Case Study: Like Pulling Teeth

A receptionist/bookkeeper at a small dental practice was the only person who understood the proprietary software used to track patient data, as well as being the one who prepared deposits of receipts for the bank. The bookkeeper noticed that she could input data (checks, insurance receipts, credit card receipts) and prepare a deposit slip for the owner to take to the bank, before inputting cash into the system. The deposit slip given to the owner of the practice did not show certain cash receipts, and hence he had no idea the bookkeeper had in fact pocketed the money. She entered the cash into the system after printing the deposit slip, just in case a patient should ever be questioned about his or her account.

The bookkeeper left the practice after six weeks for a better-paying job. However, she did not factor into her scheme a patient who returned to the dental office asking for a receipt for the cash she had paid two weeks before. The new receptionist/bookkeeper, not yet being familiar with the computer system, obtained the deposit slip used by her boss to make the deposit on that particular day and, of course, the cash was nowhere to be found. They then went into the computer file and realized what had happened. A call to the police ensued!

Case Study: How the Worm Got into the Apple

A husband and wife started a small printing business, having been in the printing world for quite some time and with an excellent relationship with their bank. They owned their own house, had a large loan to start the business, and had various lines of credit. At that stage of the business, the wife kept the books. As the company grew and prospered, they decided to hire a bookkeeper so the wife could spend more time marketing the business. The bookkeeper was a gem—the books were always in good order and she was easy to work with. Her responsibilities were gradually increased and she became controller with a suitable salary and bonuses.

The owners also had adjusted their accounting system to permit her to write checks, which would be signed by the husband or wife. Unfortunately, their trust and friendship with the bookkeeper blinded them and made them careless. They did not review the monthly bank statements. They left the collection, banking, and check-writing in the hands of the same person. However, this was not a classic fraudster; this was a 44-year-old divorced woman waiting for the good life to come her way. She started to forge the owner's signature on checks and hid them from the owners. She paid her own credit card bills along with legitimate business payables. This fraud continued for four years and almost $500,000—money that was not available for reinvestment, for maintaining loan covenants and paying off debt, or for salary increases or bonuses.

Ultimately, the bookkeeper was taking more money than the company had coming in, generating overdrafts and NSF fees. When she realized she could not repair the damage, she disappeared. On the day she left, the bank's relationship officer called the owners to discuss the overdrafts and huge NSF fees, $1,600 in the past month alone. Upon further investigation, the owners wanted to know why the bank had honored checks with such obviously forged signatures. A lawsuit ensued, demanding reimbursement of the NSF fees and the $500,000 withdrawn by the bookkeeper. The bank asserted it was up to all customers to be aware of the usual disclaimers and that the Uniform Commercial Code protected banks from the negligence of their customers by limiting liability for forged checks to one year and even then only if the customer identified the checks and signed a forged check affidavit. The case was settled after the bank offered some small restitution to the owners.

The lessons to be learned from this case study are that the owners should have been more responsible for their financial affairs and should have checked the monthly bank statements. As the ACFE points out in its 2010 survey, approximately 85 percent of asset misappropriation cases involved cash. Also, a fidelity bond policy (employee dishonesty) would have helped minimize the financial impact of the loss. Closer monitoring by the relationship manager at the bank, and asking questions as the company grew, also could have helped the owners through their growing pains.3

Case Study: All in the Family

Mary was married to Ron. Over the years, as Mary's father, Ben, continued to age, Mary would assist her father with the paying of his bills, the writing of checks, and similar tasks. During this same timeframe, Mary and Ron were getting themselves deeper and deeper into credit card debt, not unlike many young couples these days.

Mary and Ron both worked at good jobs, earning good incomes, but were living beyond their means. As Mary's father became more and more dependent on Mary's help, Mary and Ron fell deeper and deeper into debt. And instead of working on their spending problem, they sought out an easy and quick fix.

One day, when Mary was in the process of paying her dad's bills and balancing his checkbook, she took the opportunity to jot down some pertinent information, namely, the account number and bank routing number as well as the next available check number from her father's checking account. Of course she was also privy to the available balance in the account.

Her next act was to call her credit card company and offer them a payment by phone, a method of bill paying that has become widely practiced these days by busy (too busy to write a check a week or so before it's due and drop it in the mail) people. Mary used the information gained from her father's checkbook to issue an electronic check for payment against her credit card account. Her father had no knowledge of what Mary was doing—stealing her father's money!

To add even more fuel to this crime, Mary authorized a payment of $29,000 from her father's account, roughly $20,000 more than she and Ron owed on that credit card. As is the practice by most credit card companies, they refunded the excess payment amount to Mary and Ron about two months later. Mary and Ron's credit card bill was paid in full, and they had $20,000 more to spend. Ben, on the other hand, had been robbed, but was unaware of the theft, as Mary, his trusted, loving daughter, was balancing his checkbook.

Ben's lifestyle was simple, and his financial needs were easily covered by his Social Security checks, which were directly deposited into his checking account each month. Mary continued to pay her father's bills each month as she had been doing for years.

Ben, although growing old, was not feeble, and one day decided to look over his checking account statement to see how much he had sitting in the bank that had been accumulating from his excess Social Security deposits. That's when he saw the theft of his $29,000. He called his daughter, and he called his bank.

An investigation ensued, and the bank told Ben that the draft from his account was paid to a credit card company, and that the draft was complete and proper: It contained the correct account name, the correct account number, and the correct routing number, and was made out for an amount that was within the current balance at the time; therefore, it was honored by the bank.

Based on the information contained in the telephone payment draft, which the bank disclosed to Ben, as it was Ben's account the money came from, Ben then confronted the credit card company with his demand for reimbursement. After all, Ben didn't owe any money to the credit card company. And, based on the account number that was credited with the funds, Ben found out that the money was used by his daughter, Mary.

Now, Ben had a dilemma. He was out $29,000, no small sum for a retired man. The credit card company accepted his money, but without his permission, and applied it to his daughter's (and son-in-law’s) balance owing. His bank allowed the money to be withdrawn from his account, again without his permission. But Ben also realized that it was his daughter who stole the money from him. What's a father to do?

Ben sued the bank and the credit card company. He wanted his money returned, but he didn't want to see his daughter go to jail, and knew she no longer had the money with which to reimburse him.

The bank was able to legally transfer liability to the credit card company and was deemed not liable for any wrongdoing. The credit card company defended itself and hired a banking expert to assist in its defense. The credit card company was, in fact, not liable for anything and acted within allowable and legal banking standards. The case was settled before trial when the credit card company agreed to make a small cash settlement to Ben.

Case Study: The Bank Teller

The huge amounts of cash passing across the counter every day at any bank branch frequently provide all the temptation a teller may need to become dishonest. A client complained she could not account for the withdrawal of several thousand dollars recently deposited following the sale of her car. She remembered the name on the tag of the teller who had processed the deposit. The employee was interviewed and confessed she had obtained the client's identifiers (her mother's maiden name and birth date) and created a duplicate bankbook.

This was a particularly sad case because the teller was just in her early 20s. The motive for her theft was her large credit card debt, which left her without enough money to pay her rent. She was dismissed from the bank but was not prosecuted.

Case Study: Simple Payroll Fraud

The bookkeeper of a construction company knew there were hundreds of transient workers on the payroll at any given time. She also knew that at any point in time, many workers dropped off the payroll and many more joined. She also knew that no one was checking her work. She handled the payroll, used the owner's facsimile signature stamp on checks, and hand-delivered the checks to the various job sites!

The bookkeeper kept a handful of former employees on the payroll, both male and female. She even paid their union dues and payroll taxes! However, instead of delivering these checks to the job site, where of course the employees no longer worked, she endorsed the back of the checks and deposited them into her bank account. She was friendly with one particular teller at the bank branch and used this teller exclusively to deposit the checks. Several people at her employer were curious as to her new executive automobile, new home, and rumored house at the beach, which she passed off as the result of her husband's large win at the casino.

However, it took a prolonged illness and enforced absence from the office for a temporary bookkeeper to question why nonemployees were still on the payroll. Ultimately, the company recovered just about all of its lost funds, including refunds from the union and the IRS together with recoveries from the bank and the fraudulent bookkeeper.

Case Study: Expense Report Fraud

For some reason, expense accounts have been the most overlooked and least controlled area of many companies. Some supervisors give these reports a cursory review and if they pass the “smell test,” they are authorized.

Imagine the horror of a company that discovered that a particular employee's “authorized” expense reports had not in fact been authorized. She had forged the signatures of her supervisors and hand-delivered her expense reports to the accounting department, each time concocting an excuse why they did not come through the customary route along with other employees’ expense reports.

The embezzler was later described as a “smooth talker” who distracted others with her line of conversation. Over the course of four years, she submitted expense reports with several hundred thousand dollars of falsified expenses. She even went as far as creating false invoices submitted with her expense reports as support for her expenses. She included vouchers for business publication subscriptions, where she would show her credit card as having been used to incur the original expense, when in fact she hadn't even submitted the application for the subscription.

As is typical in many of these situations, her scheme was never found out while she was in the company's employment. She actually was dismissed for a totally unrelated insubordination issue. In the interim, she had become bold and mailed an invoice to the company from a fictitious vendor using a post office box, which did not reach the bookkeeping department until after she had been dismissed. A keen and skeptical clerk ran some Internet searches and internal reports and discovered the post office box actually had been used by the now-former employee. After further investigation, her entire scheme was discovered. The company recovered much of its loss from its insurance carrier, and the perpetrator was sentenced to time in prison.

Case Study: Construction Fraud

Because the competitive bidding process for construction contracts often makes profit margins razor thin, contractors may be tempted to increase their profits through fraud. A developer negotiated a $550 million guaranteed-maximum-price contract with a prime contractor and subcontractors to erect a 40-story building. To the developer's surprise, the allowances and contingency holds for unexpected costs and emergencies were exhausted before even the core and shell had been completed. This left the interior work unfunded. Puzzled and suspicious, the developer hired private investigators who discovered the prime contractor had bribed the architect and they were now colluding to defraud the developer. The contractor was purchasing goods and services beyond those required for the developer's building, diverting the excess to other jobs on which he and the architect were working and submitting the invoices to the developer. The excess expenses were approved and explained away by the architect. The contractor and the architect had convinced themselves that the developer's cost controls were shortsighted and would make the job unprofitable for them. When the architect and contractor were confronted with the evidence of the private investigation, they agreed to pay for the remaining construction from their own funds rather than be prosecuted.

The developer did not press charges against either the architect or the contractor, but he did report the architect to the licensing board. At the hearing, the investigators produced the evidence they had discovered for the developer, and the architect received a written reprimand. This effectively put the architect on an industry blacklist, which made it difficult for him to find well-paying jobs. As with other fraudsters, the consequences of the dishonest architect's fraud affected his family. He was no longer able to keep his children in private school, and he had to drop a club membership he had enjoyed with his wife. Life went on, but not at the carefree level the family had enjoyed before.

Case Study: Insurance Fraud

A medium-sized clothing manufacturer had a warehouse fire in which it lost its summer inventory and financial records. The insurer became suspicious and started an investigation when a multimillion-dollar claim was filed less than two weeks after the fire. The investigators found the inventory was three times as large as that of the previous year, despite the fact that the industry was suffering a downturn and everybody was cutting back. The only records lost in the fire were those related to the inventory; everything else had been moved to another building a few weeks earlier. On the last renewal date before the fire, the insured had tripled the coverage. The documents submitted in support of the inventory valuation proved to have been created by the owner's brother allegedly for the owner's wife in an angry divorce action. The owner had, in fact, paid his brother $100,000 for the valuation. When the fire marshal's investigation proved arson, the insurer refused to pay the claim. The owner was convicted of arson and sentenced to prison.

With the building destroyed and the insurer refusing to pay the claim, the clothing manufacturing business was worthless. The only value lay in the land on which it had stood. The fraudsters had taken a huge risk and lost everything. They now had to lay off warehouse staff and bookkeepers as well as cutters and other skilled employees. Suppliers lost a customer and were forced to lay off part of their workforce.

Case Study: A Misused Credit Card

A disgruntled employee in the accounting department informed the new president of the publishing company that the secretary-treasurer was defrauding the company through misuse of her credit card. The secretary-treasurer was then covering her tracks by manipulating the accounting records. The new president realized immediately this was a political hot potato that could not be left uninvestigated but also could destroy his effectiveness if it proved to be untrue. He was unknown, and the secretary-treasurer had been with the company for seven years. Forensic accountants were brought in to examine her accounts. They discovered that she had charged personal items to a general corporate expense account and to the advance accounts of several employees. (The company permitted employees to charge personal expenses to their advance accounts from which they would be deducted later.) The false journal entries were in the secretary-treasurer's own handwriting. On the basis of the investigators’ evidence, the president was successful in persuading the board of directors to dismiss her.

The departure of the secretary-treasurer created problems for everyone. When confronted by the board, she admitted taking the money and signed a promissory note for the full amount. She threatened a suit for wrongful dismissal but dropped it when confronted with the evidence uncovered by the forensic investigators. She now faced disgrace and loss of employment and was forced to live on her savings for 18 months before she found another job in an inferior position at a lower salary with a less prestigious company.

Those at the publishing company lost a friend and colleague. The company was now faced with the expense of an executive search and the prospect of hiring an unknown for a sensitive position. Everyone was shocked that such a trusted person should have committed fraud. The company incurred the additional expense of developing an educational program for employees in fraud prevention and detection and of reviewing its accounting controls.

Case Study: Meaty Matters

A medium-sized meatpacking company in a small Texas town began to experience financial difficulties following a fire that did extensive damage to the plant. The insurance company promptly settled the property damage claim, but a lengthy delay in coming to an agreement on a $1 million business interruption claim caused significant hardship as customers were forced to look elsewhere for their meat. The owners were concerned that a decline from their $40 million in annual sales and its effect on accounts receivable would jeopardize their line of credit with the banks. To keep their working capital ratio healthy, they began prebilling and inflating inventory records.

When the company eventually was forced into bankruptcy, the receiver discovered only $2 million in inventory instead of the stated $10 million, and $6 million in accounts receivable from clients who denied owing anything. No money, however, had been diverted to the personal use of the owners; they had acted solely to save the business.

The two owners pleaded guilty to fraud and received prison terms. The lives of two otherwise productive citizens had received blows from which no one ever really recovers. Not only were their families deprived of the presence of two husbands and fathers, but the lives of their wives and children were completely changed. The fraudsters’ families were ostracized as they suffered the reflected disgrace of the two men. The wives, who had not worked in 20 years, now had to find jobs to support their families. The children became the target of other children's taunts. In the end, the situation became unendurable, and both families moved away to start new lives elsewhere. When the men came out of prison, they had no money and were forced to begin again at a much lower standard of living. One of the couples divorced.

The effect of closing the meatpacking plant reached far beyond the immediate families of the convicted fraudsters. The company had been a major employer and had a significant impact on the local economy through its own spending and that of its employees. Of the 50 or so employees at the plant, only about 10 were able to get jobs in the town. Others found it difficult keeping up their mortgage payments and were forced to take odd jobs or look for employment in the next major center, which was about an hour's drive away. The local retailers suffered a noteworthy loss of business.

Case Study: The Whole Shebang

A manufacturing company was headquartered on the East Coast of the United States but had its main facility in the Midwest. Consequently, there was little day- to-day communication between the board of directors and senior management, and management of the main operation in the Midwest. The chief financial officer, based in the Midwest, had been with the company for many years and had worked his way up from bookkeeper to assistant controller to controller and ultimately to CFO.

What was most interesting about the CFO's role is that with all the promotions leading finally to CFO, he retained custody over the bank reconciliations. For all the best practices discussed in Chapter 3 of this book, the company, perhaps unwittingly, allowed its CFO to authorize contracts with vendors, approve payments, actually print and sign checks, receive bank statements, and perform the bank reconciliation.

It was no surprise, then, that over seven years the CFO was able to embezzle over $600,000 through almost a dozen different schemes. The schemes ranged from a falsified employee worker's compensation claim (under which the CFO paid for his children's braces) to an expense account fraud whereby the company paid the CFO's credit card bill through a corporate check, while at the same time he submitted the charges on his expense account and therefore was reimbursed twice. He also paid for lavish family travel and entertaining on the company's expense and was part of a scheme with vendors whereby he received kickbacks in return for giving them various contracts.

When questioned how these schemes could go unnoticed for so long, it became apparent from his former staff that he had created a barrier between himself and anyone who worked for him. In addition, his physical size and manner reportedly intimidated anyone who wished to confront him. The schemes ultimately were discovered when a disgruntled secretary approached Human Resources and informed them that she thought something was peculiar about the handling of the CFO's expenses. She also questioned why he was still handling the bank reconciliation. An internal investigation ensued, and the schemes were discovered.

The company ultimately recovered $500,000 of its losses under a fidelity bond; an agreement was made between the company, the bonding company, and the U.S. attorney to keep the principal out of jail and working at another company in a nonfiduciary position, where he was able to start making restitution.

Case Study: Price Fixing

Although price fixing has been discovered in many industries, one of the most outstanding recent cases was that of Archer Daniels Midland. The company paid a $100 million fine after pleading guilty to felony charges alleging a conspiracy with other producers of citric acid, lysine, and other commodities. It was estimated that makers of soft drinks, processed foods, detergents, and other products paid $400 million extra to buy citric acid from ADM and its co-conspirators between 1992 and 1995. Poultry, swine, and other livestock producers paid an extra $100 million in the same period for lysine, a growth additive used in feed.6

During the late 1940s through the 1950s, electric equipment manufacturers, including General Electric, Westinghouse, Allis-Chalmers, and Federal Pacific, conspired to fix prices in a market worth $1.75 billion annually.7 Utilities, all levels of government, the military, and industry were victimized by prices that rose by double and sometimes even triple digits, despite slow growth in the wholesale price index. Four grand juries handed down 20 indictments against 45 individuals and 29 com-panies. The power of rationalization and “neutralization” referred to in Chapter 2 is well exemplified in the remarks of some of the industry executives. One company president defended his actions this way: “It is the only way a business can be run. It is free enterprise.” Another, in a statement worthy of Yogi Berra, said: “Sure, collusion was illegal, but it wasn't unethical.”8