Trusted assistant steals $365,000 from not-for-profit

On June 27, 2014, Christie Talbot appeared before Judge John C. Rowley in Tompkins County Court and pleaded guilty to second degree grand larceny. Talbot stood accused of stealing more than $365,000 from the Society of Personality and Social Psychology Inc. (SPSP), a private, not-for-profit organization, at which she worked as an administrative assistant.

History of SPSP and Cornell

SPSP, founded in 1974, is "an academic society for personality and social psychologists focused on exploring and promoting research centered on how people act, think and behave," according to its website. In 2013, SPSP established its permanent headquarters in Washington, D.C. Before then, the society would house its administrative offices at the academic institution where its current executive officer was working.

At the time of this fraud case, SPSP was at Cornell University in Ithaca, New York, with Cornell faculty member, David Dunning, as its executive officer. According to reports filed with the Internal Revenue Service, as reported on the SPSP website, SPSP is a growing organization with total revenues of $1,130,000 in 2010 increasing to more than $2,130,000 in 2013. Net assets of $1,756,700 in 2010 grew to $3,910,000 by 2013.

Laying the foundation

In 2006, Cornell hired Talbot as an administrative assistant for Dunning and to assist with SPSP. Her responsibilities included scheduling and planning events for the society and assisting in paying the bills for these events. Talbot had the perfect training, experience and personality for the job, and she quickly gained the trust of her co-workers and superiors. She became friends with another administrative assistant, Kristin Tolchin, until Tolchin left SPSP for another job in early 2008. Overall, Talbot's new job went smoothly and all of the organization's operations appeared to be in order.

Discovering the fraud

Because SPSP was growing rapidly, its leadership decided to review the administrative structure in early 2012. The board of directors realigned and restructured existing positions and created new positions, including a chief financial officer. SPSP hired Susan Schroeder, a CPA with substantial accounting experience, for this new position. She provided new insight and a more analytical perspective to the financial operations. Before SPSP hired her, it didn't have in-house accounting expertise because of its small size and lack of resources.

As one of her first tasks, Schroeder began an internal audit of the society. She quickly discovered 171 missing checks associated with the accounts in Talbot's care dating from 2007 — shortly after Talbot began working for SPSP — to 2010. To avoid arousing Talbot's suspicion, Schroeder was careful to ask Talbot to provide checks for the previous four years to corroborate tax information.

After Schroeder's initial email request, Talbot began to display obvious signs of distress and guilt. Schroeder noted that she was being "very uncooperative." When Talbot failed to turn over the checks, Schroeder sent a second request via email. Talbot's response to this request indicated that she "has them and started a box to ship," but she "accidently dropped the box with the files, and have had to go through and sort them back out," according to New York state Tompkins County courthouse records, People of the State of New York vs. Christie Talbot, page 8. This odd behavior and delay in producing the checks raised a red flag for Schroeder and caused her to push for the needed information.

Ultimately, Talbot gave Schroeder a disorganized box of canceled checks. Schroeder hoped to be able to corroborate the missing checks with the gaps in the accounting journals. She instead found obvious signs that Talbot had created fictitious bank reconciliations — presumably in an attempt to cover up the missing money. This led Schroeder to believe that she'd uncovered an embezzlement scheme involving fraudulent check disbursements. Schroeder contacted the SPSP executive committee and urged them to interview Talbot face-to-face and follow through with an investigation of the alleged fraud.

Confronting the accused

The SPSP executive committee decided that the proper course of action would be for its attorney, Terry Devine, and board member, Todd Heatherton, to travel to Ithaca and interview Talbot about the suspected embezzlement. According to affidavits filed with the Tompkins County Court, on Oct. 8, 2012, Devine began his questioning by asking Talbot about "a number of routine procedures for paying invoices and managing the office finances," to gain an understanding of how Talbot could have perpetrated the fraud.

Devine learned that Talbot had access to blank checks because Dunning, her supervisor, "traveled a fair amount and allowed her to pay bills as they arrived." This was the first indication of the weak internal controls that existed within the administrative structure of SPSP. Later in the interview, Devine asked if she ever wrote out checks to herself to which Talbot responded, according to court documents, "Do I need a lawyer?" Devine said he couldn't answer that question.

Within a few minutes of the accusation, Talbot openly admitted to Devine that she "had taken blank signed checks and written them out to cash, herself, or a co-worker, Kristen Tolchin, who also worked in SPSP administrative office," according to court documents. Talbot said that she'd hoped to pay back all of the money that she'd taken. Her statements clarified that Tolchin was the only other employee involved. Talbot explained that Tolchin devised this plan to take the money and that both women "fantasized about what they could do with the money and at some point they decided to take some." Talbot described Tolchin as manipulative and that "she made other people do her dirty work and left them to take responsibility," according to court documents.

Talbot was arrested and charged on October 18, 2012.

Verdict and sentence

On April 23, 2014, Talbot pleaded guilty to a charge of grand larceny in the second degree; in violation of Penal law 155.40(1), a class C felony punishable by up to 15 years of incarceration. In June 2014, Judge Rowley sentenced her to 90 days in jail, followed by five years of probation. He also ordered Talbot to perform 400 hours of community service. Tolchin was also implicated.

Talbot was ordered to pay restitution to SPSP in the amount of $365,124.85 for the theft and an additional $21,830 for New York State taxes on the funds she stole. The restitution was to be assessed as either 15 percent of her gross monthly income or $200 a month, according to court documents. Talbot eventually paid $1,800 in restitution; the remaining balance is still outstanding. Because of the felony charge on her criminal record, Talbot can't find employment, and so she hasn't paid the balance of the restitution.

Although Talbot was punished for her criminal actions, the SPSP's board of directors believed the sentence wasn't adequate punishment for the crime committed. John Dovidio, a psychology professor at Yale and former executive officer of SPSP, said board members were divided about exactly how severe the punishment should be for Talbot. But, he said, they all wanted at least six months — twice what she received. "This wasn't a one-time decision, a moment of weakness," Dovidio said of the series of thefts. "It was done a hundred times over a long period of time. We felt the punishment should reflect that," according to " Leaders of org. wanted stiffer penalty for Tompkins woman who stole $365K," by Michael J. Connor, Aug. 7, 2014, The Ithaca Voice.

Non-shareable financial pressure

We can apply criminologist Donald Cressey's principles in the iconic Fraud Triangle to Christie Talbot. (See " Iconic Fraud Triangle endures: Metaphor diagram helps everybody understand fraud," July/August 2014, Fraud Magazine, by W. Steve Albrecht, Ph.D., CFE, CPA, CIA.) According to Cressey, three factors must be present at the same time for an ordinary person to commit fraud: perceived non-shareable financial pressure, perceived opportunity and rationalization.

Prior to the sentencing hearing, Talbot's attorney, Ray Schlather, filed a pre-sentencing brief that shed some light on her actions. He wrote that Talbot had numerous traumatic experiences in her past that caused her to act irrationally. She coped with severe depression. Talbot was under enormous financial pressure because she was the primary breadwinner in her family and sole financial support for her young children. She was on the brink of declaring bankruptcy. Talbot didn't know what to do to relieve this burden, so she saw larceny as a way to deal with the pressure.

The relationship with Tolchin further complicated Talbot's situation. According to Talbot's account of her interactions with Tolchin, Talbot felt Tolchin dominated her, and she couldn't get out of this relationship, according to courthouse records. Therefore, she was under an unshareable financial pressure, and she felt an added personal pressure from Talbot's partner-in-crime.

Opportunity

Opportunity is the only aspect of Cressey's Fraud Triangle that an entity can control. This case is an excellent illustration of the importance of internal controls, especially in a newly formed, and/or fast growing business or not-for-profit organization. Although SPSP was a well-established organization, it experienced great growth during Talbot's tenure.

This case is an excellent illustration of the importance of internal controls, especially in a newly formed, and/or fast growing business or not-for-profit organization.

"Then, with publication contracts for journals, income increased quite rapidly over a short period of time. … It was still being run like a small organization without all the checks and balances. …. There was not sufficient oversight to detect it at that time," Dovidio said.

The SPSP hadn't designed the existing practices and controls for the large volume of transactions during the organization's rapid growth. The organization didn't have the basic controls of pre-signed checks, disbursement approval via email and lack of bank reconciliations; Talbot and Tolchin used that to their advantage.

Talbot clearly identified the lack of controls in her initial interview when she noted that her boss often left pre-signed blank checks for Talbot to use when he was traveling. No one checked any of the records in QuickBooks or the check register for the voided checks, and cash accounts were never reconciled. Of course, any system this lax is a breeding ground for fraud. Talbot's supervisor should never have pre-signed checks; he should have signed them only after a review of the supporting documentation. Someone other than Talbot should have been responsible for reconciling the cash accounts back to the QuickBooks system each month. It was far too easy for her both to perpetrate the fraud and to cover it up with her administrative access to the systems. 

Rationalization

From the testimony and commentary on the case, Talbot apparently was basically a good person who was trying to support her family under difficult circumstances. She gave in to the temptation to commit fraud when given the opportunity. Talbot said she "hoped to pay everything back that she had taken" from the SPSP, according to court documents.

She likely rationalized her part of the fraud because of Tolchin's role in the endeavor. Talbot stated on numerous occasions that Tolchin was the leader of this fraud, that Tolchin controlled her and she was caught up in Tolchin's motivation to commit the fraud. This pattern is consistent with Cressey's common "borrowing rationalization" — a fraudster will take money because of financial necessity but will plan to repay it before anyone discovers it is missing. (See Corporate Fraud Handbook: Prevention and Detection, fourth edition, by Dr. Joseph T. Wells, CFE, CPA, page 109.)

Lessons learned

The internal audit and investigation of the case lends some insight on how Talbot and Tolchin were able to carry out the fraud. The opportunity presented itself primarily for two simple but often common reasons. First, administrators placed too much trust in key employees. Second, SPSP had a weak internal control system. Talbot's manager trusted her with blank and pre-signed checks to pay for expenses. For more than four years, Talbot wrote checks and deposited them in her personal bank account without being discovered. This unquestioned trust coupled with poor controls made the SPSP a prime target.

This case is a clear demonstration of the importance of implementing internal controls at the first stage of an entity's growth or expansion rather than delaying this action as a lower priority matter. Fraud can occur during any span of an organization's development, and one major case of fraud can cast a shadow of doubt over the entity for many years. You've heard it all before, but organizations need to segregate duties, properly authorize transactions, and separate custody of cash and recording functions.

In small organizations, such as SPSP, true separation of duties might not be possible because of limited staff. So, an organization must implement some "compensating controls" and board members and management must play a more active role.

Common examples of compensating controls include mailing bank statements directly to board members and requiring them to perform bank reconciliations and review samples of transactions. Management, of course, must set a good Tone at the Top by following new anti-fraud policies religiously.

Epilogue

Tolchin left her Cornell University job for another position in Ithaca in 2008. She left Ithaca for Colorado in 2011 before the fraud was discovered at the SPSP. The Tompkins County District Attorney's office investigated her involvement but ultimately concluded that the cost of extraditing her from Colorado would be significant and the chances for conviction were marginal because she hadn't actually written any of the checks herself.

SPSP President James W. Pennebaker, in a July 2, 2014 letter to members, wrote: "After many hours of working with law enforcement officials in Ithaca and our attorney, we concluded that Christie Talbot was not the only former SPSP employee involved. Along with our attorney, we reviewed personal financial records from Talbot, which indicated that another former SPSP employee, Kristin Tolchin, who also worked in the Cornell University SPSP office, was the recipient of nearly half of the funds that were taken from SPSP. Talbot has cooperated in providing information regarding this second employee's involvement."

In May 2014, the SPSP brought a civil action against Tolchin and by November 2014, ultimately settled out of court for an undisclosed sum. (See U.S. District Court for the Northern District of New York records.)

So ends another sad story of fraud based on misplaced trust and abysmal internal controls. I doubt the SPSP members will see that $365,000 again. 

John E. "Jack" Little, CFE, CPA, is the senior lecturer of accounting at the Dyson School of Applied Economics and Management at Cornell University in Ithaca, New York, and a local practitioner.

Jason H. Grossman is a recent graduate of the Dyson School of Applied Economics and Management at Cornell University with a Bachelor of Science with concentrations in accounting and finance. He works for the Ernst & Young Professional Service Firm and is preparing to sit for the Uniform CPA Exam.