Perils in Purchasing: Fraudulent Activities by a Telecoms Manager

(Editor’s note: The author, an internal auditor and fraud examiner, has changed the identities of those involved in this recent case.)  

John Williams was a telecoms (telephone communications) manager for a manufacturing company in Lagos, the largest city in Nigeria. An electronic engineering graduate, he was considered an expert and had been with the company for eight years, beginning as a supervisor and quickly rising to the managerial position within a few years. Company management considered Williams a “flyer” who had all the attributes of one day becoming the telecoms department’s general manager.

As part of his normal activities, Williams ordered and procured telecoms materials for the company, which involved purchasing phones and carrying out repairs on aging equipment, such as private automatic branch exchange (PABX) systems and phone cables. He was responsible not only for the company’s head office in Lagos, but also for two other Nigerian branch offices.

Initially, Williams performed his duties well, ensuring the company’s telecoms system was state-of-the-art, and that communication among the head and branch offices was efficient. After a while, however, the quality of the company’s telecoms system began to deteriorate. When senior management asked Williams for an explanation, he said the company’s system was becoming obsolete, and he needed funding to install upgraded facilities. Consequently, management approved a $500 million budget to improve the company’s telecoms system over a two-year period.

In procuring the upgraded parts and accessories, Williams initially used about seven reputable telecoms vendors. However, as time went on, only one vendor seemed to meet Williams’ requirements: MarJon Enterprises. Soon, all telecoms purchases were made through MarJon.

Naturally, one of the previously preferred vendors was not happy about this situation and decided to petition the company. The vendor further accused Williams of ordering supplies from his family business!

Management assumed this was a politically motivated petition by a disgruntled vendor, but asked the internal audit department to look into the matter. At that time, I was the internal audit supervisor. This was a daunting assignment for me, considering that I was being asked to investigate a manager who was three levels above me in the company!

I wasn’t sure how to approach the matter. If the petition were true, it could lead to Williams’ termination. How would that make other managers in the company feel about me? They might see me as a whistleblower, and my future with the company could be jeopardized. I had known auditors who investigated members of management, only to get axed in the aftermath. However, in line with my fraud examiner training, I decided to approach the matter objectively and find the truth behind the allegation.

My first step – an interview with the petitioning vendor – provided valuable information. The vendor (we’ll call him Jim) explained that he and Williams were former schoolmates. Jim said he had always appreciated Williams’ patronizing his telecoms business. In fact, Jim admitted that he routinely paid Williams a 10-percent commission on every purchase order! Although I had heard this was a common business practice in Nigeria, apparently Williams had become greedy and offended his longtime pal. Jim was angry now because he hadn’t received any purchase orders from Williams for six months.

He then asked me to reflect on the name of Williams’ new favorite vendor – MarJon Enterprises. Jim explained that Mary was Williams’ wife, and John was Williams’ first name; put them together and you have MarJon, Williams’ family business.

Armed with this startling revelation, I decided to do a physical verification of MarJon’s existence. MarJon’s office address, phone number, and postal box number were printed clearly on MarJon’s invoices, so I felt this would be easy to check out – not necessarily so.

First, I researched the postal box number by paying a visit to the city post office. I identified myself and my mission to a postal employee, who then looked up the number and told me it belonged to a church! He showed me the phone directory to confirm it. Next, I called MarJon’s phone number and discovered it, too, was phony. When I asked for MarJon Enterprises, the man who answered the phone told me I had dialed a residential number. I then tried to find out his name, but he promptly hung up on me!

Finally, I tried to find MarJon’s office. It supposedly was located on a street somewhere in the residential slums of Lagos, a distant 50 kilometers from our company office. After a one-hour search in a densely populated area with many winding roads, I abandoned my efforts.

So, there I was, faced with a vendor that had no existing office, valid postal box number, or phone number. In short, MarJon only existed on paper. But I had some questions: 1) How was MarJon collecting its local purchase orders (LPOs) from our company? 2) How was MarJon delivering telecoms materials to our company? 3) How was MarJon collecting our payment checks if its postal box number was phony?

I decided to interview our warehouse personnel, because they literally had hands-on experience with MarJon’s products. I learned that many of the employees had complained to Williams about the poor quality of MarJon’s products, and that the orders often were incomplete when they arrived. Company records showed at least five or six incomplete LPOs, each one promising to deliver the balance soon, but failing to do so. In addition, the warehouse employees told me that they felt MarJon’s prices were exorbitant, and, in some cases, there were deliveries documented on paper that couldn’t be located in the warehouse. Most intriguing was that a rumor had been circulating in the warehouse lately that Williams didn’t correct any of these problems because the woman supplying the telecoms materials was either Williams’ wife or girlfriend!

I then took my investigation to our company’s accounting department. In the check register I found that Williams was collecting MarJon’s checks and brazenly signing for them. On some of the LPOs, it actually stated, “Checks to be delivered to Mr. John Williams to quicken delivery to vendor.” Normally, vendor checks either were mailed directly to the vendor’s postal address or a designated vendor employee (with an I.D. card) would pick up the check in our office. For a company employee – namely Williams – to be signing a vendor check was grounds for termination, because it could indicate a conflict of interest. However, nobody questioned Williams’ actions, mainly for two reasons: (1) he was higher up in the company then the accounting clerks who witnessed his behavior, and (2) there was a common misconception in our company that managers wouldn’t commit fraud because their reputations were at stake.

Williams’ fraudulent activities were pretty clear to me, however, and now I needed to find out how much money was involved, and how long the fraud had been perpetrated.

Williams was promoted to a telecoms manager position in June 1994. MarJon Enterprises became one of our vendors in March 1996, supplying only small orders such as hand phones and cable wires. By August 1997, however, MarJon Enterprises had become our sole telecoms supplier, handling expensive purchase orders on a monthly basis. By September 1998, when this fraud was exposed, MarJon had milked $650,000 from our company by supplying low-quality products at high prices. In 2 1/2 years, the Williams family had profited greatly at the company’s expense.

To establish the direct involvement of Williams’ wife in the fraud, I took a sample of four checks paid to MarJon and asked our bankers to confirm the account into which they were deposited. Not surprisingly, all MarJon’s checks were paid to Mary Williams’ personal bank account. With all these findings, I was convinced I had a case against Williams. I wrote my report, attaching all necessary copies of supporting documentation found during my investigation. Management, in turn, questioned Williams, who initially tried to deny all my findings by painting me as a blood-thirsty hound. However, after showing him a copy of a company check issued to MarJon Enterprises, endorsed by his wife, and paid to his wife’s bank account, Williams broke down and admitted his guilt. He confessed that he was pushed to commit fraud to support his wife’s expensive lifestyle. He said he wanted to be able to cater to all her desires, so he could maintain her love. Williams was fired the next day.

Lessons Learned from this Case 

1) Fraud can be perpetrated by anybody in a company, from the lowest paid worker to the highest level of management.
2) Most fraud cases are exposed through tip-offs or petitions. In our case, if the disgruntled vendor hadn’t petitioned Williams’ activities, this fraud may have continued undetected.
3) Employees, or employee family members, who lead expensive lives may be at a higher risk to commit fraud.
4) All vendors, especially those with unusual business names, should have their backgrounds checked. Most companies choose names that immediately identify their nature of business (i.e., Electronic Supplies Limited, Food Specialties Inc.).
5) Vendors in residential or out-of-the-way areas should be verified. Most reputable vendors are located in business districts or areas accessible to clients.
6) Consistently patronizing a particular vendor may indicate a kickback scheme or conflict of interest.
7) Weak purchasing policies and practices are major contributors to this type of fraud. Simple measures such as background checks on vendors and separation of duties among purchasing activities can deter wayward employees.
8) The most dangerous element in this fraud is management override. Williams knew about all the internal checks and controls that existed in our company; however, because of his position as a telecoms manager, he was able to register his family business as a vendor in the purchasing department, and openly collect MarJon’s payment checks without any query.
9) Management must empower and support the internal audit department in its “watchdog” activities, and allow auditors unhindered access to any records or individuals within an organization. Once there are “sacred cows” in a company, the auditing function is virtually paralyzed.
This wayward telecoms manager’s criminal activities were exposed solely through a disgruntled vendor’s complaint – not an internal audit or normal control procedures. It is important for fraud examiners to take all complaints and tip-offs seriously, even when they involve management, because often they’re symptoms of a much bigger – and sometimes fraudulent – problem. Remember, while the water may appear calm, turbulent undercurrents could drag an unsuspecting company out to sea.

Fred T. Mann, CFE, is a former internal audit manager for a major oil company in Lagos, Nigeria. He has been an internal auditor for 12 years.