The Fraud Examiner


My First Fraud
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By Mary Breslin, CFE, ACA, CIA
President, Empower Audit


When I was a teenager my mother was diagnosed with cancer and died two years later after battling the disease. My mother’s illness was heartbreaking to witness, but it was how quickly the idea of normal ceased to exist that was surprising. Having a clean home, clean clothing, food in the fridge — things that we’d always expected and taken for granted slowly became luxuries. Coming home from the hospital at ten o’clock at night knowing you still have two hours of homework to complete, have nothing clean to wear to school tomorrow and the only thing to eat in the house is peanut butter and crackers — again, this adds to the already difficult environment and becomes downright depressing.

Then something positive changed that. A friend’s parent had reached out to a few charities on our behalf and soon nonprofit organizations were doing our laundry, stocking our pantry and cleaning our house on a weekly basis. These gestures made an enormous improvement to our outlook and emotional state. It gave us hope.

There were several nonprofit organizations that got involved with my family — some big, some small. United Way checked on us kids weekly. I half expected someone from their organization to show up at my sporting events to cheer for me in my mother’s absence. Who knows? Maybe they actually did.

This experience instilled in me a great appreciation and tremendous respect for nonprofit organizations. As I moved into adulthood I was regularly involved with, and donating to, many nonprofit organizations. It never occurred to me that bad people would work for these organizations and do anything other than help people; they are charities after all. (Naive, I now know.)

Early in my career I worked for a consulting firm that provided audit services for federal grant programs. These programs were fairly straightforward to audit: follow the cash. The entire audit focused on what the cash was spent on, proving accuracy and existence, and ensuring the expense was in compliance with the grant requirement. With my enthusiasm for nonprofits in mind, I was very excited to be assigned to lead an audit at a church-run school that was operating under two federal grants.

A fellow auditor and I arrived early on a Monday morning to kick off our short but important audit. The chairman of the board for the church greeted us. I thought this was interesting, but I tried not to read into it. She introduced us to some of the staff including the interim accountant and explained that the regular accountant had recently been diagnosed with cancer and was on leave while she received treatment. The chairman then proceeded to try to convince us to come back at another time because the interim accountant had been there less than a week and wouldn’t be able to offer us much assistance.

Cancer and a nonprofit — two things that hit very close to home for me. I made the call to the gentleman we were working for at city of Phoenix (who was executing the federal grants for the government), explained the situation and asked if we could reschedule. He was very emphatic in his “no.” I was stunned. How heartless! So we began the audit.

The audit was basically a review of what the money was spent on in the name of the program each grant supported. I started by looking at some of the higher dollar expenses. The first one was for the painting of the church and school. Wait, what?

Two issues immediately sprang to mind. First, no grant money was supposed to be spent on the church itself since all programs were run out of the school. So, the grant money should only pay for the portion of the invoice for painting the school. But that was secondary to the big issue. I remembered thinking as I arrived a couple of hours earlier that the building didn’t look like it had been painted in 100 years.

So, in an effort to prove my doubts wrong, I took the invoice outside and walked completely around all of the buildings of the church and school. It was clear no painting had occurred in a very long time. I then wandered into the school itself — maybe I’d misunderstood the invoice and they’d painted the interior of the school.

It was August in Phoenix and there were only a couple of classrooms in use, but there were a few teachers preparing their rooms for the upcoming school year. I stopped to speak with a few of them, to ask if their rooms, or anything, had been painted and to see what they thought of the grant programs. I was met with some obvious frustration and anger. The teachers I spoke with felt these “programs” were in name only and they didn’t see “a dime’s worth of improvement or help” as a result of the programs. One teacher relayed a story of how her $25 expense reimbursement request for four pairs of children’s shoes (from Payless, no less – buy one, get one free!) to enable all of the children in her class to go on a field trip was denied by the administrators of the program. The program that was supposedly for children.

Fraud

I made my way back into the church’s board room and set aside the invoice for painting to discuss with the accountant and administrator later. Maybe it was a prepayment! I was still hopeful. Meanwhile, I moved on to the next large invoice, this one for landscaping and equipment for a playground. Huh? I just walked around the entire property and didn’t see a playground or playground equipment. But to be sure, I wandered outside again. No playground. The pit in my stomach was growing. Maybe another prepayment?

The next invoice was a receipt for approximately $12,000 in audio and video equipment from Costco. I started my career at Costco! Plus, this receipt was for assets I believed would be easy to validate existence and purpose. Wrong. No one knew what I was talking about; no knowledge of this equipment seemed to exist. Plus, the expense reimbursement request contained only a copy of the receipt. The rules required the original, which was missing.

The chairman of the board heard I was inquiring about audio and video equipment and came to see me. She knew all about this equipment. She explained that it was all locked in the pastor’s office, but most certainly did exist. Great! “Can I please see it?” I asked. No. The pastor was on sabbatical and his office was locked. “But I’m sure maintenance has a key, right?” At that point the chairman corrected herself and explained that the equipment wasn’t in his office, but actually within the private bathroom inside his office, which unfortunately only he had a key for. Maintenance wouldn’t be able to gain access to that private bathroom. Unable to contain myself, I asked, “How then is this equipment able to be used for the student programs?” She replied with a flat, “It’s summer.”

At this point, I’m begrudgingly starting to admit to myself that we have a problem. But wait! I worked at Costco and I have a network I can contact. So, I called a friend at Costco and asked them to look up the purchase. I then asked them to look at all of the transactions for the membership going forward from the purchase date. Were those items ever returned? Yes, they were in fact all returned a few days after the purchase. Oh, no. Houston, we have a problem.

As I lean back in the extremely comfortable chair in the church’s boardroom to think about the situation, something catches my eye. All around the room are very large, prominent pictures of all the church board members. That’s not what catches my eye, though. What catches my eye is the name of one of the board members. It’s the same as the name on the painting invoice. Today, I would jokingly call that “a clue” but that day I snapped into action. I started looking at the individual and business names for all of the problem invoices we’d discovered and found a trend. Several of them had the same last names as several of the board members whose pictures on the wall we were now scrutinizing.

At this point I was fairly certain we had a fraud on our hands and I called my contact at the city of Phoenix. What happened next is still one of the coolest moments in my fraud career. My contact told me to keep working and not to let anyone know we had spotted any problems. Two hours later he showed up with a moving truck and six men. They took every file, filing cabinet and computer in the administrative offices for the grant programs. Apparently ability to seize records was part of the agreement. We finished the investigation in the city of Phoenix offices.

The city of Phoenix and the federal government pursued criminal prosecution for the fraud and I pursued my CFE education and certification. There were countless life and fraud lessons that I learned from that experience:

  • There are bad people everywhere. Nonprofits aren’t immune, and as we’ve seen historically, can be a rich target for fraudsters. As it turned out, the pastor was the ringleader of the fraud. And the punch line? He’d served time in jail for a similar crime in another church some years earlier.
  • Fraudsters never take time off. The accountant who was out due to illness was the mastermind behind concealing the fraud. It had been going on for years and they’d passed numerous audits because of her ability to hide the fraud. Her illness and absence enabled my colleague and I to see things as they truly were without her elaborate concealment scheme.
  • Listen to people involved with a program. If any of the prior auditors had spoken to the teachers, they would have been alerted to several red flags.
  • And finally, follow the cash; it doesn’t lie.
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