After three years of employment with a Las Vegas casino, Bill Whaling was promoted to operations manager. He was happy with the promotion, but had immediate concerns about the internal controls in the casino's cage. The cage manager, Betty Brown, was reluctant to provide access to, and share details about, cage operations.
The cage in a casino is the financial center of all operations. It routinely makes change, cashes checks, and checks slot machine access keys in and out. It also receives funds from drop teams collecting coins and currency from slot machines and gaming tables, verifies jackpots paid, fills slot machines, and makes bank deposits of gaming revenue and ancillary revenue from the bar, café, and hotel. An internal auditor always independently verifies payouts.
Several weeks after Whaling's promotion, Dave Neil and Kate Harper, two cage supervisors, approached him and timidly disclosed their awareness that Brown had been "borrowing" cage money by writing personal checks to replace the diverted funds, but she never deposited those checks. They had not come forward earlier because Brown had promised to return the money.
Whaling told Brown not to report to work as scheduled the next day. He also called the auditor to do a reconciliation of the cage. As reported by Neil and Harper, the cage was short US$128,000.
Brown had embezzled by "borrowing" large bills from the vault, and writing seven personal checks over six weeks to cover the shortage and balance out the cage paperwork. She directed Neil and Harper to collude by accepting and reporting the total of the checks in their shift reconciliations, assuring them she would return the cash and shred the checks. Though unconcerned initially, Neil and Harper saw Brown's check amounts growing with no sign that she would return the money as promised. Unable to handle the pressure, they approached Whaling to notify the owners.
Brown had been in charge of reconciling the cage department records with the underlying fund balance of the vault. Both independent semiannual audit findings and required triennial state gaming control board audits had listed this as a material weakness in internal controls. Whaling also had expressed his concerns about the issue. However, the owners were satisfied with filing exception reports with the state gaming control board to maintain compliance with the Minimum Internal Control Standards on the grounds that this was a small operation, nothing serious had ever happened, and that Brown was a trusted employee who had been with them since day one.
Whaling wanted to better understand the cage operations, and offered to cover shifts; however, Brown was hesitant because she didn't want him to see the details of the shift reconciliations, which only showed a total of all checks on hand. Brown was concerned that Whaling would recognize the fraud if he had access to the underlying checks, so she only superficially informed Whaling of bank deposit procedures and how to fill the vault with funds after deposits of currency exceeded needs. He expressed his concerns to the owners, but they told him to be patient with Brown.
Also, on several occasions, but especially on weekends, Brown told Whaling that the cage was in need of larger bills. The vault was usually filled to the imprest level of US$450,000 after bank deposits with certain amounts of currencies in prescribed denominations. The cage had not typically experienced currency denomination imbalances and Whaling had not noticed a huge increase in business — which might have explained Brown's request for additional funds. To accommodate her large bill requests, Whaling had to organize emergency fund collections from slot machines on nonscheduled days to alleviate the shortage. Because such requests have been harbingers of fraud in the industry, Whaling had to file required paperwork with the state gaming control board to report these events.
Whaling also noticed Brown experiencing emotional swings. She was a single mother who had been finding it hard to make ends meet financially. Once, Whaling saw Brown sitting on the floor in the cage crying. He offered to help, but she said she was fine, stood up, and resumed her work. Brown also had come to work with a bizarre hairstyle and excessive makeup, shocking most of her co-workers. She appeared overly happy on that day, and her co-workers wondered if she was using drugs. Casinos can request on-the-job drug tests for reasonable cause to check whether employees on duty are under the influence. If they are found to be under the influence, they are terminated. Brown's behavior was similar to situations where drug tests had been deemed necessary. However, the owners made an exception in her case.
Whaling also observed that Brown was dating one of the technicians who reported directly to her. Casino policy is to report an intimate relationship between two employees who were in direct reporting positions, and neither had done so. Trusting Brown, the owners weren't concerned when notified of the relationship. The technician was responsible for repairing slot machines and had access to the monies therein. Casino policy required signing out for slot machine keys and returning the keys at the end of shifts. Nevertheless, the technician rarely signed for receipt and return of the keys when Brown was on duty. The technician was subsequently caught stealing (via the surveillance system) and terminated.
Brown was terminated and sued by the owners for embezzlement. Neil and Harper were terminated for aiding and abetting the fraud. At the hearing, Brown cried and apologized for what she had done. She was placed on probation for eight years and had to pay restitution of US$67,000. The balance was covered by the casino's insurance. Her gaming card was revoked by the state. Neil and Harper had difficulty finding other jobs.
- Most frauds start small. The organization's employees should be encouraged to report even minor peculations. "Borrowers" of embezzled funds are often unable to make restitution.
- Employee personality changes, mood swings, and strange behavior patterns are red flags. All could be indicators of inappropriate behavior or fraud.
- Segregation of duties is critical for cash-intensive businesses. The cage manager, who had both cash recording and custody functions, should not have performed reconciliations. Being a small operation is not a justifiable excuse for exemption.
- Seniority or trust cannot be used as reasons for skirting appropriate internal controls. All employees should be subjected to the same internal control procedures. Exceptions should be clearly justified.
- Trust is a common denominator underlying many frauds. Persuade skeptical employees that making control improvements in their areas of responsibility can help place them above suspicion.
- Employment drug tests are especially important in the gaming industry, where exposure to drug abuse is exponentially high for employees.