There are many examples of frauds related to the expenditures process committed by upper level managers. In addition to the fraud committed at Phar-Mor as described in Chapter 3, Michael Monus, as President and Chief Operating Officer of Phar-Mor, made fraudulent payments on typewritten checks drawn on a special Phar-Mor checking account. The checks supported the World Basketball League (WBL) that Monus founded. The use of a special checking account allowed Monus to bypass the normal purchase order controls, invoice matching system, and computer check writing policies that accompanied Phar-Mor's main operating account, so that he could use Phar-Mor funds to keep the financially troubled WBL afloat. His fraud diverted nearly $10 million to the WBL in a period of three years.

Mr. Monus specifically established a separate checking account that avoided the internal control structure. Since top management is above the level of internal control, proper internal control systems may not prevent expenditure fraud conducted by the top officials. However, the board of directors and upper level management should ensure that the corporate managers adhere to a code of ethical conduct. Ethics codes are not guarantees of fraud prevention either, but when ethical conduct is expected and rewarded, an environment is created in which such management fraud is more difficult to conceal.

Lower level employees or managers may conduct expenditure related fraud by submitting fictitious invoices or creating fictitious vendors. As an example of fraud in accounts payable, consider the case of Paul Pigeon. Pigeon worked for a Canadian company of about 3000 employees. As the manager of employee training, he regularly hired consultants to conduct training programs for employees. These consultants were paid through a traditional accounts payable system after submitting an invoice. When one of the consultants informed Pigeon that he was retiring, Pigeon used the opportunity to begin a fraud scheme. He began submitting fictitious, handwritten invoices, using plain paper and a rubber stamp for the consultant's name. Since Pigeon was in a position of expenditures authority, he approved the invoices and they were paid through the accounts payable system. Over a two year period, he submitted false invoices totaling $490,000.

Interestingly, Paul Pigeon was apparently not satisfied with just one fraud scheme, as he was perpetrating another fraud at the same time: He was submitting his own travel expenses in duplicate. for the first submission he used his original receipts, and for the second submission he used his credit card receipts. On the second submission, he always added a very small invoice at the bottom so that the amount would be different from his previous submission. He also changed dates to lessen possible suspicion about duplicate payments. He defrauded his employer of $32,923 by this duplicate travel-expense fraud.

Walmart has an extensive “Statement of Ethics” policy available on its website at investor.walmartstores.com. The policy addresses many areas within the organization, including a section directed to those who conduct purchasing for Walmart. A portion of that policy prohibits employees from accepting gifts or gratuities from suppliers, including free merchandise, meals, tickets to entertainment events, tips, kickbacks, and personal favors. Specifically, the policy states that . . . accepting gifts and entertainment can cause a conflict of interest, or the appearance of a conflict between personal interests and professional responsibility. The Walmart culture is to never accept gifts or entertainment from any supplier, potential supplier, government, or any person the associate has reason to believe may be seeking to influence business decisions or transactions.² This is an example of how management can help prevent purchasing agents from favoring certain suppliers and benefiting personally from doing so.