how to identify and catch a thief in the workplace susan mondello, cpa, cia georgia state university...

How to Identify and Catch a Thief in

the Workplace

Susan Mondello, CPA, CIAGeorgia State University

University Auditing and Advisory ServicesNovember 14, 2007

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How to Identify andCatch a Thief in the Workplace

Introduction

Capone’s 1928 Cadillac

Al Capone

Source of 1928 Cadillac picture: About.com. Retrieved August 14, 2006,from http://vintagecars.about.com/od/auctions/ss/capone_caddy_2.htm.

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How to Identify and Catch a Thief in the Workplace

ObjectivesYou will learn about occupational fraud…

• Why you should be concerned

• How fraud occurs

• How to identify and catch a thief in the workplace

• How likely is it that a highly publicized fraud will occur on our campus

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What is Fraud?• Fraud – intentional misrepresentation of fact

causing victim to lose money or property

• Occupational fraud – fraud committed in the course of one’s occupation

• White-collar crime – a variety of nonviolent crimes committed in commercial situations for financial gain

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Why Should You be Concerned?Fraud is more likely than ever to happen in

your department because it is:• Generally more lucrative than other

types of crime such as property crime• In U.S., reported cases of property crime are

down 50%, possibly because more criminals are turning to fraud

• Of all property thefts in U.S. in 2004, 75% were worth less than $249. By contrast, median loss was $159,000 per study of 1134 occupational fraud cases by the Association of Certified Fraud Examiners (ACFE)

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Why Should You be Concerned?

Fraud is more likely than ever to

happen in your departmentbecause it is:

• Generally less risky in terms of

penalty than other types of crime

• Increasingly part of organized crime

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Why Should You be Concerned?

You should also be concerned about fraud because of Federal Sentencing Guidelines

• Organizations must make reasonable effort to prevent/detect criminal activity

• You are responsible for due diligence in your area

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Who Commits Occupational Fraud?

Some of our best personnel -Per the ACFE study:

• Majority of perpetrators were

long-serving, middle-aged, male

executives and managers• Positive correlation exists between size of loss and

perpetrator’s authority level, tenure, education

level, age, and male gender

Source: 2006 ACFE Report to Nation on Occupational Fraud & Abuse - study of 1134 fraud cases

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Who Commits Occupational Fraud?Perpetrators by position:• 61% owners/executives/

managers; 39% lower level employees

• Owners/executives median loss was $1 million or 5X manager and 13X employee median loss


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Perpetrators by tenure:

• 64% over 5 years• Median loss for those

with 10+ years was $263,000 compared to

$45,000 for someone with less than 1 year


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Who Commits Occupational Fraud?Perpetrators by education level:


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Who Commits Occupational Fraud?Perpetrators by age:


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Who Commits Occupational Fraud?Perpetrators by gender:


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Note: The typical fraud perpetrator is among the most highly regarded and trusted personnel in most organizations

Therefore: Controls should be held constant for everyone, regardless of position and reputation

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Example of accomplished and highly regarded fraud perpetrator:

Donna Stroup, PhD, program director at Centers for Disease Control – convicted in July 2006 of falsifying 107 receipts totaling $7,516

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Tom Coughlin, formerly 2nd highest ranking Wal-Mart executive, pleaded guilty in January 2006 to falsifying expense statements and obtaining unauthorized gift cards – his purchases were as varied as snakeskin boots, hunting trips, and Bloody Mary mix

Another example of prominent and distinguished fraud perpetrator:

Source of picture: CBC News. Retrieved August 18, 2006, from www.cbc.ca/story/business/national/2006/08/11/wal-mart-exec.html.

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Who Commits Occupational Fraud?Attention fundraisers - Beware donor

fraud:University of Missouri removed Wal-Mart

heiress’s name from brand new sports arena amidst allegations of cheating her way through another school. Her billionaire parents had donated $25 million for naming rights.

Source of picture: USA Today. Retrieved August 16, 2006from www.usatoday.com/money/industries/retail/2004-11-24-walmart-heiress-arena_x.htm.

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Who Commits Occupational Fraud?Those having:• Pressure - Usually caused

by financial need or desire for lavish lifestyle

• Opportunity – Typically arises from weak controls or too much independence/ control given to someone

• Ability to rationalize – Criminals make excuses and do not think of crime as stealing

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How Does Occupational Fraud Occur?

• Billing – Employee submits invoice for payment to bogus vendor or for personal expenses

• Non-cash – Employee steals office supplies, stamps, business services, identity of students/staff, etc.

• Expense reimbursement – Employee files expense report claiming personal travel, nonexistent meals, etc.

• Skimming – Employee accepts payment from customer but does not record

• Payroll – Employee takes unreported annual/sick leave, claims overtime for hours not worked, adds ghost employee to payroll


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How is Occupational Fraud Detected?


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Fraud detected via tips:

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Another method to detect fraud - Undeclared income – Examples:Al Capone and Bill Campbell convicted of income tax evasion

Source of Bill Campbell’s picture: Sweetness & Light. Retrieved July 19, 2006 fromwww.sweetness-light.com/archive/ex-atlanta-mayor-convicted-of-tax-evasion.

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Could Starbucks Fraud Happen Here?

Source: “The CFE’s Job Security: Internal Controls and Employee Theft,” by Brock Philips, CPA, CFE, Sr. Forensic Accountant, Microsoft Corporation

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Starbucks fraud – Rosemary Heinen:• Was hired November 1999 as Starbucks IT Manager• Created contract with bogus company, RAD

Consulting – forged signature approval of VP• Created, approved, and sent RAD invoices to

Accounts Payable with instructions to hold checks for her to pick up

• Said consultants rarely came to office or had just left when management questioned their whereabouts

• Began charging dormant project accounts to hide RAD payments from management

Source: “The CFE’s Job Security: Internal Controls and Employee Theft,” by Brock Philips, CPA, CFE, Sr. Forensic Accountant, Microsoft Corporation

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Starbucks fraud (cont.) – Ms. Heinen:• Had stolen more than $3.7 million via 200

invoices over 10-month period by the time supervisors called authorities

• Claimed she had shopping addiction – items purchased included 2 homes, 34 cars, 2 motorcycles, 3 boats including 47’ yacht, 3 Steinway pianos, 600 Barbie dolls

• Was sentenced to 4 years in prison

Auction was held; Starbucks recovered some ofits loss Source: “The CFE’s Job Security: Internal Controls and Employee Theft,”

by Brock Philips, CPA, CFE, Sr. Forensic Accountant, Microsoft Corporation

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1. Issue – Heinen was hired despiteshady past.

Georgia State – We likely would have detected her past due to policy of checking credit/criminal background before hiring personnel with access to cash, keys, or kids. A weakness is that we only check criminal background in the state of Georgia; crimes committed in other states are not detected.Auditor recommendation – Criminal background checks should be expanded to nationwide scope.

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2. Issue – Heinen forged signature approval on RAD Consulting contract.

Georgia State – Not much can be done to prevent forgery. However, we have improved controls by emphasizing that a manager is not to authorize others to sign manager’s name, use rubber stamp of manager’s signature, or use manager’s Spectrum password to approve transactions.Auditor recommendation – For those complying, keep up the good work! All others, please start complying.

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3. Issue – Heinen had too much control over the payment process - she served as initiatorand approver of payments to RAD Consulting.

Georgia State – Starbucks could possibly have avoided the fraud by following our procedures: a) two people who can verify business integrity must be involved in every transaction; b) someone other than the initiator must approve the transaction.Auditor recommendation – For those complying, way to go! All others, please start complying.

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4. Issue – Accounts Payable heldchecks for Heinen to pick up.

Georgia State – Heinen would have had more difficulty perpetrating fraud due to our policy that checks may not be held for pick-up; they must be mailed to the vendor. Auditor recommendation – For those complying, keep enforcing those good controls! All others, please start complying.

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5. Issue – Poor management oversight of expenditures.

Georgia State – Starbucks fraud would likely have

been detected much sooner by following our policy of monthly expenditure review.

Auditor recommendation – Thanks to those who diligently review expenditures! All others, please be advised of the importance of your cooperation and compliance.

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ConclusionHopefully, you now have a better understanding of occupational fraud:• Why we should be concerned• How occupational fraud occurs• How to identify and catch a thief in the workplace• How we are working to prevent the Starbucks and other types of fraud

We must all work together to counteract the growing threat of fraud.

Please contact the Fraud Hotline, my department, or University Police if you have any questions or suspicions of fraud.

Contact:• Fraud Hotline – 1-877-217-4674 • University Auditing & Advisory Services –

Sterling Roth, Director, ext. 1-0570• University Police – ext. 1-2100

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ConclusionThanks for your attention and

interest today.

Questions?

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Bibliography

1. Association of Certified Fraud Examiners (2006). 2006 ACFE report to the nation on occupational fraud and abuse.2. PricewaterhouseCoopers (2005). Global economic crime survey 2005. Retrieved on July 18, 2006, from

www.pwc.com/extweb/insights.nsf/docid/D1A0A606149F2806852570C0006716C0.3. Finfacts Ireland. Get an education and make crime pay. Retrieved July 14, 2006, from

www.finfacts.com/comment/irelandvatfraudwhitecollarcrimecomment24.htm.4. Barnett, Cynthia. The measurement of white-collar crime using uniform crime reporting (ucr) data. U.S. Department

of Justice, Federal Bureau of Investigation, Criminal Justice Information Services Division. Retrieved July 14, 2006, from www/fbi.gov/ucr/whitecollarforweb.pdf.

5. Baker, John S. Jr. (2004, October 4). The sociological origins of “white-collar crime.” The Heritage Foundation. Retrieved July 24, 2006, from www.heritage.org/Research/LegalIssues/lm14.cfm.

6. NW3C, National White Collar Crime Center. White collar crime statistics. Retrieved July 24, 2006, from www.nw3c.org/research/site_files.cfm?mode=r.

7. U.S. Department of Justice, Office of Justice Programs, Bureau of Justice Statistics.Crime characteristics. Retrieved July 24, 2006, from www.ojp.usdoj.gov/bjs/cvict_c.htm.National crime victimization survey property crime trends, 1973-2004. Retrieved July 24, 2006, from www.ojp.usdoj.gov/bjs/glance/tables/proptrdtab.htm.

8. AICPA Professional Standards. AU Section 316, consideration of fraud in a financial statement audit (source SAS No. 99).

9. Frieswick, Kris (2003, July). How audits must change: auditors face more pressure to find fraud. CFO: Magazine for Senior Financial Executives. Retrieved July 17, 2006, from www.cfo.com/article.cfm/3009752?f=related.

10. Coenen, Tracy L., CPA MBA, CIA. (2006, January 25). Why didn’t our auditors find the fraud? Wisconsin Law Journal. Retrieved July 17, 2006, from www.sequence-inc.com/press/auditorsfind.htm.

11. Durant, Andrew, CFE, FCA (2006). Schemes and scams – the many faces of procurement fraud. Presented at the 17 th Annual Association of Certified Fraud Examiners Conference.

12. Phillips, Brock, CPA, CFE, Sr. Forensic Accountant, Microsoft Corporation (2001). The CFE’s job security: internal controls and employee theft. Presented at the 17th Annual Association of Certified Fraud Examiners Conference.

13. Anderson, Rick (2001, January 24). Wake up and smell the coffee. Seattle Weekly. Retrieved July 18, 2006, at www.seattleweekly.com/news/0104/news-anderson2.php.

14. Maleng, Norm, King County Prosecuting Attorney (2001, August 1). Charges filed in Starbucks embezzlement. Retrieved July 18, 2006, at www.metrokc.gov/proatty/news/2001/Heinen.htm.

15. Wells, Joseph T. (2003, November). Follow the greenback road. Journal of Accountancy. Retrieved July 14, 2006, from www.aicpa.org/pubs/jofa/nov2003/wells.htm.

16. Wikipedia. Al Capone. Retrieved July 17, 2006, from en.wikipedia.org/wiki/Al_Capone.

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Bibliography (continued)

17. CNN.com Law Center (2006, June 13). Atlanta’s former mayor sentenced to prison. Retrieved July 19, 2006, from www.cnn.com/2006/LAW/06/13/mayor.sentenced/index.html.

18. Torpy, Bill; Scott, Jeffry; and Warren, Beth (2006, March 11). The Bill Campbell verdict: split decision: ex-mayor cleared of public corruption; conviction on income tax evasion charges could lead to prison time. Ajc.com. Retrieved July 19, 2006, from www.ajc.com/saturday/content/epaper/editions/saturday/ news_442157bf34eb81e20027.html.

19. Torpy, Bill (2006, July 15). CDC official fined, put on probation. Atlanta Journal Constitution. Retrieved August 14, 2006, from http://www.tobacco.org/news/228264.html.

20. Department of Justice (2006, May 17). High ranking CDC official pleads guilty to theft. Retrieved August 14, 2006, from www.usdoj.gov/usao/gan/press/2006/05-17-06b.pdf.

21. Kabel, Marcus (2006, January 31). Ex-Wal-Mart exec pleads guilty to fraud. Retrieved August 14, 2006, from www.mindfully.org/Industry/2006/Wal-Mart-Coughlin-Fraud31jan06.htm.

22. Reuters (2006, August 11). Former Wal-Mart exec sentenced. Retrieved August 14, 2006, from news.yahoo.com/s/nm/20060811/bs_nm/retail_walmart_dc_3.

23. Farzad, Roben (2005, July 15). Wal-Mart accuses second executive in fraud. Retrieved August 14, 2006, from www.wakeupwalmart.com/news/20050715-nyt.html.

24. ESPN.com news services (2004, November 24). Paige Sports Arena to be given new name. Retrieved April 26, 2006, from http://sports.espn.go.com/ncb/news/story?id=1931214.

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