Don’t allow trusted ‘Radars’ to subvert internal controls

“She was just like Radar on that TV show M*A*S*H,” said the distraught director of the 911 communications district in the rural Tennessee community. The district was responsible for answering 911 calls and dispatching emergency services to those callers. “She” was the assistant director entrusted to handle all aspects of the district’s finances until an investigation revealed she took about $80,000 from her employer. Because the district was funded by fees assessed on all landline telephones and cellphones in the county, every citizen was considered a victim of her fraud.

I knew the director was talking about M*A*S*H*’s Corporal Walter Eugene O’Reilly (AKA Radar) — one of the most beloved TV characters ever — because my father, a former U.S. Army helicopter mechanic, loved watching the show. He especially enjoyed watching the medevac helicopters in the opening credits and throughout the show.

The character Radar was a simple boy from Iowa who was drafted into the U.S. Army right after high school. He was endowed with super-human hearing so he could detect incoming medevac helicopters before anybody else. But it wasn’t these abilities that earned him his nickname. He also had extra-sensory perception. He appeared at his commander’s side before he summoned him, and he even finished his sentences. So, his boss trusted Radar to manage the administrative side of the medical unit.

For those who aren’t familiar with Radar’s talents, a contemporary movie example is Pepper Potts, who performs similar duties for Tony Stark, aka Marvel’s Iron Man. She runs his multinational corporation while he zooms around saving the day in his metallic suit.

Abdication of authority

In the 911 dispatch case, the assistant director had a financial need. Combined with the director’s well-intentioned and ultimately disastrous circumvention of a very basic internal control, this Radar exhibited two of the three elements of the Fraud Triangle necessary for a fraud to occur.

Radar phenomenon

Through my years of investigations, I’ve noticed mid-level managers in entities often exhibit this “Radar phenomenon.” They’re usually administrators at the nexus of entities’ financial transactions and are frequently responsible for enforcing other employees’ adherence to internal controls. Because of their unique positions some Radars take advantage of their bosses’ trust and commit fraud.

A scheme often begins innocently when the boss is out of the office and a signature is needed on a check, or a purchase order needs approval. Radar calls the boss with the dilemma: If these checks aren’t signed, nobody gets paid. The boss is compelled to authorize Radar to sign their name “just this one time” to avert a disaster.

In the 911 dispatch case, the assistant director had a financial need. Combined with the director’s well-intentioned and ultimately disastrous circumvention of a very basic internal control, this Radar exhibited two of the three elements of the Fraud Triangle necessary for a fraud to occur. The final element, rationalization, is almost entirely an internal decision the fraudster must make (do it or don’t do it), and it’s the element over which top management has the least control.

Radars often fill positions that are difficult to supervise. Their duties — such as paying utilities — are difficult to measure with lead metrics; instead, managers must rely upon lag metrics: “The lights are still on, so the utilities were paid last month.” (A lag measure tells you if you’ve achieved your goal. A lead measure tells you if you’re likely to achieve that goal. See “Discipline 2: Act on the Lead Measures,” Franklin Covey.)

Incompetent employees attract attention and supervision. Radars are usually extremely competent (or appear to be) in their legitimate duties. Otherwise, their managers wouldn’t happily delegate more and more responsibilities with less and less supervision.

Many Radars exude confidence, which is reassuring to their managers. But, of course, “conman” is derived from “confidence man.” Multiple online articles exhort workers to make themselves “irreplaceable” at work by going the extra mile (“I’ll do it for you, boss”), being a problem solver (finding a weakness in internal controls is solving a problem) and making their bosses’ job easier. Sounds like a step-by-step guide for a Radar to gain trust and create opportunity.

Fraudulent Radars often groom their supervisors by offering to assume more of their bosses’ mundane routine duties so they can concentrate on “important” executive things. For example, bosses may not give up vendor interactions, but they’d be glad to surrender the drudgery of payroll processing. In the 911 communications district case, the director’s duties frequently took him away from the office, so his reliance on his Radar developed into dependence, and she took full advantage of his trust.

One of the stated goals of the ACFE’s Occupational Fraud 2022: Report to the Nations is to compile detailed information about the characteristics of people who commit occupational fraud, and it provides useful demographic information about fraudsters. The Radar phenomenon correlates well with the statistical information in the report:

• 76% of all frauds are committed by employees or managers, which includes clerks, bookkeepers and office managers who often fit the Radar phenomenon.
• 47% of fraudsters have been on the job for one to five years, which is long enough to learn systems, identify weaknesses in internal controls and gain their supervisors’ trust.
• 25% have been on the job for six to 10 years. That’s enough time to amass important responsibilities and gain their supervisors’ trust.
• 27% of fraudsters work in operations or accounting — the positions you’d expect to be filled with those trusted to sign managers’ names.
• 54% of fraudsters are from 31 to 45 years old. Bosses may believe that some employees are mature enough to be beyond risky behavior and are worthy of trust.

CFEs are trained to look for red flags of fraud when auditing or investigating. In addition to traditional red flags, I’ve determined the Radar phenomenon has its own specific red flags or at least possible conditions for fraud. I’m particularly concerned about an employee who:

• Is in a position that’s difficult to supervise, and their performance is measured with lag metrics.
• Is the nexus of financial transactions and has access to multiple assets and control over financial processes.
• Has been employed long enough to learn the system, identify exploitable weaknesses and gain their supervisor’s trust.
• Has a relationship with their supervisor built upon the supervisor’s dependence and ensuing trust.
• Is aged from 31 to 45, and their supervisor perceives them to be mature and therefore trustworthy.
• Regularly signs the supervisor’s name to documents of any type.
• Has unrestricted access to the supervisor’s signature stamp.

Other red flags include:

• A supervisor has substituted trust for part or all the internal control system.
• A supervisor can’t explain a simple function, such as a procurement process, but refers inquiries to an employee who “handles” that for them. “Handles” is synonymous with inadequate separation of duties.
• When a supervisor approves a document, they flip to the yellow “sign here” tag and sign without reviewing the preceding pages.

Fraudulent Radars often groom their supervisors by offering to assume more of their bosses’ mundane routine duties so they can concentrate on ‘important’ executive things.

Detecting bad Radars

All organizations have exceptional, honest and invaluable Radars who’d never commit fraud despite their freedom to keep the machines oiled. But trust isn’t an internal control. As fraud examiners, we must remind organizations that bad Radars misuse their supervisors’ dependence on their managerial abilities.

Daniel G. Porter, CFE, is a consultant and trainer. Contact him at daniel.porter.tn@gmail.com.