analysis is calculating the impact of a fraud for one organization. If a company with $10 million in annual revenues and a 10 percent net margin experiences a $100,000 fraud, an additional $1 million in revenues must be generated to replace the embezzled $100,000!

Clearly managers cannot write off a fraud this large as a cost of doing business. Especially when they will have to ask their sales force to increase their targets by an additional $1 million. ("Sorry folks, no bonus this year. Bob in bookkeeping embezzled it!") (Read more...)

What you see is what you get - detection of fraud in a newly acquired company

JUNE 1998: Simple tools, like a telephone book and criss cross directory, helped one internal audit department save the company $2.35 million.

XYZ company was engaged in an aggressive acquisition program. The recent purchase of ABC Manufacturing had been engineered to provide entry into a business area where the company had no direct operating experience.

XYZ's standard procedure required internal auditing to perform a post-acquisition audit about nine months after the deal had closed. The key purpose of the audit was to facilitate integration of the acquired entity. Due to the relatively high risk associated with this unfamiliar business, however, the internal auditors initiated the post-acquisition audit of the ABC purchase somewhat earlier. (Read more...)

Full service fraud - internal auditors' discovery of fraud in company's garage operations

APRIL 1998: Data analysis software can elevate the research abilities of even the best internal audit teams; and it might even help uncover fraud in places where it's least suspected.

After a year on the job, the manager of the company garage was already well liked and respected. He and his assistant provided quick, efficient maintenance service for all company cars and were responsible for disposing of vehicles after they had reached a certain mileage. The garage included a gas pump and was considered a "full service" station. Unfortunately, the manager's definition of full service went beyond what company management had in mind. (Read more...)

Wanting to find fraud. (expert fraud detection beginning with internal audit department)

FEBRUARY 1998: Internal auditors' functions include the identification of potential problems including potential fraud. When indications of fraud are becoming apparent in an audit, internal auditors should immediately act rather than succumbing to the temptation of rationalizing exceptions in audit working papers.

Common indicators of fraud include missing documents, accounts which have not been reconciled, and so-called stale items in reconciled accounts. This is demonstrated in an example using a fictitious company. A former employee of ABC Insurance Co requested help from the company's auditor regarding problems at XYZ, where the employee worked at present. XYZ had an excellent audit staff but had experienced cases of fraud which had not been earlier detected. How ABC auditors assisted XYZ in detecting fraud is discussed. (Read more...)

The third time is a charm - fraud investigation involving loans

FEBRUARY 1997: The financial services subsidiary of a large financial holding company provided consumer and commercial loans to their clients. These loans were marketed primarily through another subsidiary's field force of insurance agents, enabling the organization to market its products nationally. A centralized staff at the corporate headquarters was responsible for all loan underwriting, issuance, and servicing.

This small, close knit staff consisted primarily of upper level loan officers with broad responsibility and authority. The management group, which included two former internal auditors, all had strong financial backgrounds. Staff members were personal friends as well as professional colleagues.

One day, the president of the organization happened to take a routine inquiry call from a customer regarding a new loan. The regular loan officer assigned to that customer's region was out of the office.

In the course of conversation, the president mentioned another loan made to the client; but the client knew nothing about it. (Read more...)

Employee fraud: internal auditors must train themselves to recognize fraud symptoms

OCTOBER 1996: Internal auditors must train themselves to recognize fraud symptoms and pursue the truth.

Fraud is seldom witnessed firsthand. It's a crime that is often shrouded in ambiguity, and it's sometimes difficult even to determine whether or not a crime has actually been committed. Only the symptoms of fraud, the red flags or indicators, exist to alert management of wrongdoing. Unfortunately, many such fraud symptoms go unnoticed; and, in some cases, signals that are recognized are not vigorously pursued.

Internal auditors must learn to recognize employee fraud indicators and discover whether the symptoms are the result of actual fraud or if they represent other factors. In situations where employee fraud has occurred, internal auditors must be prepared to persist and pursue until a confession or other convincing evidence is obtained. (Read more...)

The importance of follow-through

OCTOBER 1996: Perseverance is often the only difference between stopping fraudulent activity and allowing it to continue unabated. The auditors in the following case understood that maxim and stuck to their guns. As a result, they uncovered and put an end to a massive kickback fraud that cost their organization millions of dollars. (Read more...)

The first audit - check fraud

AUGUST 1995: Gus Jackson was hired from a Big Six public accounting firm to start a new internal audit function for ABC Company, a newly acquired subsidiary of a large organization. His first tasks involved getting to know ABC management and supporting the public accountants in their year-end audit work.

The accounts payable audit went smoothly, although many employees made no effort to conceal their hostility and resentment toward anyone associated with the new parent company. One exception was Hank Duckworth, the accounts payable manager.

As the audit neared completion, Gus reviewed an audit comment Jane had written, a statement concerning some accounts payable checks that lacked complete endorsement by the payees. (Read more...)

Case study: system of accountability

JUNE 1995: Mark Wright, Audit Manager for Appalachian Chemical, was surprised when the credit manager suddenly showed up at Wright's office and said, "Help me out with this. Something looks strange at the Nebraska City District."

Mark knew that accounting personnel at headquarters had been trying for some time to resolve a sizable unlocated difference unique to this particular district. This unlocated difference, which was actually an excess of debits, was in the balance sheet account, "Other Assets," and had grown over a period of two years to more than $500,000. (Read more...)

The billion dollar paper clip - how to prevent employee pilferage

Is pilfering the same as stealing?

OCTOBER 1994: Would you believe that in the U.S. alone, workers annually pilfer a billion dollars in paper clips, pencils, stationery, and postage? Nationwide, employees may pilfer as much as $200 million a day -- about $4 per employee.

My first experience with pilferage came when I was a rookie FBI agent assigned to investigate the disappearance of a large sum of cash from a local bank. It looked like an inside job. (Read more...)

Disposing of assets

OCTOBER 1994: At a warehouse, the internal auditing director for XYZ Company had been studying work schedules and processing of goods when he heard a knock at the door. It was a truck driver, a member of the union. The trucker, who thought the auditors were focusing on union members, asked why the auditors were chasing pennies when management was making off with millions.

In response to the auditor's questions, the driver went on to say that the audit group should look at the sale of used trucks and trailers. He said all the trucks and trailers were transferred to one facility for disposition, with all sales then being made to the same company, ABC Trucking. The trucker refused to say any more, claiming he feared reprisal. (Read more...)

Review of Executive Travel Expenses? Why Bother?

AUGUST 1994: The auditor and audit manager were discussing an upcoming audit of officer travel expenses.

"I would rather not work on this audit," the auditor said. "Frankly, one reason I left my last employer to come here was that another audit team conducted a travel expense audit and found serious problems. The problems involved some executives and top people in marketing. The auditors were told never to issue that report if they wanted to keep their jobs. I don't want to ever get into that situation." (Read more...)

Fraud in the North Woods

JUNE 1994: The construction site was in the woods on the shore of a large bay. The project to build a huge structure of concrete and steel had just begun.

A young engineer on the project called his father, a senior vice president at the home office of the large construction firm, to convey some misgivings he had about some of the transactions he had observed at the project site.

On Monday morning, an internal auditor was on a plane to the Northwest to conduct a "routine audit." After the usual friendly, cooperative greeting, the auditor told the office manager he would like to start by looking at the petty cash fund.

The first snake to crawl out from under the rocks was a gasoline charge card receipt copy in the current batch of items for reimbursement -- the original of which was in the last month's batch, already reimbursed. (Read more...)

Recognizing the symptoms of employee fraud

MAY 1994: Unlike crimes that leave easily detectable physical evidence, employee fraud may be difficult to detect because often only symptoms of such crimes are readily apparent, and the symptoms may or may not signal actual fraud. This article discusses six categories of symptoms that indicate fraud may have been committed by an employee, and presents a case study example to illustrate symptoms auditors and financial managers should investigate. (Read more...)

Three fraud stories

APRIL 1994: The following scenarios point up the penalties of not dealing promptly and appropriately with incidents of fraud. The incidents are drawn from real cases: (Read more...)

Financial reporting fraud

DECEMBER 1993: IN A TYPICAL fraud, an employee, vendor, or customer profits from his or her misdeeds. This case involves a financial reporting fraud where the operating results were misstated in the income statement. The fraud had gone on for nearly a year; although all the symptoms were visible, no one did anything about it -- until the internal auditors performed a typical audit of food and beverage inventories.

* Discovery

As usual, the audit of food and beverage inventories began shortly before year end. The auditors performed and recorded the inventory counts and followed with blind test counts, agreeing their counts to the accountants' and ultimately to the perpetual inventory records. Everything looked fine -- until they made a comparison to the general ledger balance. (Read more...)

Fraud in the executive suite

OCTOBER 1993: "Although this landscaping plan is expensive, the project is long overdue. I heartily approve!" wrote the president of a West Coast company in an internal memo.

One year later the internal audit department conducted a routine review of significant expenditures involving the construction, renovation, and maintenance of corporate properties. One of the disbursements selected for review was issued in connection with the relandscaping of the company's corporate headquarters.

The auditors decided to probe further because the landscaping cost seemed excessive, there was no competitive bidding, and because the contract was administered by high-level executives rather than those usually administering such contracts. (Read more...)

Financial Frankensteins - financial fraudsters

Who knows what evil lurks in the hearts of men?

APRIL 1993: McKinley Tabor didn't steal that much -- only about $150,000. It was how he stole it: right under the nose of his own internal auditor. Tabor, a CPA at the time -- and others mentioned here who have embezzled millions -- have one thing in common: they are the auditor's worst nightmare. Tabor says, "It was so easy; it was child's play." (Read more...)

Endorsement review - Fraud Findings

APRIL 1993: The university had never recognized the need for auditing, but it was forced to establish an internal audit function in response to a new state law. During the audit department's first year of existence, the internal auditor decided to review endorsements on paid checks. The auditor believed that the endorsement review would be a good way to see what was being paid and get a better understanding of university payments.

Several student scholarship checks had the second endorsements of the chairman or secretary of a particular department. The auditor was told that the second endorsements were to ease check-cashing at local banks and to help the student avoid having to pay a check-cashing fee. The auditor was immediately skeptical, however, because all the checks were cashed either at the bank on which the checks were drawn (with the bank thus prohibited by law from charging a fee) or deposited and not cashed.

The auditor's follow-up determined that some checks were issued to students who were not currently enrolled or who were not eligible for scholarships the semester that the checks were issued. The students were asked to examine the payee endorsement. They confirmed in writing that the endorsements were not theirs. (Read more...)

Free parking

DECEMBER 1992: In a certain city, hotel customers could park free in parking garages owned and operated by the hotels. Some hotels leased parking spaces from others in order to accommodate their guests and to remain competitive.

At one hotel, the general counsel was notified by the State's Attorney General's office that they had received a reliable tip that the parking facility's cashiers were billing the hotel for more cars than the hotel had actually parked. Internal audit was notified immediately. (Read more...)

Favorite frauds - several public auditors recount their most memorable fraud experiences

AUGUST 1992: Asking public auditors to describe their "favorite frauds" is like asking generals to describe their favorite battles. Wounded only by the occasional paper cut, the auditors describe strategies, the cunning of the enemy, and how the bad guys were smoked out of their bivouacs and soundly trounced. Most share the same tone of voice in telling their tales, a bemused "can you believe someone would have the nerve to try this?" tone tinged with pride when they describe the final victory. (Read more...)

An open invitation - fraud case

APRIL 1992: XYZ COMPANY, INC. stores, buys, sells, or processes commodities and products. The company is involved in receiving, shipping, weighing, grading, storing, and inventorying the commodities and products. Commodities are received and shipped by truck, rail, and barge. Truckload deliveries may come from dealers or producers -- from 6 a.m. to midnight, seven days a week -- as frequently as one eighteen-wheel truck every two to six minutes. Contract truck drivers get to know the company receiving personnel very well.

An XYZ location manager received an outside tip, suggesting that "something funny is going on at your site"; but when local management quietly investigated, they found nothing. They did not report the tip or their investigation to anyone at corporate. Several months later they received a second tip, initiated another investigation, and again found nothing.

Shortly thereafter a yard employee asked his supervisor, "What are Ben, Mark, and Bill doing? How do I get in on the action?" His supervisor, who was not in on the action, reported the incident to local management.

The third investigation, which focused on transactions handled by the graders and weighmasters named by the yard employee, uncovered some striking irregularities. (Read more...)

Fraud findings

DECEMBER 1991: George Marshall, the Manager of Group Premium Accounting for ABC Company, called Sarah McIntire, Director of Internal Auditing, and asked if she could come to his office. When she arrived, George introduced her to Alan Coogen, chief stockholder and President of XYZ Enterprises, a manufacturer with 250 employees. Alan told her the following:

"One of our employees went to the hospital this week for scheduled surgery. When the hospital verified insurance coverage, they were told our group insurance policy was not in force. Yet here is our paid check! When I called the insurance company, I was told we were always late and that you had finally cut us off! We have always paid the insurance premiums as soon as our agent drops off the premium notice. Here are our paid checks for the past two years!" (Read more...)

A professional doesn't quit at five o'clock - Fraud Findings

AUGUST 1991: THE MONDAY NIGHT FOOTBALL game he was half-watching in his hotel room was so one-sided that the internal auditor did not really mind doing a little work. He had been sent alone to a West Coast city to perform a "routine" purchasing audit of the local branch. To distract himself from the boring game, the auditor began tracing vendors listed on a report of local service vendors to the local telephone book.

The auditor had had EDP personnel prepare the report by using ZIP codes near the branch location and the unique identifier code in the company's purchase order number for acquisition of services. Finding a listing for the vendor in the local telephone book would provide some independent verification of the vendor's existence. (Read more...)