How a Clerk’s $250,000 Fraud Went Unnoticed for 4 Years

GUEST BLOGGER

Courtney Babin
ACFE Communications Coordinator

Between August 2010 and March 2014 an employee within the City of Ithaca’s Tompkins Consolidated Area Transit (TCAT) diverted cash out of TCAT accounts using a fraudulent check scheme. In total, the fraud cost the not-for-profit organization nearly $250,000 over a span of four years. The fraud kept growing in the years that it remained undetected: in 2010 they lost $1,600; in 2011, $43,000; in 2012, $69,000; and in 2013, a staggering $113,000.

In last month’s Fraud Talk podcast, John E. “Jack” Little, CFE, CPA, Senior Lecturer of Accounting at Cornell University, examines this fraudulent check scheme and discusses a three-part process that every anti-fraud program should implement.

The perpetrator was Pamela Johnson, an accounts assistant clerk, who managed the bills and the accounts payable system. According to The Ithaca Voice, she created a fictitious vendor, “JTD Enterprises,” which happened to reflect her husband’s company: Johnson Tool Design. Johnson then created fictitious invoices which she paid through the accounts payable system. She cut the checks, signed them with a signature stamp and then deposited them into a business account to which she had access.

The fraud was discovered March 2014, during the audit process of the 2013 year, by a staff accountant. The accountant asked Johnson to pull an invoice and when Johnson was uncooperative, the staff accountant went to the purchasing manager and asked them to look into the issue. “The purchasing manager, of course, had never heard of the vendor,” says Little. Ultimately, Johnson was interviewed, suspended and indicted for grand larceny in the second degree.

The fraud went unnoticed mostly because of the volume of TCAT’s $13 million budget. “When you have a $1,600 fraud amongst $13 million, it’s not apt to be discovered,” says Little. “Even in the next couple of years when it’s $40-$60,000, in the grand scheme, it’s perhaps not ‘material.’” By 2013, she had gotten a little bolder and was taking larger sums and more often. And at the same time the fraud became material, it was discovered.”

According to Little, it’s essential for all entities to have an anti-fraud program and it needs to be a 3-part process: deterrence, detection and response.

  • Deterrence: How companies set their top at the top. There need to be written policies that outline fraud prevention, internal controls and some sort of prevention program that is educational in nature. Organizations need to educate their board, management and staff.
  • Detection: Organizations need to know how to investigate fraud. Fraud can be prevented by simply having better controls. With detection, monitoring and auditing all of the procedures on how we deal with misconduct should be written down and summarized. There has to be a response policy implemented.
  • Response: What happens when an organization finds something? How do they investigate and report to when there is an alleged fraud. “It’s so important that these things get laid out and considered long before you have a problem,” says Little, “It shouldn’t be a reaction, it should be preventative in nature.”

Little’s advice to staff auditors is to be diligent in your work and follow through. Watch for unusual behaviors in your coworkers. Is there unusual behavior by coworkers at your organization that is going unnoticed; what about behavior that is evident? It’s easy to look the other way and press forward with the rest of your work but follow through with the rest of your items in question. But above all, says Little, “Be diligent.” 

Hear Little's full interview with the Fraud Talk at ACFE.com/podcast.

Untethered From the Office: How We Fight Fraud on the Go

LETTER FROM THE PRESIDENT

James D. Ratley, CFE
ACFE President and CEO

It was wonderful to see so many of you at the 26th Annual ACFE Global Fraud Conference. At the opening general session, I told attendees that ACFE founder and Chairman Joseph T. Wells, CFE, CPA, and I recently were discussing the future of fraud and what lies ahead for the profession.

I told them that when the ACFE was founded in 1988, the life of the Certified Fraud Examiner (CFE) wasn't nearly as complicated as it is today. However, technology has quickly changed our profession.

In the latest Fraud Magazine cover article, "Fighting fraud on the go: CFEs enter smart new world of mobile devices," by Robert Tie, we find that many fraud examiners now carry their offices in their pockets. We conduct our jobs with convenience and speed.

But because it's so easy to unobtrusively make audio and video recordings with smartphones and tablets, Tie writes, a critical question arises: Is it legal to secretly make those recordings during interviews or on surveillance assignments? "It's complicated," says David Wall, J.D., CFE, CPA, PI. (Wall is a director in the forensic and litigation practice of SingerLewak LLP, a regional public accounting firm.)

"State privacy laws comprise a jurisdiction-by-jurisdiction patchwork of sometimes conflicting rules," Wall says. "But they all agree on two key principles." The first is that private individuals — and in certain situations, public officials and celebrities — have the right to a reasonable expectation of privacy, he says in the article. The second principle, according to Wall, is that it's illegal to intrude upon anyone's privacy without first obtaining that person's informed consent.

Tie then gets practical and provides app recommendations. "My smartphone is an absolutely critical tool for staying in touch with people, information and activities," says Brian Willingham, CFE, PI, president of the Diligentia Group Inc. in Katonah, New York. He loads apps on his phone for organizing educational materials, case studies, articles and schedules; and coordinating real-time conversations about documents, spreadsheets and presentations shared through the cloud.

I remember when our first fax machine at the ACFE was the most marvelous bit of technology we'd ever seen. Instant communication! But we were still tethered to our desks. No more. However, as Spider-Man's Uncle Ben said, "With great power, comes great responsibility." Read about the implications of the brave new world.

Chief Compliance Officer Prepared to Fight Fraud 'Anywhere, Anytime'

MEMBER PROFILE

Dante Fuentes, CFE, Chief Compliance Officer  
Security Bank

“Think fraud, fight fraud, anytime, anywhere. Sacrifice for the good of others,” says Dante Fuentes, CFE. Raised in one of the most populated cities in the Philippines, Fuentes is Chief Compliance Officer for Security Bank, one of the top 10 local banks in the Philippines. Fuentes is also president of his local ACFE chapter and finds that the most rewarding aspect of his job is that he is able to help others reach their full potential from the training he gives them. “I am able to coach and mentor, learn skills that better myself, and I am able to pay it forward and assist someone else in the same way.”

When did you become passionate about fighting fraud? 
I became passionate about fighting fraud when I worked in a bank in 1978 as a savings account bookkeeper.

What do you think contributed to your success moving into your current position? 
More than the experience, the training I received from the ACFE helped me improve and achieve my goals in my current positions.

What does your current role entail? 
As the Chief Compliance Officer at Security Bank, part of my job is not only to help prevent misdemeanors and fraud in the organization, but also to lead money laundering investigations. I am the lead senior officer for purposes of administering the compliance program and interacting with the Bangko Sentral ng Pilipinas (Central Bank of the Philippines) on compliance-related issues. I also oversee the design of an appropriate compliance system, promote its effective implementation and address breaches that may arise. I report the matter to the Board, and recommend the imposition of appropriate disciplinary action on the guilty parties and the adoption of measures to prevent a repetition of the violation. I am responsible for ensuring the integrity and accuracy of all documentary submissions to the Bangko Sentral ng Pilipinas. My job requires me to have the commensurate skills and expertise to provide appropriate guidance and direction to the bank on the development, implementation and maintenance of the compliance program.

My other affiliations, such as being the president of the ACFE local chapter (ACFE – Philippines), the president of the Association of Bank Compliance Officers, Inc. (ABCOMP) and one of the Senior Advisers of the Good Governance Advocates and Practitioners of the Philippines (GGAPP), entails managing/administering my peers on matters related to fraud detection and prevention from which the knowledge and experience I acquired from being a CFE was a big help.

What are the best opportunities for someone entering into your career? 
The best opportunity for someone entering into a career like mine would be the experience gained through the years of exposure in your field of endeavor and proper training.

What do you wish you knew (but didn’t) when you first contemplated this career? 
I wish I knew in the early part of my career that there was a formal organization of fraud warriors.

Is there a memorable case or project that you have worked on? 
Indeed I do. My most memorable case with fraud was very painful. Early in my career, I investigated my best friend, who was my co-employee in a bank. He recommended me to the bank where we both worked, and his parents and my parents are very close friends. When my best friend was suspected to have abstracted cash, I was assigned to do the investigation and make a recommendation. The problem was, should I exonerate my friend or do what is right? I chose to do what is right. My best friend was terminated. I did not realize then that I had to go through and experience this emotional process and overcome it to be a better fraud fighter.

After the first experience, almost 200 more fraud investigations followed. Most of the fraud cases I have investigated in the banks I worked with were committed by first-time offenders, therefore easier to investigate and prosecute – unlike a money laundering investigation which is a more complex and sophisticated fraud committed by seasoned, learned and mostly powerful people.

What do you consider to be the most important values a CFE must have? 
The most important values of a CFE are to have a strong character and moral integrity.

When you are not working, what types of things do you enjoy doing? 
My Monday and Wednesday nights are for bowling. This is my “me” time with friends. In fact, I just bought my new bowling shoes when I attended the conference in Baltimore.

Read Dante's full profile in the Career Center on ACFE.com.