High Art, Low Value, Part 2: How a Connoisseur Became a Convict

This case history is excerpted and adapted from the upcoming book, "Fraud Casebook: Lessons from the Bad Side of Business," by Joseph T. Wells, CFE, CPA, to be published by Wiley and Sons in July.  

Lawrence Fairbanks was a popular university official but he apparently had an aberrant psychological need to buy and preserve antiquities and objets d'art and send the doctored bills to the university. Here's how the lead fraud examiner discovered Fairbanks' obsession, how she catalogued every last curiosity, and the lessons she learned.

Our story so far: Ellen Fischer has discovered, through Aesop University's Materiel Acquisition and Disbursement automated system, several questionable purchases paid through Lawrence Fairbank's department. Ellen the Audit Manager now transforms into Ellie the Temporary Bookkeeper to find the whole truth.

As the paper drifted in, I started matching up the endorsements on the backs of the checks with the vendor names on the in-house versions of the invoices. Some of the mismatches were so obvious, it hurt. For example, the check that Aesop University issued to "Redhill Publishing" in New York City was endorsed and deposited by "Redhill Antiquarian Books." The payee names on the checks were always close enough to the vendor's true names that they were less likely to notice the "slight" inaccuracy. In the end, vendors are far more concerned that the checks they deposit stay deposited -- and you can take an Aesop University check to the bank.¹  

Discretion was not only the better part of valor; it was the only way to keep an investigation of a high-profile character from a famous institution from being prematurely publicized. Until we had more than one invoice for a fussy purple chair, Frank decided to inform only his boss and campus in-house attorney during these early stages.

My challenge was to have the vendors respond to my requests to mail and/or fax me copies of the authentic invoices without tipping our hand. Anyone who calls our main office number reaches a recording that announces, "You have reached the Aesop University Audit Department." I came up with a way to minimize the perceived stature of the audit department. I transformed my name from Ellen the Audit Manager into Poor Ellie the Temporary Bookkeeper. Sure, Mata Hari is a more exotic nom de guerre, but Ellie was easy to remember.

I timed each call toward the end of the business day, adjusting for different time zones. That way, whomever answered the vendor's phone would know that Poor Ellie was stuck working late. I began each call by raising my normal speaking voice half an octave and beginning with the words, "Um, hi."

The story was pretty much the same: Poor Ellie was slogging her way through thousands of university payment records. She had to make sure that Aesop's main accounts payable department had a copy of each and every invoice that it paid over the past three years. For some reason, the university lost a slew of invoices during that time, and Poor Ellie had to ask the vendors for copies. Poor Ellie had to get the job done -- or else.

Pathetic? Sure, but it worked. In came the proof.

Fairbanks' methodology was obvious. He not only had doctored the description of the purchases, but he applied his own artistic flair -- and some common desktop publishing tools -- to redo the vendors' logos. In some cases, Fairbanks created a new letterhead for the vendor, eliminating telltale verbiage like, "dealers in antiques since 1947," that might have alerted the support staff in university communications and campus Accounts Payable.

For three years running, Lawrence Fairbanks spent $475,000 of Aesop's money on lithographs, serigraphs, original oils, photographs, antique luggage, books, and cameras. Cartoons, sculptures, and ceramic pots. Strange space-aged- looking lamps with Swedish titles. More fussy chairs. A phrenology head and three taxidermy specimens -- all encased in glass; all incredibly dead.

It was time for me to interview the assistant vice chancellor. Frank and I first met with Fairbanks' boss, Lennie Scott, to give him the background of the case and to solicit his assistance in getting Fairbanks to submit to an interview. Scott was surprised and outraged. Within 30 minutes of our meeting, he sent us a copy of the e-mail in which he instructed Fairbanks to come to the Aesop Audit Department at 10 a.m. the following day to discuss some questionable transactions.

DECORATING THE TRAP 

Before Fairbanks arrived, I did some interior decorating in our conference room. On our massive, bleached-oak conference table, I arranged the files for the 52 vendors in five open cartons, so that the folder tabs with their names were visible. Along the way, we also had gotten a private investigator to take snapshots of the buildings of the 30 or so local galleries and furniture stores that Fairbanks patronized. I opened the photo album to the picture of the Squire storefront (the hoity-toity furniture store) and set it at the edge of the conference table, nearest the door.

Fairbanks couldn't miss it.

He arrived at the Aesop audit department reception area at 10 a.m. sharp. Frank and I each shook Fairbanks' hand outside the closed door of the windowless conference room where I had set up shop.

Frank led the way in and sat in one of the chairs across the table from where Fairbanks and I would sit next to each other. As I had learned in several Certified Fraud Examiner training seminars, my sitting beside Fairbanks would allow me to develop the rapport that would, with a measure of luck, lead to his unburdening.

Neither Frank nor I expected what Fairbanks did next. Upon eyeing the opened photo album and the cartons arranged on the conference table, Fairbanks pivoted on his heels, marched straight out of the room, and with increasing velocity, through the reception area and out of the suite. I heard no "ding" from the elevator -- he had taken the stairs.

Later that afternoon, Frank received a call from the campus attorney whom he had notified earlier about our investigation and our pending interview with Fairbanks. Upon leaving the Aesop Audit suite, Fairbanks didn't stop until he reached the office of his own attorney, Arnold Kruger.

Kruger assured the campus attorney that Lawrence Fairbanks would return to Aesop Audit the very next morning, and that he would cooperate fully in an interview. But there was a catch. Apparently, the connoisseur had kept nearly everything that he had purchased and he was offering to assist the university in recouping the ill-spent funds by selling off the goods. Kruger was trying to dissuade Aesop's officials from prosecuting Fairbanks in the criminal arena by allowing him to make the university "whole" again.

Then, there was the sympathy factor: Kruger explained that Fairbanks was a very troubled soul who had been under psychiatric care. He wasn't a thief; he was sick, and he was prepared to make it all up to the university. The campus attorney told us that he wouldn't recommend that criminal prosecution be avoided. However, he did make an agreement with Kruger that the university would support his client's efforts to mitigate the loss.

The next morning, Fairbanks returned to the conference room. Slouching in a maroon V-neck sweater, a '60s rock band haircut framing his ashen face, the connoisseur confessed. In carefully measured sentences, Fairbanks recounted how he got away with his first purchase -- a $10,000 oil painting that he split into four "low value" orders for "design and layout" services. In the earlier days, he would take an actual invoice, cut and paste the logo into a less telltale version of the vendor's name onto another sheet of paper, and photocopy the whole thing. Then he discovered it was just easier to fabricate the entire invoice using simple word processing graphics. He began to crack a faintly proud smile.

"How did the vendors react to getting checks drawn on Aesop University's bank account and not yours?" I asked.

As I had guessed, the vendors really didn't care, and Fairbanks knew they wouldn't. Aesop is a player in the art world, and Fairbanks' position in the university was prestigious. No one questioned the fact that the checks were coming from Aesop. A few must have assumed that Fairbanks was purchasing art pieces and fancy furniture on the university's behalf.

"Who else in university communications knew what you were doing?" I asked.

Eyes intense, Fairbanks adamantly replied, "No one!" Fairbanks explained that, as with most top-level officials, he didn't do windows. That is, he had administrative employees processing the invoices -- the sanitized versions. He even knew how to skirt the checks and balances in his department that provided for a secondary review of each transaction by an accounting supervisor. So long as there was a budget for the "publications" purchases, the busy accounting supervisor, always immersed in details, wasn't going to question him.

And what of Fairbanks' wife?

With downcast eyes, Fairbanks began to sob as he proclaimed how much he loved Allison and dreaded how this was going to shatter her life. She knew nothing of his purchases.

A THIEVING PACK RAT 

But, how did Fairbanks keep Allison from knowing? Did he bring the merchandise home?

"No," he sighed, "That is my sickness."

Fairbanks unfolded the story of a poor child peering through store windows in a depressed downtown area. It had been his goal to gain the education and social standing that would avail him the finest things that money could buy. Along the way, Fairbanks branched out of the banality of department store goods and into the esoterica of fine art and antiques.

Even more than the acceptance he enjoyed from the art world, Fairbanks was following a noble calling. He was saving old, dark photographs of people who didn't matter anymore even though their images had become collectors' items. He was preventing old books, antiques, and the strangest objets d'art from being erased from their places of honor in the world. And he was creating new pieces -- like the Ophelia Chaise -- that would be the antiques of tomorrow.

They mattered; he mattered. And he kept them from harm's way in a public storage facility. Over the past three years, Fairbanks had rented three contiguous storage rooms in one of those "You-Haul-It, You-Store-It" places. Many items, he assured me, were still in their original packing.

Aesop University wasn't paying for the storage. I checked.

Before our interview concluded, Fairbanks had a question for me. I thought he was going to raise the usual concerns about what would happen next, whether he would go to jail, etc.
Instead, he startled me by asking, "Tell me -- is this the most sophisticated scheme you've ever seen?"

Not vindictively, but honestly, I replied, "No, Lawrence, it isn't."

As Fairbanks ambled out of the conference room, he looked more insulted than contrite.

The police and the district attorney pronounced the case a "slam dunk," and Fairbanks was sentenced to full restitution and house arrest for one year.

In a sweet, three-bedroom home of pre-war construction, Allison, Bobby, and Ruthie Fairbanks were woken from the American Dream. Allison divorced her husband and moved out of state. At the conclusion of his house arrest, Fairbanks moved to the same city, to be near the kids. He now supports himself as a freelance magazine writer on the subject of arts and culture.

LESSONS LEARNED 

Our investigation provided incontrovertible proof of Aesop's monetary loss of $475,000, not to mention a detailed confession. However, we all agreed that the process would have been a lot easier had Fairbanks set fire to his acquisitions or dumped them in the river.

The investigation in the audit department was within our control, but the agreement between Arnold Kruger and the campus attorney wasn't. We all intuited that the sale of the Fairbanks Collection wouldn't abolish the loss or, as Fairbanks optimistically asserted, net Aesop a profit. However, the university now was obliged to take custody of, and account for, all of the merchandise that awaited us in the three storage lockers.

As auditors, Frank and I knew better than to handle it ourselves. We called in experts. On a wet, dreary November morning, clad in blue jeans and old sneakers, I joined two similarly attired curators from the Aesop University art museum. Fairbanks met us, keys in hand.

I had come to the storage facility equipped with an Excel spreadsheet that served as an inventory of all of the items from the vendors' actual invoices, including a title, physical description and, where applicable, the artist's or gallery's serial number.

The curators brought two cameras, kid gloves, bubble wrap, and a university truck to transport the collection to a secure room that had been reserved in the Aesop administration building. The door to the secure room had been outfitted with an emergency installation of a dual-custody lock. One curator had a key, and the offset key was given to the receptionist of the area outside of the secure room. We planned it so that both "unrelated" employees had to be present to admit the appraisers and, eventually, the buyers.

Again, as auditors, Frank and I wouldn't take custody of these unwanted assets. Still, we knew that we had to play a major role in protecting Aesop from being accused of breaching the attorneys' agreement or, even compromising the criminal case, if one of the purchased items had been "lost" or damaged.

Fairbanks raised the first of the three corrugated metal doors to reveal a fully packed locker. It looked just as he described it; most of the items were still in their original cartons, unopened.

All day long, the curators methodically opened each carton and removed the pieces with kid gloves. We jointly identified the pieces, and as I checked off each item, both of the curators, Fairbanks, and I each initialed the line item on the Excel spreadsheet.

The curators placed index cards bearing the inventory numbers that I had assigned to each piece in front of the objects, and they simultaneously photographed the items. We wanted to make certain that, if one camera failed, there would be a second photograph.

The curators then encased each item in bubble wrap, affixed a sticker bearing the same inventory number, and loaded the pieces onto a dolly. When the dolly was full, Fairbanks would close down and lock the metal door, and he and one of us would "escort" the dolly to the truck. The driver, an experienced employee of the Aesop Museum, would carefully load the objects into the back, as Fairbanks watched.

We wouldn't allow Fairbanks to leave our presence while either the storage lockers or the truck were unlocked. Finally, when the process was complete, everyone, including the truck driver, signed the inventory listing, which I took back to the Aesop audit department. I immediately faxed the listing to all who were present at the storage facility, and to Kruger and the campus attorney.

For several months beyond Fairbanks' house arrest, university communications served its own time with some heavy-duty bookkeeping that resulted from the attorneys' agreement. It was quite a burden as the auction houses dribbled $100,000 worth of sales proceeds, in piecemeal fashion, back to Aesop.

I didn't ask what became of the squirrels-under-glass after one of the curators mentioned that it's illegal to sell taxidermy specimens in this state.

The biggest lesson in all of this -- and one that served us well -- was that an investigator will, at some point, lose complete ownership of the case. As auditors, we weren't in the position to tell the campus attorney to back off from an agreement with the subject's lawyer -- one that almost created more work than the investigation itself.

However, by adopting a flexible posture and applying our expertise in the areas of recordkeeping, safeguarding, and accountability, we were able to exert our own special brand of control over an unexpected complication.

RECOMMENDATIONS TO PREVENT FUTURE OCCURRENCES 

Separate accounting duties and implement secondary purchase approvals at all employee levels. Assistant Vice Chancellor Fairbanks was uniquely poised to commit major fraud through his position of authority and trust in the Aesop Communications Department. Traditional business controls, such as separation of accounting duties and secondary approvals of purchases, were limited to subordinate staff in the past. High-level officials were practically immune to scrutiny, which enabled Fairbanks to rack up an astronomical bill in fraudulent activity. It's important to separate accounting duties and have secondary approvals of purchases, regardless of an employee's rank.

Monitor for suspicious activity
A member of senior finance staff -- not a department-level accountant for any of the subordinate departments -- should be hired as an independent monitor for the entire organization. The monitor should look for signs of trouble: repeat payments to the same vendor, payments just under the low-value threshold, vendor names and addresses that seem incongruous with the online descriptions of the expenses. The monitor should report anything that appears strange or suspicious.

Redefine job descriptions to maintain integrity
Human resource experts should review and update the accounting supervisor's written job description. The supervisor should understand that she is as responsible for the integrity of the expenses she approves as she is for the bookkeeping detail. When the accounting supervisor in Aesop University Department of Communications accidentally took delivery of a large package from the San Francisco-based Lincoln Galleries, she immediately recognized the address from the many invoices she had approved for Lincoln Photography. The supervisor said that she had a "funny feeling" about the package. She wasn't afraid of angering Fairbanks by questioning him about the delivery. To the contrary, the supervisor was more fearful that a serious inquiry might cause unnecessary harm to her boss' reputation.

The accounting supervisor lacked the healthy perspective of an overseer. She was entirely focused on making sure that the individual "publications expenses" were charged to the correct ledger codes and that they fit safely over the bottom line. A specific job description that clearly stated her duties might have prompted the accounting supervisor to inspect the package more closely and put a stop to the fraud in a timely manner.

Implement a hotline
Finally, though not the direct result of this particular case, Aesop University implemented a 24-hour whistle-blower hotline that supports anonymous complaints. Had the hotline existed during his acquisition of the antiquities, Fairbanks might only have squirreled away one locker's worth of stuff.  

Ellen A. Fischer, CFE, CIA, is the audit manager for a large U.S. university.  

Reference 

¹Names of all people, places, and things have been changed to protect the guilty and innocent.

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