An intern's front-row seat to fraud

This former intern learned firsthand about fraud when her boss and mentor, the senior accountant, was arrested for embezzlement and credit card fraud. The author helped discover the crimes at the nonprofit business.

On March 5, 2018, I walked into my office at a nonprofit company expecting a normal day. I wasn’t prepared for what would transpire. I’d arrived at a crime scene and saw my coworkers shedding tears of anger and betrayal. I learned my supervisor, the senior accountant, had been committing fraud for more than four years.

I had been with this nonprofit since April 2017. My official job title was “junior accountant,” but I really was just the intern as I completed my accounting and criminal justice studies. My job responsibilities included reviewing journal entries and small-business cash receipts, and reconciling the company’s credit card monthly. I reported directly to the senior accountant whom I considered my mentor.

In 2012, the company hired Sarah Sharp (not her real name). She began in a temporary accounting position through a staffing agency. However, in one previous job she’d stolen $14,000 from one client and in another job misappropriated funds with that company’s credit card. So, why did the company hire her?

This is where the story really begins.

No background checks

When the temporary staffing agency placed Sharp at the nonprofit, it wasn’t aware of her record. The organization didn’t require that temporary employees undergo background checks and normally relied on a staffing agency to screen its clients. However, when the human resources department eventually issued mandatory “CORI-checks,” we uncovered serious red flags in Sharp’s background. (Massachusetts, the state in which the organization resides, compiles Criminal Offender Record Information — CORI — a record of all criminal court appearances in the state, including arrests, convictions, dismissals and serious violations.)

The company discovered Sharp had larceny charges of more than $250 in both 2010 and 2012 at other businesses. The staffing agency never ran background checks on her, so it didn’t know about these infractions. The business was faced with a decision: Let her go, or give her a second chance. As a nonprofit company built on second chances, it decided to keep her as the senior accountant.

Sharp had major responsibilities at the company. She managed the payroll and four company credit cards, reconciled balance sheets and journal entries, performed human resources tasks and was the No. 1 go-to person for all payroll-related questions. Although Sharp reviewed other employees’ work, no one reviewed hers. She signed off on her statements and posted them to the accounting database. Her son even helped file away the paperwork. No one questioned anything she did.

Despite the company’s lack of controls with its financial statements, it didn’t allow Sharp access to the accounting safe that contained petty cash and cash deposits. But she found other creative ways to steal from the company.

Getting around the credit card system

Sharp had the sole responsibility of managing credit card statements. No one else saw what was on those statements or what was getting paid. When the accounts payable supervisor would ask to look at the statements, Sharp would get very defensive and not allow her to see them. The company later discovered that Sharp had been making personal charges on its cards for a Hulu account, a snowblower, an Xbox One, her cable and Verizon phone bills, Intuit payroll for a private company she was forming, and family vacations to the Great Wolf Lodge and Hampton Beach, among others. She even purchased a book on the company card to help her study for the CPA exam. Sharp didn’t make large one-time purchases to avoid red flags but instead used cash advancements on the cards to pay for things such as her monthly car payment. In the end, we discovered almost $45,000 total worth of charges on company cards.

Our business was faced with a decision: let her go or give her a second chance. As a nonprofit company built on second chances, it decided to keep her as the senior accountant.

All charges on credit card statements had to be entered into the accounting software so the company could write manual check payments to pay those bills. It didn’t enter charges into the system unless it had signed physical copies. Sharp would bypass this process by entering the charges into the system and allocating them to different accounts. She also entered the receipts under wrong vendors, so if anyone checked up on the accounts, they’d be sent through a tailspin of erroneous accounts.

Only Sharp reconciled the credit card accounts, and then her son would immediately file them away. No one else signed off on her reconciliations. She’d hide the charges by debiting the credit card clearing account and crediting cash. They’d appear wrongly on the subledger, and the accounts never balanced. But that didn’t matter because no one ever checked them.

Because Sharp was always covering her tracks, she never filed the payroll taxes. The company owed more than $20,000 just in taxes alone during the three years she was in charge.

[See sidebar: “Personal purchases with company funds”.]

Sharp should never have gotten sick

The company eventually caught Sharp when she went on medical leave. In her absence, the company appointed the accounts payable department and me to be responsible for all credit card accounts. When we discovered the alarming charges for Hulu, Verizon and her cable company — among others — we notified our supervisors, and they began investigating.

The accounts payable clerk also noticed some weird receipts in Sharp’s mailbox, such as one for a GEICO statement. The company didn’t use this insurance company. Because she was on medical leave, she couldn’t intercept the fraudulent receipts before they got into the hands of the other company accountants.

About three weeks after the company discovered the red flags it fired Sharp. And the next day, March 6, 2018, police and the assistant COO showed up at her door to recover any documents she had brought home from the company. During the investigation, the company discovered its errors. The biggest mistake, of course, was the lack of internal controls and supervision. No one saw the obvious red flags. “Talk about red flags? It’s more like we’re sending up flares!” the accounts payable clerk said.

As of press time, the investigation was ongoing. The company filed charges against Sharp, but no court date was set. I hope justice will be served. As an intern, I learned that fraud can happen anywhere, and the guilty party could be anyone. Organizations of all types — especially small businesses — heed the mistakes. I’ve now learned lessons outside of the classroom that I’ll carry with me throughout my career.

Bethany Faford is a staff accountant at AAFCPAs in Westborough, Massachusetts, and a Master’s of Science in Accounting student at Nichols College in Dudley, Massachusetts. Contact her at bethany.faford@nichols.edu.

Personal purchases with company funds

Dishonest employees often use company accounts to buy items for employees, their businesses or themselves, such as Sarah Sharp, the head accountant of the Massachusetts nonprofit business.

The heart of a fraudulent billing scheme isn’t the theft of the items but rather the purchase of them. The perpetrator causes the victim company to purchase something it didn’t actually need, so the damage to the company is the money lost in purchasing the item.

Personal purchases through false invoicing

Employees who undertake purchases schemes might run fraudulent invoices through the accounts payable system. The perpetrator buys an item and submits the bill to their employer because it seemed to represent a legitimate company expense.

The fraudster as authorizer of invoices

The person who engages in a personal purchases scheme is often the very person in the company whose duties include authorizing purchases. Fraud arises in part because of a perceived opportunity.

Sometimes the perpetrator is authorized to approve purchases, but controls prevent them from initiating purchase requests. Unfortunately, those with authority to approve purchases often have a good deal of control over their subordinates and can force them to assist in purchasing schemes.

Personal purchases on credits cards or other company accounts

As we saw in Sarah Sharp’s case, prior approval for credit card purchases isn’t required. An employee with a company credit card can buy an item merely by signing their name (or forging another name) at the time of purchase. Many high-level employees approve their credit card expenses.

Adapted from the online ACFE Fraud Examiners Manual, Section 1: Financial Transactions and Fraud Schemes/Asset Misappropriation: Fraudulent Disbursements/Billing Schemes.