Occupational Fraud: The Audit as Deterrent

Skimming
The business manager of a church stole nearly $200,000 from the collection plate until the volunteer treasurer noticed a trend: While church attendance was increasing, weekly contributions were decreasing. The church hired a CPA/CFE to look into the matter. She counted Sunday's contributions and compared them with the business manager's Monday deposit. When the deposit total was lower, she used video surveillance in the manager's office, which caught him opening the safe on Monday morning—before the funds were counted—and helping himself to handfuls of cash. Dual control over the cash function would have easily prevented this scheme.

Billing
Internal auditors were doing a routine purge of dormant vendors when they noticed activity in two of the accounts. Although the company hadn't done business with the vendors in years, there were recent payments to them on the books. After an investigation the auditors discovered a warehouse manager had caused $535,000 in checks to be issued to the dormant vendors, which he deposited into a bank account he controlled. The scam was made possible be a basic violation of computer security practiced by one company supervisor: The warehouseman knew the supervisor didn't log off the system when he went to lunch, so he used that computer to make the fictitious entries. Proper controls over computer access might have prevented this loss.

Fictitious Refunds
A cashier for a government agency managed to steal $150,000 in two years by issuing fictitious refunds slips to nonexistent purchasers of inventory and removing an equal amount of currency from the cash register. In addition, the cashier was known to spend a lot of money and, most obvious of all, he bragged about his thefts to other employees and claimed he was blackmailing his supervisor to look the other way. When a new supervisor was hired, employees quickly revealed the fraud. A CPA could have easily detected the scheme by using analytical techniques that would have shown the agency's inventory shrinkage was high.

Cash Larceny
The controller for a 400-person company liked to brag to employees that he was winning big at the gambling casinos because of his "foolproof system." The winnings gave him quite the lifestyle: racehorses, expensive cars and a mansion. But the boss was skeptical. He found out the controller was losing big-time and hired fraud examiners to take a close look at the books. They discovered the controller had forged checks totaling $2.5 million and deposited the proceeds in his own checking account, which he withdrew for gambling. The controller had coded the checks to a variety of expense accounts, making his thefts easier to conceal. This scheme could have been detected early by an independent review of the bank statements.

Expense Reimbursement Schemes
An upper-level manager of a large company traveled frequently with other employees, who noticed he always asked for extra blank receipts in restaurants and taxis. They turned him in to the CFO. Auditors quickly discovered forged, duplicate and phony expense receipts. On top of that, the manager's travel log didn't even match the expense documentation. He spent six months in jail for an $18,000 fraud, an unusually harsh sentence for a first-time offender. Routine audit procedures—such as matching expenses to itinerary—would have easily revealed the fraud.

Payroll Fraud
The timekeeper for a government agency doubled her salary in one year by taking advantage of an internal control deficiency. Procedures required that a supervisor sigh her timecard before the hours were posted to the books. The timekeeper routinely got approval for the correct hours on her timecard, then grossly inflated the hours she worked when entering the information into the computer. The scheme came to light when actual salary expense exceeded budget. Two simple control measures would have prevented this fraud. First, the timekeeper should not have been permitted to post her own payroll records. Second, the computer system should have flagged large or unreasonable entries.

Inventory Frauds
The purchasing manager of a large company dreamed of starting a hardware store in another state. Since he was short on cash, he decided his employer could help out. The manager rented a warehouse, began approving merchandise purchases on behalf of his employer and had the merchandise shipped to the warehouse. From there he reshipped out of state. Since the purchasing manager had authority only to approve purchases up to $5,000, he was careful to keep his transactions under that amount. But a sharp-eyed accounts payable clerk noticed a distinct pattern. On many occasions, merchandise purchases in the tens of thousands of dollars were being split into smaller amounts. The clerk notified the company's fraud examiners, who uncovered several hundred thousands of dollars in phony inventory purchases. The auditors could have uncovered this scheme earlier by conducting a detailed review of disbursements under $5,000.

Corruption
An executive of a construction company contract had final authority to approve all vendors and amounts paid to them. The exec worked out a secret sweetheart deal with two of the vendors. They'd send him phony or inflated invoices for material or labor, he'd approve payment and the three would split the loot. But the company, a Fortune 1000 enterprise, had an internal communication program that allowed any employee to request information on any subject. One curious worker wanted to know why this particular construction project cost so much. An audit revealed the manager had pocketed more than $565,000 in kickbacks. He spent a year in prison and was on parole for five more years. He was ordered to pay complete restitution. Corruption schemes, although difficult to detect, can often be prevented by requiring written disclosures of personal finances from key employees such as those in the purchasing function.

Fraudulent Statements
A county treasurer with control over a large public investment fund speculated recklessly and lost about $5.4 billion of public money in less than a year. The perpetrator conspired with two other officials to hide the losses from several institutions that were investors in the fund. The treasurer and his accomplices falsified records and secretly shifted money from other funds in an attempt to pay the principal on billions of dollars in short-term investments. Eventually the scheme collapsed, and the perpetrators were forced to confess to the crime when they were unable to cover the losses on their short-term investments. The case was referred to law enforcement authorities, and the three perpetrators were convicted. The auditors failed to uncover the scheme because they accepted—without independent verification—phony audit evidence placed in the fund's portfolio.