Category Archives for "Fraud"

Would Andy Griffith Steal?
Dec 12

Would Andy Griffith Steal? Receipt Fraud in Law Enforcement

By Charles Hall | Asset Misappropriation

Would Andy Griffith steal? Maybe not. But other law officers do. Thankfully, most don’t.

The Theft

If you’ve watched Andy Griffith as much as I have, you may find it hard to believe a (small town) officer would steal–but it happens.

Andy Griffith steal

A friend of mine (we’ll call him John) audits a small Georgia city (this is a true story). One year he was reviewing the planning analytics for the audit, reviewing five years of comparative data. In scanning the comparisons, he noticed the police fines had fallen off significantly. So John asked the police chief why the fines were down.

The police chief (we’ll call him Robert) responded, “I took it.”

John laughed and said, “I’m serious, why do you think the fine revenue dropped?”

“I said I took it.”

John was stunned. It was hard for him to absorb what he was hearing. After all, fraudsters don’t generally confess on the spot–but this one did. And the chief was well-known and well-liked, a man known for his integrity.

The discussion continued as John inquired about how the chief took the money. Here’s the deal.

Robert had two receipt books, one for cash and one for checks. When checks were received, he would write a receipt from the checks receipt book–those funds were turned over to the city clerk. When cash was received, he wrote receipts from the cash receipts book–those monies went into his pocket. Simple, but effective, as he stole over $50,000.

The Weakness

So, what control weakness allowed this theft?

No one was controlling the issuance of the city receipt books. Also, the city clerk should have noticed the lack of cash payments being received for fines.

The Fix

How can we remedy this problem?

When governments use physical receipt books, assign the duty of purchasing and issuing receipt books to a particular person. He or she should maintain a log of the receipt books and who has each one.

Surprise audits of those receiving funds is another way to combat theft. These reviews can be performed by the government’s internal audit staff or by an outside CPA or Certified Fraud Examiner.

White-collar crime is real, so stay vigilant. (Even so, I still can’t believe the real Andy Griffith would steal.)

Stealing unaccrued receivable checks
Dec 11

Stealing Unaccrued Receivable Checks is Easy

By Charles Hall | Asset Misappropriation

Stealing Unaccrued Receivable Checks

Some fraudsters steal unaccrued receivable checks and convert them to cash. In this article, I explain the mechanics of the theft and how you can prevent it.

The Theft

Susan is an hospital executive that has the authority to approve purchases of medical devices. She commonly receives rebate checks from vendors. Since she negotiates the purchase contracts, the vendors mail the rebate checks to her. Some of these checks are north of $50,000.

A while back she received a rebate check and placed it in her top left-hand drawer, thinking she would take it to accounting the next day. But she forgot.

stealing unaccrued receivable checks

Picture is courtesy of AdobeStock.com

A month later she opened her drawer, and there it was. Oops! She hurriedly took the check to the receipting department and said, “Gosh, I must be losing my mind.” They all laughed, knowing it was an innocent mistake. But in the course of these events, she realized that no one knew she had the check. Why would they? Susan approves the purchases, and she provides the rebate information to no one. So, the rebates are not accrued in the general ledger.

Not long thereafter, Susan decides to retain two of the rebate checks totaling over $100,000. She places them in the same left-hand drawer, but this time, she does so on purpose. And then she waits—several weeks. No one calls about the checks. It’s obvious that no one knows she has them.

Susan converts the checks to cash by depositing them into a new bank account that she has opened in the name of the hospital. She is the sole authorized signer for the new bank account.

Now, let’s see what the control weaknesses are and how we can remedy this problem. 

The Weakness

The weakness is that no one is tracking or accruing the rebate checks.

The Fix

How can we cure this weakness?

Determine what companies provide rebates checks (and any other checks commonly received and not accrued). Send confirmations to the paying parties and compare the confirmed amounts with activity in the general ledger.

A master list of rebate companies should be maintained by someone in accounting, and the related activity should be monitored by comparing receipting information to this list. When possible, accrue rebate receivables.

White-Collar Crime

This is one more example of white-collar crime. Click here for many more articles about theft. For a detailed article about auditing receivables, click here.

splitting payments
Dec 07

Splitting Payments to Circumvent Approval Requirements

By Charles Hall | Asset Misappropriation

Some fraudsters split payments to circumvent approval requirements. In this article, I show you how this type of theft works and what you can do to prevent it.

The Theft

The maintenance supervisor, Billy, wants to make a fraudulent payment to ABC Hardware for $9,900. (ABC Hardware is owned by his cousin.) So, Billy wants to avoid his company’s review process. He knows that all checks over $5,000 require the physical signature of the finance director. All checks below $5,000 are signed by the computer. What’s a boy to do? Well, Billy can split the transaction–two checks for $4,950 each. That will work.

Billy asks his cousin for two ABC Hardware invoices of $4,950 rather than the one for $9,900. Afterwards, Billy approves each invoice, and the payments are made.

splitting payments

Picture is courtesy of AdobeStock.com

So, Billy tries the scheme again, and it works. Then, he does so repeatedly. His cousin rewards him with free trips to South Dakota, his favorite hunting destination.

The Weakness

No one is querying the check register for payments just below the threshold. Also, bids were not obtained.

The Fix

Download the check register into Excel (or any database package). Then, sort the payments and look for repeated payments–just below the threshold of $5,000–to the same vendor.

Require bids for significant expenses, and retain the bids as support for the payments.

Difference in Bribes and Gratuities

Learning tip: The hunting trip is referred to as a gratuity rather than a bribe. Why? Bribes are inducement payments made before the purchase decision. Gratuities–free trips in this example–are given after the vendor payments. The purpose of the gratuity is to reward the complicit person (Billy). Then, in the future, Billy knows the drill and expects more of the same.

White-Collar Crime

Splitting payments is a form of white-collar crime. There are many ways that professionals steal. Click here for more fraud-related examples (some of which are hard to believe).

Rita Crundwell story
Dec 06

The Rita Crundwell Story: Why Some Ranches Have a Bad Smell

By Charles Hall | Asset Misappropriation

Is it possible for one person to steal over $53 million from a city with an annual budget of less than $10 million? Yes. The Rita Crundwell story provides a cautionary tale for small businesses, governments, and nonprofits.

The Theft

Rita Crundwell, comptroller, and treasurer of Dixon, Illinois stole $53 million over a twenty-year period. The city of 16,000 residents held Crundwell in high esteem. One friend described her as “sweet as pie.” Another said: “You could not find a nicer person.”

So why did she steal? It appears Rita just enjoyed the good life. She used the money to fund one of the top quarter horse ranches in the country, and she did it with style: Some of the funds were used to purchase over $300,000 of jewelry and a $2.1 million motor coach vehicle.

Rita Crundwell story

The picture is courtesy of AdobeStock.com

Her annual salary? $80,000.

The city’s annual budget? $6 to $8 million

Were yearly audits performed? Yes.

Were budgets approved? Yes.

So how could this happen? Ms. Crundwell had won the trust of those around her—especially that of mayor and council. In April 2011, finance commissioner and veteran council member, Roy Bridgeman, praised Crundwell calling her “a big asset to the city as she looks after every tax dollar as if it were her own.” (Too much trust is the main cause of white-collar crime.)

It was a disturbing moment when Dixon Mayor James Burke presented the FBI with evidence of Crundwell’s fraud. Burke later recalled his emotions and words: “I literally became sick to my stomach, and I told him that I hoped my suspicions were all wrong.” Such a response is understandable given that Crundwell had worked for the city for decades. She had fooled everyone.

According to the mayor, the city’s annual audits raised no red flags, and the city’s primary bank never reported anything suspicious. So how did she steal the money? In 1990, Crundwell opened a secret bank account in the name of the city (titled the RSDCA account: the initials stood for reserve sewer development construction account). Crundwell was the only authorized check signer for the account, and the RSDCA bank account was never set up on the city’s general ledger. The City’s records reflected none of the RSDCA deposits or disbursements.

Crundwell would write and sign manual checks from a legitimate city capital project fund checking account, completing the check payee line with “Treasurer.” (Yes, Crundwell had the authority to issue checks with just her signature—even for legitimate city bank accounts.) She would then deposit the check into her secret account. From the bank’s perspective, a transfer had been made from one city bank account to another (from the capital projects fund to the reserve sewer development construction fund).

While the capital project fund disbursement was recorded on the city’s books, the RSDCA deposit was not. A capital project fund journal entry was made for each check debiting capital outlay expense and crediting cash. But no entry was made to the city’s records for the deposit to the RSDCA account. Once the money was in the RSDCA account, Crundwell wrote checks for personal expenses—and she did so for over twenty years.

To complete her deceit, Crundwell provided auditors with fictitious invoices from the Illinois Department of Transportation; these invoices included the following notation: Please make checks payable to Treasurer, State of Illinois. (So the canceled checks made out to Treasurer agreed with directions on the invoice, but the words “State of Illinois” were conveniently left off the check payee line.) Remember Crundwell was the treasurer of Dixon. 

Those invoices and the related checks were often for round dollar amounts (e.g., $250,000) and most were for more than $100,000. In one year alone, Crundwell embezzled over $5 million.

So how was she caught? While Rita was on an extended vacation for horse shows, the city hired a replacement for her. For some reason, Crundwell’s substitute requested all bank account statements from the city’s bank. As the bank statements were reviewed, the secret bank account was discovered. And soon after that, the mayor contacted the FBI.

The Weakness

Why was Rita able to steal $53 million? Wait for it…a lack of segregation of duties (getting tired of my saying this?–sorry, but so many thefts are rooted in this weakness).

Rita could do the following:

  • Write checks
  • Approve payments
  • Create and monitor the budget
  • Enter transactions into the accounting system
  • Reconcile the bank statements

The Fix

Multiple people should perform accounting duties, not just one person.

Accounting employees should be required to take at least a one-week vacation, and while they are gone, someone else should perform their duties. The vacation itself is not the key. The performance of the absent accountant’s duties is. Why? Doing so allows the replacement person to understand the work of the vacant employee. And, more importantly, as the substitute employee works, he or she sees any unusual or fraudulent activity.

Here’s another action to take. Periodically contact your organization’s bank and ask for a list of all bank accounts. Then compare the list to the bank accounts set up on the general ledger. If a bank account is not on the general ledger, see why. Request a copy of the related signature card from the bank.

What Happened to Rita?

So, what happened to Rita? She was sentenced to 19.5 years in prison. Here are pictures from the Chicago Tribune that shed light on the fraud.

steal with company credit cards
Dec 04

How Employees Steal with Company Credit Cards

By Charles Hall | Asset Misappropriation

Employees sometimes steal with company credit cards. Today, we look at a case where one employee was able to steal over $300,000 by misusing college credit cards.

The Theft

Donna Gamble made fraudulent purchases of over $300,000 using Georgia Tech purchase cards (credit cards).

Gamble was employed by Georgia Tech in the Parker H. Petit Institute for Bioengineering and Bioscience. As part of her job, she had access to Georgia Tech credit cards.

Gamble used the purchase cards to buy over 3,800 personal items. How did she hide her theft? She submitted false receipts to her supervisor and made fraudulent accounting entries. The thefts–taken from grant money provided to Georgia Tech by the National Science Foundation–occurred from April 2002 through April 2007. So money designed to advance educational learning was spent on personal items such:

  • A popcorn machine
  • Football tickets
  • A wave runner
  • Video games

Ms. Gamble was sentenced to two years and eight months in federal prison.

The Weakness

The internal control weakness that led to the theft was a lack of appropriate monitoring.

steal with company credit cards

Credit cards provide a simple means to bypass normal purchasing policies. Most purchasing policies require the issuance of a purchase order prior to the purchase. Such purchase orders are provided by a second person–someone other than the purchaser. So, the authorization to purchase is separate from the bookkeeping. In other words, at least two people are involved in the purchase transaction. Having multiple people involved in such transactions strengthens the controls. Why? A single person can’t make purchases alone. Consequently, theft–when such controls are in place–requires collusion. Now, it’s more difficult to steal.

Many organizations don’t require purchase orders for credit card purchases. Therefore, one person can purchase without a second person’s involvement. Even when a second person authorizes purchases, theft can occur if that person doesn’t pay sufficient attention to purchase requests (and the related documentation).

The Fix

What’s the fix? The monitoring of credit card use. Persons using company credit cards must know that someone else sees their purchases. For instance, internal auditors should routinely audit credit card activity. And the users should know that such audits occur.

Theft, like the one above, occurs when the fraudster knows no one is looking–they believe they can steal, and no one will notice.

Here are some ideas to lessen the possibility of credit card fraud:

  • Limit the number of cards issued
  • Assign each card to one person
  • Set low credit limits
  • Keep all cards in a secure location
  • Restrict card usage to particular vendors (which can be done with a purchase card)
  • Require the person to provide support for each purchase
  • If appropriate support is not provided, disallow the use of the card
  • Reconcile monthly credit card statements to supporting documentation
  • Audit personnel (internal or external) should review credit card activity
  • Provide a summary credit card activity report for each employee to the governing body or owners of the company

For more information about white-collar crime, click here.

payroll fraud
Dec 01

Payroll Fraud: I Get By with a Little Help from my Friends

By Charles Hall | Asset Misappropriation

Payroll fraud is quite common. Sometimes the theft occurs as a payroll department employee secretly inflates payments to family and friends.

The Theft

One Friday evening, Jimmy and Rachel are sitting on the back porch drinking a cool lemonade and chatting about how long it’s been since the business gave them a raise–three years and counting. And everyone knows the owners just bought a beautiful cabin in Aspen. The cost: $10 million. Meanwhile, Jimmy and Rachel (cousins) are wiling away their time discussing what they could do to make more money.

payroll fraud

Picture is courtesy of AdobeStock.com

“Don’t you control what people make,” Jimmy starts. Rachel laughs and says, “I may be in payroll, but I can’t give anyone a raise.”

Jimmy pauses and says, “I didn’t ask if you give raises? I mean, can’t you change pay rates, like you could increase mine. You know, quietly.” He grunts, “After all, the owners sure don’t need the money.”

Rachel ponders the request and replies, “I think I could. No one ever reviews what I do. I doubt anyone would ever notice. Come to think of it, I could do the same for myself. With over 300 employees, no one would know. The supervisors never look at the computer payroll files, only the physical personnel files.

The next day Rachel increases her pay rate and Jimmy’s by 10%, just to test the waters. If anyone notices, she’ll say it was a mistake. But no one does. And after six months, she moves the rates even higher–another 30%. Easy money. Even if she’s caught, white collar crime is often lightly punished.

The Weakness

No one is comparing–on a test basis–the pay rates in the payroll master file to the approved rates in the personnel files.

The Fix

Have someone in internal audit or an external CPA or CFE randomly select employees, comparing the master pay rates for each person to the personnel files. Let the payroll and human resources employees know that this test will be performed once a year. The knowledge of the test will be a deterrent to fraudulent increases in the master pay rate file. In particular, pay rates for payroll personnel should be reviewed.

How to Audit Payroll

For a detailed article about how to audit payroll, check out my post here.

expense report fraud
Nov 30

How Honest People Steal

By Charles Hall | Asset Misappropriation

Honest people steal. White collar crime is real. Nice, innocent-looking people take money that’s not theirs.

The Theft

The title of my post–How Honest People Steal–is tongue-in-cheek. Why the title? Well, we’re talking about expense report fraud.

I teach a college Bible study, and in it, I sometimes talk about “acceptable sins,” things like gossip, impatience, anger. My point is they are all issues and not acceptable, but we like to pawn them off as being okay–especially when it’s me that’s angry.

Picture is courtesy of AdobeStock.com

Picture is courtesy of AdobeStock.com

Likewise, expense report fraud is often viewed as acceptable, at least when it’s within bounds. But we all know fraud is fraud. The taking of something that does not belong to us is theft. But, I must say, it is so human to fudge on expense reports. We think things like: If I drove 355 miles, isn’t it okay to round up to 375? After all, I forgot to turn on my distance gauge until I was at least three miles out of town. Such rationalizations are easy to come by.

It always amazes me that executives–making six figures–are willing to jeopardize their positions for a few measly dollars. But C-suite employees commit expense report fraud just like new-hires. Recently, the Health and Human Services Secretary resigned over questions about travel. While the Secretary was not accused of expense report fraud, it’s an example of how powerful people can abuse the use of travel privileges and, in this case, cost his employer (the federal government) money.

So how do people inflate their expense reports?

  • Inflating mileage
  • Submitting the same receipt multiple times
  • Asking for advances and then requesting a second payment after returning from the trip
  • Submitting the receipts of a nonemployee (e.g., spouse)
  • Submitting hotel reservation printouts (with projected cost), but not spending the night there

The Weakness

Usually, the weakness is that no one is properly reviewing the expense reports. Also, the company may not appropriately communicate the penalties (what happens when fraud is detected) for false reporting.

The Fix

Create a written expense report policy that all employees sign, acknowledging their agreement to abide by the guidance.

The person reviewing the expense reports should be trained. He needs to know what is acceptable–and what is not. And most importantly, the person reviewing expense reports must be supported by the leadership of the entity–he has to know that the CEO or board chair has his back. (It’s difficult to stand up to high-level employees unless the reviewer knows the leader supports him.)

Local Government Fraud Prevention
Nov 30

The Little Book of Local Government Fraud Prevention

By Charles Hall | Fraud , Local Governments

Do you desire to fight fraud in governments? Or maybe you are just curious about how fraudsters get away with their wily schemes. See my book The Little Book of Local Government Fraud Prevention. You can purchase it on Amazon as a paperback. Also, the ebook is available as a Kindle download.

Local Government Fraud Prevention

Fraud occurs in local governments in a multitude of ways, yet many cities, counties, school systems, authorities, and other public entities are ill-prepared to prevent or detect its occurrence. Why is this so? Some governments place too much reliance on annual audits as a cure-all, but clean audit opinions don’t mean that fraud is not occurring. And some governments fail to understand how vulnerable they are–until it’s too late.

Why is local government fraud so common? Many small governments don’t have a sufficient number of employees to segregate accounting duties. It is also these smaller governments that place too much trust in their accounting personnel. This combination of a lack of segregation of duties and too much trust in key employees often leads to significant losses from theft.

The Little Book of Local Government Fraud Prevention provides several real-life stories of fraud. The stories will inform you about how local government employees steal. Then I provide you with prevention techniques to assist you in mitigating fraud risks. In one story, for example, the book shows how a single municipal employee stole over $53 million dollars, all from a city of just 16,000 citizens.

If you audit governments, you will find this book helpful in pinpointing common areas where governmental fraud occurs. The book also includes fraud audit checklists and fraud detection procedures. Whether you are an internal or external auditor, you will find fresh ideas for prevention and detection.

The Little Book of Local Government Fraud Prevention will assist you if you are a:

1. Local government accounting employee
2. Local government elected official
3. Local government auditor
4. Local government attorney
5. Certified Public Accountant
6. Certified Fraud Examiner

Even if you don’t work with governments, you’ll find this book useful. I provide fraud prevention steps for transaction cycles such as billing and collections, payables and expenses, payroll, and capital assets.

Together we can bring down the risk of fraud and corruption in our local governments. Come join the team. We’ll all be better for it.

If you don’t desire to spend money on the book, here’s a free list of controls.

stealing while dying
Nov 17

Stealing While Dying: The Motive for Fraud Comes in Many Forms

By Charles Hall | Asset Misappropriation

Some fraudsters steal while dying. What’s their motive? Possibly to avoid leaving their family with medical bills. Whatever the reason, it’s a strange thing. Today we visit a fraud that I encountered over twenty years ago.

stealing while dying

The Theft

In one of the stranger frauds I’ve seen, the bookkeeper of a small health department, Susan, stole money. And she did so while she was dying. In the last months of her life, she fought a battle with cancer. In between the chemo treatments, she continued her work. I’m sure she believed she would survive. After all, she was only thirty-six. 

I had provided external audit services to this health department for years and knew Susan well. She sent me thank-you cards–yes, thank-you cards–for my audit work. She was polite and great at her job. If ever I thought there was someone who would not (and could not) steal, it was her.

But external circumstances can make the best of people do the unexpected. The medical treatments resulted in numerous medical bills, many of which she received while still working. She died just before my annual visit for the audit.

Knowing that Susan had passed away, I knew the audit would be challenging, especially since the health department board had not hired anyone to replace her.

Upon my arrival, I requested the bank statements, but the remaining employees could not locate them. I thought maybe she had taken the bank statements home and had not returned with them due to her illness, but that was not the case. After the employees searched for some time with no result, the health department requisitioned the bank statements and cleared checks from the bank.

In reviewing the cleared checks, I quickly noticed round-dollar checks written to Susan. The first one was for $7,000. My first thought was, “Not Susan, I’ve known her too long. No way. ” But then there was another and another…

The Weakness

The weakness was a lack of segregation of duties. Susan did the following:

  • Keyed payables into the general ledger
  • Created checks for signing
  • Had signature authority on the bank account
  • Reconciled the bank statements
  • Created the monthly financial statements

Are you noticing a recurring theme in the 30 Days of Fraud? Yes, a lack of segregation of duties. It’s fundamental. One person should not be allowed to do everything.

The Fix

Segregate the accounting duties. Most importantly, Susan should not have been on the bank’s signature card. Additionally, someone other than Susan should have been reconciling the bank statement and examining cleared checks. For small organizations, have the bank statements mailed to someone outside the accounting department (e.g., a board member). This outside person should open the statements and review the cleared checks—then the statements should be sent to accounting.

how bribery works
Nov 16

How Bribery Works: How to Understand It and Prevent It

By Charles Hall | Corruption

The World Bank estimates that over $1 trillion in bribes are offered each year. Today we look at how bribery works and how you can prevent it.

The Theft

The FBI performed a sting operation involving two mid-Georgia city council members. The Bureau’s court complaint alleged that two city council members contacted a city vendor requesting a bribe. The vendor, according to the complaint, had previously provided services to the city. But when the contract came up for renewal, the city officials sought monetary encouragement (also known as cash) to continue the arrangement.

how bribery works

Picture is courtesy of AdobeStock.com

The vendor’s president, once aware of the proposed bribe, contacted the FBI, which in turn conducted the sting. On the arranged date, the company CFO delivered $20,000 in cash to the city council members. The conversation was recorded as the payment was made. The arrests followed soon thereafter.

The bribe was unsuccessful in this case, but, all too often, the bad guys receive the cash, and the organization suffers. How?

Vendors usually don’t absorb the cost of the bribe. They pass the expense along to the organization in the form of increased invoice billings, or the vendor will, in some cases, provide substandard products or services. Either way, the organization suffers, and the villain walks away with cash or a free vacation or a free car or…well, you get the picture.

The Weakness

The root of bribery lies in unethical leadership. Organizations should vet each key employee before hiring, making sure the person has historically acted in an upright manner. (In the case above, the citizens must vote for ethical leaders.)

The city had no fraud hotline. The Association of Certified Fraud Examiners biennial survey has repeatedly shown that corruption is often unearthed by tips–often through a fraud hotline. What is a fraud hotline? It is any means that an organization provides its employees to report a potential theft. (See below.) Bribery can occur even when organizations have the best of controls, but hotlines are a key defense.

The Fix

Organizations can increase communications about potential theft by:

  • Providing a 24/7 phone number–it can be a 1-800 number (employees call and report any information anonymously)
  • Provide employees with an email address where they can report suspected fraud
  • Ask employees to report red flags (signs of fraud) to a designated person in your organization

To mitigate corruption, implement these controls (there are others, but these will help):

  • Require sealed bids that are opened in the presence of multiple people (mainly for larger purchases)
  • Implement a whistleblower program (include vendors)
  • Require announced periodic vendor audits
  • Implement a conflict of interest policy
  • Implement a bribery prevention policy (include gifts)
  • For significant construction contracts, monitor all phases of the project, including solicitation of bids, awarding of the bid, development of the contract, on-site construction, and related billing, and contract change orders (don’t trust the builder to do this for you).
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