The U.S. Federal Bureau of Investigation (FBI) alleges that an acclaimed robotics professor defrauded Michigan State University and the Institute of Electrical and Electronics Engineers of more than $400,000,
Mlive.com reports. According to the criminal complaint, Ning Xi submitted false claims for travel and other expenses to the two organizations over a five-year period. The FBI alleges that Xi altered and fabricated receipts and used the money to pay off credit card debt. Investigators first started looking into Xi to determine whether he had fraudulently obtained National Science Foundation research grants by not disclosing foreign funding and affiliations. Xi had previously been in a dispute with Michigan State when he took a position with a Hong Kong university while he was on a sabbatical. He resigned from Michigan State in 2015 after the university learned he had accepted a second position with the University of Hong Kong.
Previous articles about expense reimbursement fraud have outlined red flags and what can be done about them (see
"The Perils of Grant Fraud" and
"Traveling First Class"). Management often overlooks this kind of fraud because it considers its employees to be trustworthy and the relatively small loss involved may not be worth the time and effort to track, detect, or deter. In reality, according to the Association of Certified Fraud Examiners'
2016 Report to the Nations on Occupational Fraud and Abuse (PDF), expense reimbursement schemes account for nearly 14 percent of occupational frauds and result in a median loss of $30,000 per year. The report analyzed 2,410 occupational fraud cases from 114 countries.
This fraud story is even more complex, involving an alleged attempt to hide a serious conflict of interest with Chinese affiliations, research, and funding in U.S. federal grant applications. It also includes allegations that Xi exploited past connections and relationships to collude for a financial advantage.
Keeping the organization safe from thieving employees and their multifaceted fraud activities demands strong controls, tough actions against perpetrators, and management leading by example. This is particularly important for multinational corporations with employees throughout the world or institutions such as Michigan State with international ties and staff members who move among other institutions. Xi allegedly perpetrated three main fraud schemes: reimbursement fraud, conflict of interest, and collusion. Here is what internal auditors can do to help detect and prevent them:
Forensic accounting experts can help companies implement preventive measures against fictitious expenses, multiple reimbursements, and mischaracterized expenses. Written expense reimbursement policies and procedures should require detailed expense reports that set forth amounts, times, places, people in attendance, and specific business purposes. The organization also should ask employees to use company credit cards; submit original, detailed receipts (no photocopies); and provide boarding passes for air travel. Periodic audits of travel and entertainment expense accounts also can be a powerful deterrent.
Forensic accountants also can help detect employee reimbursement fraud through a variety of audit and review
techniques. These techniques include examining reimbursement documentation for photocopies, duplicates, or fakes; comparing employees' expense reports and supporting documentation to check for multiple claims for the same expenses; and comparing the times and dates of claimed expenses to work schedules and calendars to look for inconsistencies. An example of the latter would be looking for expenses claimed that were actually incurred during vacations.
Other related red flags that may signal fraudulent activity or warrant further investigation include:
- Claims for disproportionately larger reimbursements than other employees in comparable positions.
- Paying large expenses in cash despite access to a company credit card.
- Submission of consecutively numbered receipts over long periods of time.
- Consistently submitting expenses at or just under the company's reimbursement limit for undocumented claims.
Quantitative analytical and statistical methods also are important tools. One technique is to look for employees whose expense patterns violate Benford's Law, a statistical analysis tool that can reveal fabricated numbers. This law is an observation about the frequency distribution of leading digits in many real-life sets of numerical data. Specifically, it posits that in many naturally occurring collections of numbers, the leading digit is likely to be small. For example, in sets that obey the law, the numeral "1" appears as the most significant digit about 30 percent of the time, while "9" appears as the most significant digit less than 5 percent of the time. By contrast, if the digits were distributed uniformly, they would each occur about 11 percent of the time.
Benford's Law also makes predictions about the distribution of second or third digits, digit combinations, and so on. As far back as the 1970s, mathematicians suggested that the law could be useful in forensic accounting and auditing to indicate accounting and expenses fraud. Assuming that people who make up figures tend to distribute their digits fairly uniformly, comparing first-digit frequency distribution from the data with Benford Law's expected distribution should reveal any anomalous results.
Technology can help prevent the submission of fake expenses as well as spot problems with tracking and disclosure of inappropriate employee conflicts of interest. An intelligent expense management system will know the approval hierarchy. It will enforce a business rule requiring the expense to be submitted by the most senior attendee and approved by his or her boss, removing the chance for collusion. The system also can have in-line audit capabilities that automatically flag for audit an expense report that fits a set of criteria before approval.
In this case, Michigan State could tighten up scrutiny of disclosures of foreign relationships and double or conflicting employment through its fraud risk assessments. It also could risk-target particular countries and institutions for audits of employee activity. Computer-based collection of data and analysis of sources such as Xi's various institutional connections and social media presence might have revealed his employment in Hong Kong earlier. University officials also might have taken stronger actions when they first found that Xi was hiding his employment activity in 2014.
Organizations must address deliberate collusion, whether between colleagues or with a supervisor, to knowingly approve funding, a grant, or a false claim. In large, diverse organizations with lengthy histories and widespread operations, it is possible that two or more people with past relationships will occupy positions where decision-making authority might be abused. For example, one person could become a managing director and the other a sales director (or in this case, a professor and former student). Rigorous conflict-of-interest policies, background checks, and scrutiny of unusual patterns of behavior in work relationships are needed to combat fraud.