The Fraud Examiner

Behind ‘Tears and Hugs,’ a Staggering Fraud
 

March 2013

By Tiffany Couch, CFE, CPA

 

Editor's note: The following case study is a true account. Names have been changed. 

 

Mandy was a superstar. For my client, a nearly century-old private school, she was much more than the bookkeeper. She was the beloved “school mom” who wore many hats when she was needed in a pinch - including secretary, nurse and janitor. She was adored by school staff and parents alike.

 

The school principal was shocked when she received a call from the Internal Revenue Service (IRS) informing her that the school was nearly two years behind in paying payroll taxes. An emergency board meeting was held and superstar Mandy was called to explain. As she told the board that the school’s decreasing enrollment and late-paying families had combined to create a cash flow crunch, she cried with conviction as she told them of her desperation to “keep the lights on and the teachers paid” instead of paying the payroll taxes.

 

The meeting ended in tears and hugs and an even larger admiration for superstar Mandy, who had convinced them that she had singlehandedly saved their beloved school.

 

Committees were formed, funds were raised, and the more than $200,000 in taxes and penalties were paid by a combination of the fundraising drive and a complete withdrawal of the school’s entire savings account.

 

New internal controls were implemented. The school principal signed all checks instead of allowing Mandy to sign them.  The kids went back to school. The parents went back to work.  All was well again.

 

Or so Mandy thought it would be.

 

 

Questions Arise 

Mandy’s convincing performance persuaded Mark, a parent, board member and practicing attorney, to work pro bono in an attempt to obtain a refund of the penalties and interest paid by the school (more than $100,000). This work resulted in a suit filed against the IRS.

 

Once again, superstar Mandy was called for another performance. This time, to provide deposition testimony to the IRS. It was during this deposition that Mark caught Mandy in a lie.  He wondered why, during her deposition, she would lie about something as silly as where she was on a particular day.



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