Most of our event speakers instruct from the knowledge they have in specific areas of fraud examination. But Kathe Swanson isn’t trained in law enforcement, auditing or compliance. She’s someone who noticed something wrong and had the guts and determination to shine a light on it.Read More
“Second Year Syndrome” is the malady of medical students who experience the symptoms of the disease that they are studying at the time. If they’re studying skin cancer, suddenly that zit becomes melanoma. If they’re studying arthritis, their joints start to ache. If they’re studying narcolepsy, they suddenly feel they’re about to fall asleep. (That last might be attributable to being grossly overworked, but you get the idea.)Read More
ONLINE EXCLUSIVE, FRAUD MAGAZINE
Annette Simmons-Brown, CFE
Greed is everywhere. It pollutes all industries and organizations, including those dedicated to helping the poorest and most vulnerable of our society. And it breeds fraudsters within these organizations who have profound canniness and precisely zero moral queasiness when selecting their victims. Fraudsters like Emma and Kate.
Emma Kollegian and Kate Lashua never knew each other, although my office knew both of them in painful detail. But the similarities of their profiles, the sub-basement venality of their embezzlements and the predations of their victims make them an identical sub-type of embezzler that society should be educated to recognize. My unscientific theory is that when I see two embezzlers with similar characteristics and schemes, scores more are out there, including those who wear the professional halos of social-service employees.
Program coordinator preys on vulnerable clients
For 22 years, Emma worked at a nonprofit corporation called LifeAid Inc. that provides services to people with severe mental illnesses and/or chemical dependency problems. These services include housing subsidies and case management for long-term, chronically homeless clients. LifeAid receives public funds for its work and has several employees.
During her first 19 years at LifeAid, Emma worked as a case manager for individual clients who were deeply troubled and in great need. Emma eventually was promoted to program coordinator for LifeAid's Homeless Project; she retained her caseload of clients, while also taking on new responsibilities. The promotion also gave Emma the authority to issue checks from the Homeless Project's sub-account within LifeAid.
Shortly after she was promoted to program coordinator, Emma embezzled more than $96,000 using two separate schemes. In scheme No. 1, she issued 128 checks to herself from the Homeless Project account, purportedly for reimbursements, often using the signature stamp of the LifeAid manager actually authorized to sign or stamp checks. She supplied no meaningful documentation for these issuances, and many of the "reimbursements" were for purchases outside of LifeAid's policies and procedures.
In scheme No. 2, Emma generated 23 checks payable to at least a dozen of her own clients totaling more than $17,500. For each fraudulent check, she would drive the client payee to her bank, where the client would endorse and cash the check and give her the money. Or the client would sign the check over to her and she would deposit the check herself.
Emma gave her defenseless, trusting clients a number of pure-malarkey explanations for these checks. She told them the checks were issued to them by mistake; the checks should have been paid to their landlords; the checks were actually for their apartment expenses; the checks simply should have been payable to someone else; etc. Emma's clients had so many life problems and so few resources or capabilities that often they performed odd jobs around LifeAid's property (such as moving furniture or clearing litter from the exterior grounds) as their sole employment. Emma had been their case manager for years, so they trusted her, they needed her services and they did what she asked them to do.
Emma did not deploy these stolen funds to her trusting clients. She blew the money on personal living expenses — including mortgage payments on a primary residence and a lakefront cabin she co-owned with her wife — and on booze and gambling.
Early in Emma's 22nd year of employment, and well into her embezzlement scheme, LifeAid's comptroller noticed suspicious activity in bills and documentation. The comptroller also noticed two checks payable to clients — a highly unusual occurrence because all checks for client expenses were issued to vendors, not to the clients themselves. The comptroller immediately initiated an audit and forensic analysis by an outside accounting firm. Through a process of document review, bookkeeping records review, and, most painfully, in-person interviews with all of the clients named as payees, the audit uncovered the entire scope of Emma's thefts. Many of the clients who were interviewed had significant memory problems but were still able to describe startlingly similar stories and to identify instances when someone else's handwriting appeared under their signatures on endorsed checks.
LifeAid notified its insurance carrier and filed a police report. Police investigators interviewed Emma, who LifeAid had fired by then and was working as a vocational counselor with another social service agency. Emma denied keeping any money for herself; she admitted to taking clients to the bank but stated she cashed the checks and gave the cash to her clients or deposited the endorsed checks and gave cash she already had on her to the client. She told investigators she did this because many of her clients didn't have bank accounts, and she wanted to help them avoid stiff check-cashing fees. She also told investigators that LifeAid had coached her clients and deliberately "lost" her supporting documentation, and that a member of the LifeAid staff was "evil."
Her allegations notwithstanding, Emma was later charged with two counts of felony theft by swindle, and the disposition of this case is pending as of this writing.
Read about Kate, another nonprofit embezzler, in the full article on Fraud-Magazine.com.
Andi McNeal, CFE, CPA
ACFE Director of Research
Julia, an accounts payable clerk, gave her manager two weeks’ notice that she was leaving to take a new job. On the surface, there was no dramatic “I quit” moment or signs that Julia was leaving on anything other than a positive note. During her exit interview, an HR representative had Julia sign some forms, went over the termination of her benefits and asked Julia a few cursory questions. When questioned about her reasons for leaving, Julia stated that she’d been offered a position at another company that paid more — which was true. But what Julia didn’t reveal — simply because she was never asked — is that the reason she began looking for another job was that she was deeply disturbed by a pattern of dishonest behavior displayed by the company’s controller. As she left the organization, so did management’s chance to glean, and act on, the information Julia held. Instead, the company’s controller was able to continue his dishonesty undetected — to the tune of embezzling more than $275,000 from the organization.
Many organizations conduct exit interviews as a matter of company policy. Far fewer use these interviews as a formal element of their anti-fraud programs, leaving them vulnerable to missing candid and crucial information about ethical issues and blind spots, and even the warning signs of potential or existing fraud. Like employee surveys and a reporting hotline, exit interviews provide an opportunity for employees to give (sometimes brutally honest) feedback as they are departing the company. And management should want that feedback — especially from individuals who have seen what the company has to offer and choose to move on.
Although the perceived risk of retaliation should be diminished for employees who are leaving, some individuals might have concerns about negative professional references for future jobs or other forms of retribution. Consequently, the exit interview should be conducted in a way that makes clear the value management places on hearing what the exiting employee has to say. Rather than the employee’s supervisor, the party conducting the exit interview should generally be someone from the HR department or ethics team; some organizations even outsource exit interviews to a third-party provider to add a layer of independence and foster the individual’s comfort in the process.
During exit interviews, the interviewer should ask departing employees questions like:
- Why are you leaving the company?
- Why did you begin looking for another job (if applicable)?
- Did you feel you were adequately trained and equipped to do your job well?
- Did you receive adequate training regarding the company’s compliance, ethics and anti-fraud policies?
- How would you describe the organization’s culture?
- Did your coworkers, supervisors and management adhere to the company’s compliance, ethics and anti-fraud policies?
- Did you know how to report concerns about fraud, dishonesty or other misconduct?
- Were you comfortable talking to your direct supervisor about ethical concerns or issues?
- Do you have any unresolved ethical concerns or issues related to the position you are leaving?
- Do you have knowledge about any unresolved ethical issues in general?
- Do you have knowledge of any potential fraud that occurred during your time with the company?
If someone seems reluctant to provide information or if the interviewer suspects the individual is holding back, a different line of questioning — such as “Would you recommend this company to a friend as a place to work?” or “If you could change anything about your position here or the company overall, what would it be?” — might help reframe the conversation and open the lines of communication. The interviewer should also follow up on any responses that indicate potential ethical issues or signs that the individual has knowledge of misconduct with additional questions. Additionally, the interviewer should be trained in what to do with the information provided by the exiting employee, including when and to whom to escalate any issues noted for further investigation.
And yes, disgruntled employees might use an exit interview to complain about personal issues or grumble about specific coworkers. But those same employees might be dissatisfied because their legitimate concerns were overlooked during their employment. Much like the tips received through a helpline, it’s better to have employees providing their honest thoughts — even if management has to sort through them to find the real red flags to follow — than to have employees keep quiet and not have the flags waved at all. And disgruntled employees can be a source of valuable insight into issues of organizational or department culture that should be noted and potentially explored.
When conducted effectively, exit interviews can provide management with a wealth of knowledge to help assess the culture of specific departments and the organization as a whole, as well as to uncover issues that might otherwise have been missed. If only Julia’s employer had known to use her exit interview for this purpose, the company might have been able to uncover the controller’s scheme much sooner.
Annette Simmons-Brown, CFE
Hennepin County Attorney's Office
By far, the most common type of financial crime I work on is embezzlement of organizations — usually by employees. When it comes to their modus operandi, few employee-embezzlers are overburdened with imagination: they write checks payable to themselves, submit phony invoices for reimbursement, inflate their proper wages, transfer monies online from business accounts into their own, use the company credit card for their personal expenses, etc. In fact, now when I look at new employee-embezzlement cases and I see the standard-issue raft of victim-business bank and credit card records with the continual drain of funds directly into the embezzler's sticky hands, I think, "Another employee embezzler, $267,000, spreadsheet, spreadsheet, blah, blah, blah." It gets to the point where I long for something totally outside of the box just to stay awake.
Be careful what you wish for ...
In many ways, Edith Chase fit one of the stereotypes of the traditional embezzler. She was a middle-aged woman in a mid-level accounting/bookkeeping job at a smallish business — wallpaper to most of the rest of the company after almost three decades of stolid, reliable work. The business, Precision Mold Design Inc. (PMDI), an unremarkable, invisible manufacturer in a blue-collar suburb, offered its employees paid vacation and sick leave, health insurance and a 401(k) plan.
Edith, of course, handled payroll duties for the business. PMDI used Payroll Processing Company (PPC), an outside vendor, but Edith was responsible for regularly informing PPC of employees' gross wages and of required withholdings from their paychecks. She was also responsible for informing Large National Bank — which administered PMDI's 401(k) employee accounts — of the net amounts to be withdrawn from PMDI's general account at Small Local Bank and distributed to the account holders. Including her 401(k) account.
Edith, a veteran of several failed marriages and parent to several failing children, subtly and ingeniously supplemented her income for more than eight years by using her knowledge of PMDI's accounting system and the cracks therein. She committed her crimes without ever cutting one fraudulent check to herself, making one false charge on the company's credit card or illegally wiring money to herself from her company's bank accounts — all of which made her the most non-traditional employee-embezzler in my personal pantheon. "How did she do this?" I hear you cry. Let's find out.
PMDI permitted its employees to take out personal loans from their 401(k) accounts and repay these loans via regular deductions from their paychecks back to their 401(k), which Large National Bank held and administered. Edith regularly took substantial "loans" from her 401(k) and deployed several steps that allowed her to take PMDI's money from its operating account at Small Local Bank. She would hide the thefts primarily by running the funds through the 401(k) loan program.
Edith was responsible for informing PPC of how much money should be withheld from each employee's paycheck for 401(k) loan repayments. However, she didn't tell PPC to withhold funds from her own paycheck (and PPC's payroll records would show that).
She instead created a spreadsheet to track funds directed to repayments of 401(k) loans at Large National Bank. For all employees, except for herself, she tracked on the spreadsheet the amounts withheld from their paychecks for loan repayments as processed by PPC. However, for herself, the spreadsheet falsely showed what should have been withheld by PPC for her loan repayment but wasn't.
Read more at Fraud-Magazine.com.