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

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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.