The fight against corporate fraud is ongoing, yet why does it always seem to come out of left field when a business finds itself defrauded and down thousands of dollars, often stolen by a trusted employee or leader? Several local businesses and non-profits found themselves facing this very same situation in 2011. With the beginning of the New Year, we have the opportunity to look back at these cases and identify the lessons other companies can learn before they are up against the hidden enemy to profitability and success: internal fraud.
In the first case, a former vice president of a Las Vegas homebuilder pled guilty to stealing $1.4 million over four years from the company (Las Vegas Sun, Jackie Valley, June 28, 2011). Along with two co-conspirators, they created a fake business and submitted fraudulent invoices for construction supplies. As vice president, he was able to both approve and pay such invoices without getting outside approval. With the help of his co-conspirators, the fake vendor received 11 payments totaling $1.4 million from July 7, 2004 to July 25, 2008, funds he did not include on his income tax returns.
In the second case, a Las Vegas priest pled guilty to mail fraud for stealing $650,000 over an eight-year period (Las Vegas Sun, Gregan Wingert, October 7, 2011). Using his position of authority and trust within the church, he took money from the church bank account for personal reimbursements, stole funds from the gift shop and took candle donations. He was also on the church’s finance committee in addition to his administrative roles at his own parish. In that capacity he also underrepresented the church’s income in financial reports to the Las Vegas Diocese. It was later discovered that the priest was addicted to gambling and was stealing to cover his gambling debts.
With my experience as a Certified Fraud Examiner (CFE), there are some internal controls that, if in place, could have saved these organizations hundreds of thousands of dollars. Some lessons that other businesses can learn from these two fraud investigations include:
- Segregation of duties. In each of these cases, one person had control over multiple financial areas and was able to hide their thefts from others. If the same person approves an expense and then writes the check, as in the payment to a false vendor, there is ample opportunity for fraudulent payments.
- Need for oversight and audits. Neither case appeared to have oversight or surprise type audits. Let employees know that they could be audited at any time, and that a third party will check their work for discrepancies. Fear of getting caught is an effective fraud deterrent.
- Perform a fraud checkup yearly. The thefts in these two cases occurred over an extended period of time, four and eight years, respectively. During the time before the fraud was discovered, the other leaders within the organization may have had no idea that any wrongdoing was occurring, until it was too late. Though it may seem pessimistic, expect the worst and stay ahead of fraud within your organization with a regular fraud checkup (contact a CFE for a checklist).
- Create levels of accountability. High level officials and trusted employees still need supervision and to be accountable to someone. In the case of the priest, he should not have had financial control with his parish AND serve on the church’s finance committee, giving him a high level of autonomy, and therefore, the means to commit and conceal his fraud.
- Look for warning signs. Did someone know of the priest’s gambling addiction? Personal problems or changes in behavior are red flags for fraud. Gambling or other addictions may contribute to the rational for the theft, and provide the motive for taking money to cover debts or expenses.
- Don’t cut administrative roles. It may be tempting to cut a position to save money, but what could be the ultimate cost? Losing out on effective internal controls could open the door to the opportunity for committing fraud for the employees that remain. For the cost of one additional administrative salary, a person who would offer checks and balances, the fraudulent expenses and fake vendor invoices could have been detected in the cases above.
While these two fraud investigations during 2011 are unfortunate, they should serve as a warning to other businesses and nonprofits wanting to avoid the loss of valuable funds due to internal fraud. It is difficult to stay profitable, and even more so when a trusted employee is siphoning off hard earned funds. Stay ahead of fraud with an aggressive internal control strategy and an eye on the bottom line.
Tricia J. Cook is a senior forensic analyst with the forensic accounting and litigation services department at Piercy Bowler Taylor & Kern CPAs. She sifts through financial transactions to resolve allegations or evaluate suspicions, interpreting transactional data and then organizing that information into easy to understand reports for use by counsel, or for presentation in a court-of-law. She can be reached at firstname.lastname@example.org or 702-384-1120.