Living the Good Life! Case Study of Another Authorized Maker Scheme, Part 2

A staffer at the local bank informed the town mayor about inappropriate charges for women's clothing that the clerk-treasurer made on the city's credit card account. In addition, an external auditor who was reviewing city financials discovered the clerk-treasurer had issued unauthorized checks to herself for almost $80,000 in a three-year period. This column brings you the conclusion of this case study.

An authorized maker scheme is a type of check-tampering fraud. In the ACFE's Fraud Tree, the crime is a subset of fraudulent disbursements, which is a subset of cash schemes. (We dissected another authorized maker scheme in the November/December 2010 and January/February issues.) In this scheme, the perpetrator physically prepares a fraudulent check and/or causes the organization to issue an unauthorized check, which is then converted to personal use. This scam has the potential to drive small businesses into bankruptcy. A trusted employee who perpetrates this fraud must have access to the checkbook and bank statements and the opportunity to forge signatures and alter accounting records to perpetrate this crime. 

Part 1 of this column discussed the perpetrator, the organization, the initial discovery of this disbursement fraud and some lessons learned. We now continue the story in this column by discussing the actual investigation, including elements of the fraud, the red flags, some additional detection techniques and information about the interview. Here is a summary of the case.
 
The clerk-treasurer of a small town in Washington compromised the town's internal control system by issuing 106 unauthorized checks to herself, petty cash and the bank. These checks totaled $79,586 over three years. Supporting documents were not on file for most of these transactions. She falsified vendor invoices and the check register to support the disbursements and conceal the fraud. 

Fraudsters with almost total control over all financial transactions within an organization frequently perpetrate more than one type of fraud. Such was the case here. The clerk-treasurer also used the town's credit card to make 51 purchases of women's clothing and gifts, which totaled $10,670 from nine Internet shopping sites. The only documents available for review for these transactions were the monthly credit card statements. She had destroyed all supporting invoices.   

THE INTERVIEW   

We now pick up the story with my interview of the perpetrator. As the external auditor of this case, I have to say this was one of the most unusual interviews I ever conducted during my career. After the town fired her, the clerk-treasurer hired a defense attorney to help her negotiate the conclusion of this case with the county prosecutor. I made arrangements with the clerk-treasurer and her attorney to discuss the results of the audit with them. In addition to defending his client, the defense attorney had accepted this engagement to help the clerk-treasurer come to grips with the gravity of the situation and the impact of her actions on all parties concerned, including her family and friends and other town employees and officials. She even moved to a nearby state to avoid contact with neighbors. 

The clerk-treasurer and her defense attorney arrived for the interview at the appointed time and location. I opened the meeting with introductions and the procedures that I planned to use to conduct the interview. The defense attorney then introduced a rule of his own. He said that his client would only respond to questions, which had "yes" or "no" answers. This was the first and only time I ever encountered this handicap to communication. My fellow fraud examiners can imagine how difficult a task this was. 

I began the interview using the defense attorney's method of asking questions, but it produced poor results. We both experienced difficulties communicating our thoughts in this unproductive process. Therefore, we mutually agreed to abandon this initial procedure. The defense attorney then agreed to let his client answer any question I had and in any format I chose. We made real progress in the interview after making this change in procedures.
 
I first discussed the clerk-treasurer's use of the town's credit card. She told me what she had done and that she already had admitted her unauthorized actions to the mayor. She also said she had destroyed all the supporting invoices for these purchases.
 
We showed her a list of all of the unauthorized credit card purchases of women's clothing and gifts from a variety of Internet shopping sites. She reviewed the list and agreed that it appeared reasonable and represented everything she had purchased for herself and her family. After this admission, the defense attorney said he and his client would review the list further and give us their final position in the matter. They started to excuse themselves from the meeting as if the interview had been completed. However, I was just beginning my work and asked them to stay to address one more issue. They agreed. 

I then discussed the clerk-treasurer's issuance of unauthorized checks totaling $79,586 for unauthorized purposes to herself, petty cash and the bank. I began by placing a stack of supporting documents on the table in front of me. I presented copies of the documents for the first transaction. The defense attorney and his client followed along with great interest. These documents included the initial disbursement document, a copy of the falsified check register, a copy of the altered check and deposit slip indicating the check had been deposited into her personal bank account and a copy of the check after it had been redeemed from the bank.
 
The variations in the vendor names and payees on these documents were obvious. They clearly showed that the clerk-treasurer had misappropriated funds from the town. Her face turned almost white as I revealed the details of the first transaction. Moreover, the defense attorney became visibly upset. He fully understood the elements needed to prove a criminal case against his client based on his prior experience as a county prosecutor. He immediately escorted the clerk-treasurer out of the room and did not return to the interview for about 20 minutes. When I saw him again, the defense attorney told me that his client had not disclosed the additional scheme to him. He was completely blindsided by my presentation. 

 
Seeing the stack of additional transactions, he asked: "How many transactions are involved in this additional scheme?" I said: "Over a hundred." He simply shook his head in disbelief and finally asked: "Are all of the items on the list the same as the first transaction you showed me?" I said: "Yes." He then asked: "Does the concealment activity get any better?" I said: "No, most of the transactions were very similar to the first transaction I had presented. The one exception to this was for some petty cash disbursements where the amount of the checks exceeded the amount of the supporting documents on file. 
"What I would like to know," I continued, "is whether or not your client had misappropriated the difference in these amounts on these transactions?" 

 
 He responded with a question by asking: "Were the town's accounting records falsified for all of these transactions?" I told him they were. I then provided him with a copy of the lists for each category of transactions involved in the case. The defense attorney indicated that he and his client would review these lists further and then give me their final position later.
 
After a couple of weeks, the defense attorney returned all of these lists to me with the clerk-treasurer's signature on them indicating that they represented the extent of her unauthorized activities. I concurred. With no supporting documents for any of the credit card purchases and no other explanation available for the unsupported petty cash disbursements, these signed lists would become the only evidence we had to prove these portions of our case in court. As he departed this second meeting, the defense attorney said: "It's good therapy for my client to admit to all of her unauthorized actions." I shook my head in disbelief; this was the only investigation I ever conducted in which the defense attorney actually agreed to help my case. 

COMPUTER-ASSISTED AUDIT TECHNIQUES  

A CAATs test to identify false disbursements in small organizations, such as this town, can determine if there are any vendors that have more than 12 monthly payments recorded each calendar year. In this case, we found that there were too many monthly payments per year for three vendors. They were in the name of the clerk/treasurer (using variations of her first name and initials), petty cash and one utility vendor. This information matched the results of our other testing of the town's disbursements. Once these vendors had been identified, we then reviewed the supporting documents to determine whether all disbursements had been made for official business purposes. We also obtained a copy of the organization's payment history for these vendors for the period being tested. These actions confirmed the universe of the unauthorized transactions in the case.

LESSONS LEARNED 

Let's review some of the finer points of fraud deterrence and detection of authorized maker schemes as illustrated in this disbursement fraud case:

• In small organizations, identify any vendors with more than 12 payments per calendar year and review the supporting documents to determine if all disbursements have been made for official business purposes. 
• Make inquiries of vendors with more than 12 payments per calendar year, obtain a copy of the organization's payment history and compare this information to the organization's accounting records for agreement. 

Refer to Part 1 of this column in the March/April 2011 issue, as well as to the chart of red flags and fraud detection techniques presented in this column, for additional finer points of fraud deterrence and detection.  

The next series of columns switches gears to pursue travel fraud, something that is not usually systemic within an organization. This fraud can happen anywhere. So, get prepared! 

Joseph R. Dervaes, CFE, CIA, ACFE Fellow, is retired after more than 42 years of government service. He remains the chair of the ACFE Foundation Board of Directors.  

The Association of Certified Fraud Examiners assumes sole copyright of any article published on www.fraud-magazine.com or www.ACFE.com. ACFE follows a policy of exclusive publication. Permission of the publisher is required before an article can be copied or reproduced. Requests for reprinting an article in any form must be e-mailed to FraudMagazine@ACFE.com.