John E. “Jack” Little, CFE, CPA
Professor of Practice, Cornell SC Johnson College of Business, Cornell University
One of my colleagues from the Agri-Business department of the Cornell SC Johnson College of Business, knowing my interest in fraud examination, forwarded me an article about a $5 million-dollar fraud that occurred at a Minnesota agricultural cooperative. Published in the online magazine Successful Farming, author Laurie Bedord does a fine job outlining how coop manager, Jerry Hennessey, carried out the crime that lasted over the last 15 years, his motivation for the crime as well as the internal controls that were lacking that allowed the fraud to be committed.
We should never be surprised to find fraud in any particular industry, but who would expect something of this magnitude in a grain elevator? Regardless, the story sounds like many frauds we hear about. A charismatic executive and a long-term employee, that has the trust of the board of directors and management, gains too many financial responsibilities. He has financial pressures or compulsive behaviors and the next thing you know he is writing company checks to bail himself out.
The author offers some insight into what went wrong at the coop. Financial controls were clearly lacking, he was able to write checks to himself, then miscode them so they appeared to be grain purchases in the accounting system. He created a fictitious off-site grain inventory account that helped cover the magnitude of his crime over time. There was limited oversight by the entity’s Board of Directors. No financial audits were conducted by the Minnesota Department of Agriculture or by outside auditors. It was not until early 2018 when CoBank, the bank who held the coop’s $8 million line of credit, demanded an audited financial statement that caused the scheme to unravel.
Hennessey admitted to his role in the fraud and is awaiting sentencing, scheduled for June 21, 2019, in Fergus Falls, Minnesota.
As is often the case, everyone is now interested in finding ways to keep these frauds from happening again. The Minnesota State Legislature had proposed legislation to strengthen the financial protections for ag coops, calling for more inspections, audits and board member sign offs on financial statements. The bill is still in the legislature and, if passed, will be sent on to the governor. Beyond legislative action, the Grain Advisory Group is focused on ways to train coop board members, both on how to be better financial managers and on how to uphold the fiduciary duties of Boards of Directors.
We, as fraud examiners, know there are at least 5 keys to deterring a fraud like this. They are:
Build a strong “tone at the top” in the organization. Management must be vigilant and broadcast to employees that fraud and abuse will not be tolerated.
Perform a risk assessment. Try to understand where the risk of fraud exists in your organization, and build controls and systems that anticipate that risk.
Create strong internal controls and procedures. There must be checks and balances built into the prescribed policies and procedures. Document, document, document — everything must be set forth in writing so that there is no uncertainty as to the proper procedure.
There must be periodic monitoring. Regardless of strong procedures, monitoring assures the procedures are being followed as prescribed.
When fraud and/or abuse is found, it must be thoroughly investigated and prosecuted to the fullest extent. This will drive home that fraud will not be tolerated within the entity. Subsequent to any investigation of abuse, systems may need to be updated with what is learned.
All public and private entities should be considering these key steps in fighting fraud in their organization.
John E. “Jack” Little, CFE, CPA, is a Professor of Practice in the Cornell SC Johnson College of Business, Cornell University, Ithaca New York, and a local practitioner. His email address is email@example.com.