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​​Charity Begins in the Home

A well-liked employee’s fak​e vendor scheme nets her US$600,000 over three years.

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​It was a hot Friday afternoon in the Atlanta airport. John Rigby’s flight was delayed four hours, and he wanted to fill that time productively. He remembered he still had an unresolved audit exception on a routine match of vendor and employee addresses. The match was for the supervisor, Marilyn Bell, at his client’s graphics department only a few miles away from the airport.

After a 15-minute taxi ride, Rigby opened the door to the small office and announced himself.

“I’m an outside contractor for the audit team at headquarters,” Rigby explained to Bell. “I just need to follow up on an exception we had on some routine audit testing of vendor files last month. Tell me a little about your supplier, Charity Smith.”

The blood drained from Bell’s face as her eyes started watering. Rigby knew he was on to something.

“Tell me what happened,” Rigby instructed.

“Charity is a longtime friend of mine since high school,” Bell began to explain. “She’s a single mom with two young children, and she helps me out from time to time when we have excess work and tight deadlines.”

During the course of his conversation with Bell, Rigby learned a lot about Smith. During the last three years, when the need arose for new print materials — from training manuals to quarterly product catalogues to promotional posters and banners — Smith was often called on to handle the design work.

Smith worked from her home office, often clocking late night hours so she could better juggle the demands of client work and caring for her children. She sent her finished work and weekly time sheet by email, which were reviewed by Bell, approved by Bell’s manager, and sent to accounts payable for payment.

After listening silently for almost 10 minutes, Rigby thanked Bell and asked one follow-up question: “Why are Smith’s payments mailed to your home address and deposited into your checking account?”

Bell replied without any hesitation, “Charity lives out in the country, and with taking care of the kids all day she has a hard time getting to the bank in the nearest town to make her deposits. It’s an hour of driving round trip to get to the bank and back, so once a month I deposit her checks into my account, withdraw the cash, and meet her half way for coffee and to give her the money.”

Bell said she had always intended to speak to her boss about the arrangement, just to make sure he was aware of the situation, but she never got around to it. Rigby asked her to write down everything she told him. He explained that he needed something for his audit files to explain the exception, and that her write-up would take care of that.

As Bell wrote, Rigby called a manager in charge of the office from the next room and asked for permission to send Bell home. They agreed and called a manager from another office in Atlanta to come immediately to assist Rigby.

Bell wrote a 12-page report and confirmed verbally and in writing that it was all true. Before sending Bell home, Rigby asked her to get Smith on speakerphone so she could corroborate the report. Again, the blood drained from Bell’s face and her eyes teared up. She froze at the request.

Bell said she did not have the phone number with her in the office, so Rigby suggested she quickly drive home and get it so they could call Smith together in the office. Bell didn’t move.

Rigby realized that during the car ride, Bell could call someone to help her by pretending to be Smith, but it was a calculated risk that paid off. Bell continued to sit still and stare at the desk.

“It’s not true, is it?” Rigby inquired, while holding up Bell’s written statement.

“No,” she answered. “I made it all up to cover the amount I’ve taken from the company.”

Rigby then called the office manager back and asked him to pull Bell’s personnel file and look for any other addresses she had provided, regardless of how old they were or why they might be in the file. Two more matches with vendors were found — her parents’ address and her boyfriend’s business address (he was her emergency contact). The total paid to the three fake vendors over three years was almost US$600,000.

Bell’s boyfriend’s address was a retail store. Further investigation revealed that he was taking the checks mailed to his business and to Bell’s parents’ address and including them in the store receipts for the day. An identical amount of cash was removed from the deposits. He was later charged and found guilty of money laundering.

Bell began her scheme to recover from extreme pressures at home after a messy divorce. She fell months behind in her mortgage payments, and she and her children were going to lose their home. Once she put her ethics aside to get up-to-date on her mortgage, she found it much easier to do it again to meet other needs that came up in her life. These included a new car, paying off credit cards and a US$25,000 line of credit, new clothes, vacations, and a custom home with expensive high-end finishes and a custom spa room.

Bell’s manager was held responsible for signing dozens of fabricated time sheets and invoices from the three fake vendors. He trusted Bell and never checked the details.

Bell agreed to cooperate with the investigation and to make restitution. Her parents mortgaged their paid-off house to help, and her church took up a special collection as well. Just before her trial, Bell agreed to a plea arrangement that kept her out of jail.

Lessons Learned

  • Fake vendor schemes are common. Procurement teams will assure they have adequate controls over new vendors, but fraudsters will tell you exactly how — and how easy it is — to circumvent those controls.
  • Address matches are a standard audit test. Unfortunately, they often lead to false positives and inefficient follow-up work. But auditors shouldn’t let down their guard. There’s a reason why procedures like this are so standard — they produce that needle in a haystack that deserves immediate attention. Auditors should always check every address they can find related to that person to see if they have been busier than first suspected.
  • Even well-liked, trusted employees can perpetrate fraud. Bell’s work was excellent — she was reliable and she always went the extra mile to serve her many in-house graphics clients. But financial pressures at home caused her to come up with a scheme to help her pay the mortgage and, eventually, finance a lavish lifestyle.
  • Nonverbal reactions can often indicate that a fraud is likely occurring. Bell’s surprise at Rigby’s visit and her attempt to cover her tracks with a complicated story about her fictitious friend were clumsy and full of obvious holes. Auditors should make a point to follow up on audit exceptions in a way that they can see the face of the person as they ask. Get trained in what to look for at this critical moment.
  • The command, “Tell me what happened,” can be used to pivot from an audit query to a fraud-based interview. Don’t set limits on the subject matter or time frame. Let the interviewee decide where to begin the story and what details to include.
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