Lack of Checks and Balances Create Opportunities for Fraud

By Tricia Cook, CFE

An Indiana business man recently pled guilty to fraud, acknowledging that he abused his position as board chairman and head of the audit committee at an Iowa-based manufacturer of equipment for all-terrain vehicles and golf carts.

Between 2009 and his resignation in 2010,  he convinced the company to give him control of more than $507,000 after promising he would use it for a plan to take the company private through a stock buyback. In reality, he used the money to pay for his personal credit card bills and mortgage payments on one of his two homes.

To cover up the scheme, the executive lied to the board and the company’s auditor and created phony bank and brokerage account statements. He also signed a false statement filed with the SEC.

Red Flags

There were red flags about this scenario that should have raised concern prior to the fraud discovery. Paying attention to certain details like a change in lifestyle, an unwillingness to take vacation or to change roles might be clues that one of your employees may be deceiving you.  Take a close second look to make sure everything is in order, especially if any of these conditions exist within your company:

  • Red Flag 1: His position as board chairman and head of the audit committee goes contrary to the concept of always having proper checks and balances between departments.  By giving someone this much control, the board and audit committee opened themselves to risk.  The executive should not have been the head decision maker in addition to having control over the funds and the audit function.
  • Red Flag 2: The board gave him control of more than $507,000 after promising he would use it for a plan to take the company private through a stock buyback, but it seems that was the end of the story. The board should have required a plan and a way to track the money.  Additionally, there should have been some type of reporting to check on his progress each month.
  • Red Flag 3: He created phony bank and brokerage account statements to cover up his fraud, but if there had been a segregation of duties, it could have been prevented. With someone else in charge of opening the bank and brokerage statements and then reconciling them, this executive would not have had the access to create false documents.

If you have concerns over your company’s internal controls and would like a free copy of the Fraud Check Up, please contact me at tcook@pbtk.com.

Source: http://www.ibj.com/indiana-businessman-admits-guilt-in-2-fraud-plots/PARAMS/article/37571

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