Trusting Assistants With Access

Explore the case study of Evelyn Reynolds, a trusted executive assistant, who embezzled more than $100,000 from a children's charity for her own nefarious use. The authors outline how she did it and their investigation.

Many executives are lost without their professional assistants who control their daily activities — calendar appointments, meetings, telephone calls and expenses. But what if an assistant has too much control and exploits an executive's trust?

Evelyn Reynolds, a supposedly faithful assistant to the chief operating officer at a prominent non-profit organization, perpetrated a multi-faceted fraud totaling more than $100,000. In less than 10 months, she provided herself with a rhinoplasty, a recreational vehicle and a pile of cash that she didn't earn. (See Figure 1 below.) 

In this article, you'll learn:

• How she perpetrated this fraud and the techniques she employed.
• The warning signs that you, your supervisors and your executives need to know.
• Details of our investigation.
• Controls to help mitigate the risk of a similar fraud at your organization.

Embezzlements are common, but they're often unnoticed until it's too late.

(All the names of businesses and individuals are fictitious to protect the privacy of the victimized organization.)

LOYAL AND FAITHFUL EMPLOYEE

Evelyn worked for Children's Education First Inc. (CEF), a prestigious non-profit organization in Chicago. CEF's mission is to provide funds for underprivileged children's education expenses. As the COO's assistant, she had direct and indirect access to a variety of functions from credit card purchases to purchase order requests.

Evelyn had built a good relationship with her supervisor and other members of the organization. She had an excellent work ethic, went above and beyond her normal duties, and employees viewed her as a friend and co-worker.

After she worked at CEF for about one year, Evelyn's personal life began to collapse. She and her third husband divorced, which created emotional and financial stresses. She also became entangled in a property suit with her brother. She wasn't able to take her kids on their traditional summer vacation, and she became increasingly self-conscious because she couldn't participate in expensive activities with her friends.

As the financial stresses mounted, Evelyn began to feel that she was underpaid given her strong performance rating and work ethic. She started thinking of small ways to take a little bit until things improved.

POINTS OF ENTRY

As the administrative assistant to the COO, Evelyn touched every area of the business that her supervisor did, including:

• Access to immediate funds as an authorized user of the organization's credit card (i.e., procurement card; see March/April 2012's Fraud's Finer Points) and the keeper of the petty cash box.
• Authority to make external payment requests directly to the bank.
• Authority to issue internal payment requests to accounts payable.
• Authority to create open purchase orders to accounts payable to route donor funding to children and their families and for payment to vendors.
• Ability to approve her own timecards.

SIMILARITIES TO THE SALAMI TECHNIQUE

The "salami technique" involves the theft of small amounts of assets from a large number of sources without noticeably reducing the whole. Evelyn's methods, at least early on, did bear some resemblance to this technique; though she stole a significant amount, it wasn't a large portion of CEF's endowment or expenses, and she spread her fraud across a variety of different areas to avoid arousing immediate suspicion.

Figure 2 [Image no longer available. —Ed.] outlines the misappropriated amounts our team identified by area. These sums accumulated over numerous transactions that, with the exception of one check of about $20,000, were all less — in many cases much less — than a couple of thousand dollars.

MODES OF MISCONDUCT

Evelyn's methods for misappropriation weren't overly sophisticated; she was successful because of her understanding of the system, the internal control weaknesses, her ability to access and authorize transactions across a variety of operations and the discipline to spread out her misconduct. Like most new fraudsters, she started out small, but as her successes grew so did her appetite for greater gain.

We'll explore her schemes for illegally obtaining funds in each of the areas in Figure 2. [Image no longer available. —Ed.]

Procurement card

Though Evelyn was authorized to use the organization's procurement card, she still had to provide receipts and obtain her supervisor's signature for her purchases. Nevertheless, she had no qualms about forging his John Hancock for her personal purchases.

Regardless, she was confident that the finance office couldn't possibly perform a detailed review of the scores of monthly purchases and supporting documentation and probably wouldn't find her crimes because the transactions came directly from the COO's office and were fairly small in the beginning. The finance office didn't push back on the charges because the level of the office and stature of the COO position was so elevated and revered in this organization. Over time, her individual acts became extensive and included laptops and higher-dollar items. (See Figure 3 at left.) [Image no longer available. —Ed.]

Accounts payable and cashier's checks

Evelyn had the authority to request payments to vendors and disbursements to families awarded assistance from CEF. She also had the ability to make journal entries that allowed her to cover her tracks.

In several instances, she requested payments to her children, under the auspices of requesting money for children in need, by completing bogus applications and falsifying memorandums. Because her children had different last names, the bogus applications didn't immediately raise any red flags. She used this scheme to secure thousands of dollars to each of her children.

Evelyn was also able to insert herself into the process of accounting for stray checks as shown in Figure 4. [Image no longer available. —Ed.] Unexpected donations (e.g., those from charitable remainder trusts) came to her office so that she could help to research their origins and designated purposes. She deposited the money into the nonprofit's general operating account and immediately performed a reverse-journal entry for the exact same amount to make the transaction look like an error. Simultaneously she created a letter to the bank authorizing payment for that same amount directly to her account or to a vendor so that the money would disappear before anyone in the organization knew of its existence.

Evelyn obtained the majority of her stolen money using this method; the stolen funds paid for her rhinoplasty and a new RV that cost more than $30,000. (Though she financed these larger items with misappropriations in smaller increments.)

Unapproved overtime

The organization expected Evelyn to accomplish her duties within the standard 40 hours per week. Evelyn had the authority to approve her own timecard, so she consistently added a few hours of pay each week, which added up to the significant sum of $14,000.

Petty cash

Evelyn was steward of the petty cash box, so she was able to steal $400 and didn't leave any receipts.

Blackberry Charges

The organization, which had issued Evelyn a Blackberry to help her respond to emergency requests, permitted minimal personal use only if charges didn't exceed the monthly minimum plan costs of $85. However, she consistently racked up monthly charges of several hundreds of dollars (one month was more than $1,000) by talking to family members, friends and sales clerks at some of the shops she frequented. Her phone usage spiked after hours when she had no reasonable explanation. However, because employee names didn't appear on the account statements, the accounting reviewer assumed these calls were made from the COO's Blackberry.

THE SLIP-UP

Evelyn eventually became sloppy and made two mistakes almost simultaneously. First, the accounting department questioned a duplicate check request meant to benefit a "child in need," who happened to be her daughter. Second, her boss found his forged signature on a credit card approval form under her desk. The organization began an initial investigation. Evidence began to snowball. We found that her requests often lacked supporting documentation, and discovered credit card purchases at retail stores in the vicinity of her home address without any explanation and a myriad of other suspicious transactions that warranted further review. We then launched a full investigation.

OUR FRAUD INVESTIGATION APPROACH

We first recommended that CEF suspend Evelyn without pay so she wouldn't interfere with the investigation. Then we devised this approach:

• Understand the areas in which Evelyn had access and design methods to target further review in those areas.
• Conduct interviews with several of Evelyn's colleagues and supervisors to determine timing of particular purchases (such as the nose job and the RV), financial troubles and other relevant events. (We were unable to interview Evelyn because she was fired before we had the chance.)
• Use the information from our interviews to dig further into transactions across the areas we wanted to target.

For example, we requested checks for all the transactions she initiated in a targeted timeframe. We inspected the back of each check for potential matches on signature, bank account or known payee. When the payee didn't look like a CEF business expense, we performed additional research and often made calls to vendors to determine the natures of the purchases. These methods allowed us to uncover several checks to her children. Additionally, we were able to trace checks endorsed by a plastic surgeon's office and an RV dealership.

We also involved the FBI because CEF had mailed several of the checks to Evelyn's children across state lines. The organization ultimately fired her, and the U. S. government charged her with mail fraud. However, she didn't make restitution and didn't serve jail time.

INTERNAL CONTROL CHANGES

After the shock from the fraud subsided, management, of course, asked, "How did we let this happen?" Minimal enforcement of the barest controls allowed Evelyn's misdeeds to continue much longer than they should have.

Why does it take a major loss like this to finally institute such measures? Most organizations think it simply can't and won't happen to them. Additionally, in the case of nonprofits, individuals are so focused on their missions, they don't always appreciate the need to allocate time and monetary resources to improve controls, and instead will put those resources towards the mission. Similarly, in the commercial space, the return on investment for internal controls is not always tied to the bottom line and thus can fall by the wayside without constant vigilance.

Our recommendations addressed specific findings as well as some overarching areas for improvement. Subsequently, CEF instituted these changes to the control environment:  

• Segregation of duties: Separated the receiving, issuing and collection of payments functions to prevent fraudulent payment requests and receipt of funds.
• Background checks: Instituted background check procedures prior to each hiring decision, which included altering responsibilities if negative information was found. (Depending on the severity of the infraction and how recent it took place, the organization may still choose to hire someone when something is uncovered. This is really a judgment call and depends on whether there's any impact on the job they will be performing.)
• Edit reports: Implemented procedures to review each quarter a report of changes that had been made to an account so that each department manager could review and locate any potentially fraudulent or incorrect changes.
• Systems integration: Integrated systems such as the human resources and student records systems so that future children receiving donations could be referenced against the
  employee database to avoid conflicts of interest and fraud.
• Procurement card review: Required cardholders to note business purposes for purchases on all receipts and instituted an additional review of all procurement card transactions for suspect transactions or those without the proper supporting documentation.
• Policy changes: Supplemented existing policies with additional review checkpoints, such as reconciliation of payment requests to payment creation prior to issuance. Also, altered the timekeeping policy to require supervisors to review and approve their employees work hour records.
• Blackberry charges: Requested the telephone company include additional information on monthly invoices so that phone numbers and names were associated with their respective usage charges.

CONTROLS HELP KEEP FRAUDSTERS AT BAY

Fraud can occur at all levels of an organization. Obviously, when employees have more access and control, they have greater opportunities to commit acts of misconduct. An organization won't be able to create a perfect system of checks and balances without hampering itself with administrative burdens. The key is to institute internal controls that provide reasonable assurance an organization will prevent or detect fraud quickly. This includes adequate enforcement with training sessions, peer reviews and internal and external audits. Finding the right balance is a matter of judgment, but too few controls will easily lead to many more trusted Evelyns who will rip you off with smiles on their faces.

Monica Dalwadi, CFE, CPA, CIA, is a fraud and forensic examiner and director at Baker Tilly in its Tysons Corner, Va., office. She specializes in working with nonprofits and institutions of higher education.

Aaron Raddock, CFE, CFCM, is a fraud and forensic examiner and manager at Baker Tilly in its Tysons Corner, Va., office. He focuses on serving government contractors, non-profits and institutions of higher education.

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