Friday, September 30, 2016

How a Small Little League Handled a Big Curveball

My client’s former treasurer, a 40 year old woman with a husband and young children at home, was recently sentenced for embezzling funds from the local little league organization. The case resonated with us at Acuity Forensics for many reasons.

First, the victim(s). A small non-profit with volunteers working hard to provide a great experience to the youth of a small rural town in Southwest Washington.  The money missing was to be used to fund better equipment, uniforms, and the registrations for kids whose economic backgrounds could not afford for them to play.

Second, the navigation of the client through the turmoil they were experiencing. Embarrassed, frustrated, and feeling as if they were the only ones dealing with these emotions, clients typically feel all of this and more. A better part of our job here is to provide clients with the reassurance that, in fact, they aren’t alone and their emotions are quite normal in situations such as these. And the situation was a difficult one. A small group of board members wanted to have the issue of missing money looked into. Another group of board members were incensed that anyone would accuse the treasurer of wrong doing. How “dare they” even think it?!  Once the evidence became irrefutable and there was no other explanation for the missing funds, the group had to wrestle with whether or not they should have it investigated.

These politics are quite normal. Emotions in embezzlement cases run high. Why? White collar crimes involve a major breach of trust. In fact, it is the very people organizations like and trust the most who are stealing the money. Instead of accepting this, clients will turn inward, thinking, “What’s wrong with me that I trusted him/her” and/or “What will people think of me if I accuse him/her of stealing?” It is often this mentality that will allow frauds to go on longer or not to be investigated at all.

Lastly, this case was important because the crime was primarily the skimming of concession stand cash. How do you prove how much money came into the concession stand in the first place? There was concern among all parties, this fraud examiner included, that the theft would be hard to prove.

Undaunted, we set out to understand the role of the treasurer. It was her job to attend all registration sign-up events, receipt the funds collected and deposit those funds to the bank. Incredibly, there were receipt books for those events. We calculated the carbon copy receipts and traced the deposit of funds to the bank. Bingo! Only the checks were deposited; none of the cash. We now had irrefutable evidence that a cash skimming scheme was happening with registration fees.

Now to the concession stand. In the months of May and June not one single solitary dollar bill or coin was deposited to the bank. As most of us in America know, May and June are prime little league months and the concession stand is a popular place to be on game day.

This little league had heard us speak on good internal controls over concession stand money and had even implemented a process whereby two people in the concession stand counted the money at the end of each shift and prepared the funds for deposit.

Just one problem. It was the treasurer’s job to pick up the count sheets and the money and take it to the bank. All the count sheets and all the money were missing.

Back to square one.

That’s where the accountant in me kicked in. I had the league’s bank statements spanning many years, even years prior to when the treasurer took her role. I was able to figure out how much money they deposited for concession sales and I was able to compare that figure to the cost of the food they purchased from big-box stores like Costco and Cash N Carry. What did that analysis tell me? For the four years prior to the treasurer’s role, the cost of goods sold for the league was approximately 50% of sales. In other words, for every one dollar of candy or popcorn sold, the cost of the food was $.50 and the league was making money.

The first year that the treasurer took over, the cost of goods sold jumped to 78 percent. One cannot blame an increased cost of food on an increase in cost of goods sold by more than 25 percent in a single year.

The second year the funds were in the treasurer’s hands, the cost of goods sold jumped to 101%. This was the year that the board continued to ask for bank statements and financial reports that never came. Once the board obtained the bank statements, it became immediately apparent that not one regular deposit had been made in the months of May and June (unless those deposits were credit-card related).

Our analysis, along with the evidence on the registration thefts, were provided to the league who then reported the crime to the police.

The rest, as they say, is history, the treasurer plead guilty to the crime just a few months after being charged. She was sentenced yesterday to 45 days in prison for a loss of approximately $20,000. 

Tuesday, September 20, 2016

A Crisis of Culture

In the last week, we have learned that Wells Fargo has fired more than 5,300 employees and will pay $190 million in penalties and fines in the wake of an ongoing and widespread fraud scheme. The fraud involved the opening of more than 2 million accounts, which customers never authorized but were charged for.

The sheer number of accounts, number of employees losing their jobs and the total fines Wells Fargo will pay, are astounding and newsworthy on their own.

Personally, I am more intrigued by the information Acuity Forensics is finding in the follow-up stories coming out this week. It is the information in these stories that could spell real trouble for Wells Fargo. The threat they are facing isn’t the loss of the employees or the loss of money they will pay in fines. The real trouble facing Wells Fargo is what I call a “culture crisis”.

Last week we found this article, stating that Wells Fargo executive Carrie Tolstedt, in charge of the very unit deeply involved in the fraud, will retire early and walk away with more than $95 million in stock.

Wells Fargo has gone so far as to put their CEO John Stumpf on the “campaign trail” with major news media. His message? The fraud was the “responsibility of low level employees.”

The pieces of this puzzle tell an interesting story. A widespread, systemic fraud, involving thousands of employees, and millions of unauthorized accounts, opened for the sole purpose of meeting sales and commission goals. The walking away, with nearly $100 million, by the executive in charge of the unit perpetrating the fraud. And the CEO shaming the position of the very employees who lined his pockets, because surely, these frauds equated to profits. And what do profits generally equate to? Higher pay and higher stock prices.

In our experience, it is not typical for widespread, systemic fraud to be perpetrated in a vacuum or unbeknownst to management. Simply put, 5,300 employees don’t participate in a fraud unless it is known, out in the open, and accepted practice.

And where do 5,300 employees opening more than 2 million accounts understand accepted practice? From the top. From the CEO, to the Executives, to the Managers.

If you’re reading this, you’ve been an employee, a manager, an owner somewhere in your lifetime. In each of those organizations, how much power did the low-level employees have? How much decision-making authority?


Why do 5,300 otherwise honest, hard-working employees participate in a fraud in the first place? Typically, it starts with Pressure. Pressure to perform, meet sales goals, earn commissions. But, pressure goes deeper than monetary pressure.

Pressure includes the pressure to be included in a group of co-workers and not be considered an “outsider”. Pressure includes the pressure to keep one’s job and pay one’s rent and keep one’s medical benefits. Pressure includes the prestige of having a great job at a “great bank” and pressure includes avoiding the stigma of suffering a job loss.

It is my experience that this kind of fraud could not have happened unless Wells Fargo’s management sent the message that money and numbers were more important than anything. The pressure came from the top and trickled down.

Wells Fargo then sent another message. A message to its high-level executives.

It’s okay. You can oversee and facilitate one of the largest and most-systemic frauds in banking history, and not only keep your job, you can walk away on your own terms with an obscene amount of stock options.

When you make crimes okay, when you make the consequences of overseeing and having knowledge about significant frauds equivalent to winning the lottery, there will be a trickle-down effect. More frauds will occur. More harm will be done. And when caught, what will those perpetrators say? Nothing. They won’t need to. They need only to point to Ms. Tolstedt and ask for the same deal she received.

One only need to look at Mark Whitacre, otherwise known as “The Informant” to understand the importance of sanctions when fraud is uncovered. He knew that a former C-suite executive had stolen millions from the organization and when caught? That executive walked away with stock options, a company car, and little more than a pink slip. In several interviews, Mr. Whitacre figured that the worst that could happen to him would be the same deal that the former executive had received.

As we place the pieces of the Wells Fargo puzzle into their proper places, then the picture becomes clear. The picture reveals a set of arrows, pointing in the direction of the C-suite and Mr. Stumpf, himself. The place where messages of “more profits” and “more money” and “it wasn’t me” come from.

With a message such as that, a forensic accountant like me can’t help but be pessimistic about Wells Fargo’s ability to change its corporate culture and find its way back to ethical, responsible, and accountable practices.

Are the investors and their representatives on the Wells Fargo Board of Directors going to stay silent? Accept the message as is?

Or, are they going to take the courageous step to change the message and reset the bank’s ethical tone?

How about starting with “I’m sorry” followed by “We were wrong”?

Over time, with actions that include ethical messaging, integrity in account management, and follow through when employees are charged with unethical or illegal behavior, Wells Fargo’s culture will thrive, and the puzzle picture will instead reveal a bright future.

Monday, October 19, 2015

Expense Reimbursement Schemes

Expense reimbursements. In our world, we call it "low hanging fruit." In other words, if we are asked to look into allegations of fraud, we always ask for the suspect's expense reimbursements, too. It is not unusual to find additional fraud in plain sight on employee expense reimbursement forms.

I have seen several million-dollar expense reimbursement schemes (yes, you read that correctly) involving high level executives. These individuals had W-2 forms that would be the envy of most, yet they expensed everything from their daily Egg McMuffins, to their Thanksgiving dinner at the country club, to their personal trips to Hawaii. I have seen priests expense personal items through a church's coffers, and I have seen low-level employees alter receipts. Expense reimbursements are easily perpetrated by all members of an organization.

All for the purpose of securing additional cash.

Recently, a client of mine found that their second in command (and likely next CEO) had forged the CEO's signature on his expense reimbursements. They thought it was an error in judgment, for the purpose of getting his reimbursement through the system more quickly.

They thought wrong.

Within a few hours, using the employee's reimbursement forms, his calendar, and conducting a key interview, we discovered a fraud scheme that resulted in losses of $1,450,000 to our client. That executive traded in his extraordinary and comfortable lifestyle for a jumpsuit and a prisoner number in a federal penitentiary in Washington.

Expense reimbursements come in varying forms, including:
  • Fictitious Reimbursements: Employee remits reimbursement for expenses that never occurred.
  • Mischaracterized Reimbursements: Employee remits reimbursement for personal expenses as if they are a business expense (e.g. a receipt for a pink toy remitted as a meal expense).
  • Altered Reimbursements: Employee alters a receipt for a legitimate business expense (e.g. writing in a larger tip amount on a meal expense or altering a cab fare).
  • Duplicate Reimbursements: Employee remits a receipt for the same expenditure more than once or returns the item for cash after already reimbursed for the expense.
Expense reimbursements (including P-Card purchases) should be considered as necessary for higher-level scrutiny in all organizations. This includes at least one additional review and approval before the expenses are paid, spot checking "audits" of employee expense reimbursement forms, and a robust and enforced policy that includes the remittance of timely and original receipts and copies of credit card statements.

Proper oversight of expense reimbursements is as critical as internal controls over incoming cash and outgoing disbursements. And remember, when employees know that significant scrutiny is applied to their reimbursements, they will be less likely to manipulate them.

  • Require original receipts be presented for all expenses.
  • Require original signatures on all reimbursement forms.
  • Ensure meal expenses include names of participants and business purpose of meal.
  • Compare an employee's calendar with purported business travel.
  • Use simple online searches to verify prices match remitted receipts.
  • Use analytics to monitor employee reimbursements (e.g. total paid to employees over time, budget to actual reports, etc.)
  • Request copies of credit card statements be remitted along with receipts. 

Friday, March 6, 2015

Good Guys vs. Bad Guys

This article was originally published in Fraud Magazine - March/April 2015 issue.

“I love getting bad guys — I think that would be so fun to do with you!said the prospective job applicant sitting across from me. I’d just asked her why she would want to come to work for my firm.
I considered my next move carefully. “Tell me how you would feel about working for one of those bad guys,” I said. The furrowed brow and crook of her neck indicated that she was perplexed. I obliged her. “Well, in this office we work for white-collar criminals, tax evaders and people sometimes perceived as the ‘bad guys.’ So how would you feel about that?” I asked. I then sat back to observe what her verbal and nonverbal cues would be (I practice my interviewing skills any chance I get, don’t you?). She was suddenly parched, swallowed multiple times and took a deep breath before answering, “I didn’t think you would ever do such a thing. I mean, I guess, well … I always thought of you as someone who worked for the good guys.”
I didn’t hire the applicant.
I had a similar conversation with a fraud examiner over lunch during a recent speaking engagement. She clearly was frustrated by her clients who chose not to prosecute their alleged fraudsters. She told the group at our table about a couple of prosecutions that had resulted in the alleged fraudster “only having to do community service and a small amount of restitution.” She was physically and emotionally upset about these outcomes. My curiosity got the better of me and I asked, “Why does this bother you so much?” She explained that she had put so much work into these cases and it wasn’t “fair” or “right” that these people avoided more formal or significant punishment for their alleged crimes.
I gently reminded her that it wasn’t our job to exact punishment. Most importantly, our own ACFE Code of Professional Ethics expressly prohibits us from opining on a person’s guilt or innocence. She acknowledged this, but I pressed further. How many defense cases have you worked? The reaction from her was similar to my job applicant. “None!” she said. “I don’t see how I could ever defend someone who had committed a fraud!”
Encounters such as these aren’t uncommon. Admittedly, they’re delicate conversations — often ones that those of us in private practice discuss in private.
ACFE training is unlike any other. If you want to be a fraud examiner, there’s no better place to get your education, training and credential (and I don’t say this just because I’m an ACFE faculty member and member of the Board of Regents). However, the training applies to both sides. In my own private practice, there’s plenty of room and good reason to work defense cases. In fact, the work is similar no matter what side you’re working on.
If you’re considering how or whether to take on defense cases, read on.

Consider your ability to be impartial
Discovering “why” you’re doing your job is important (it certainly makes going to work every day easier). A predisposition to “get” a bad guy can be a detriment in a case and can place blinders on a fraud examiner who might see questionable documentation as a crime — when in fact it’s only red flags of fraud. Zealotry could lead to unnecessary work, false accusations, inaccurate employment-related decisions and potential liability, which can then harm the client or others.    
Consider a recent case of mine. A woman (I’ll call her Betty) had worked 30 years as the office manager for my client’s medical practice. A new physician-partner in the group was trying to get up to speed, so he asked Betty for bank records, financial statements and other standard documents. She refused. An office-sized firestorm ensued. Doctors took sides, and accusations flew among staff members even though they didn’t yet have any real information.
I walked into the perfect climate for possible fraud: A long-term trusted office manager who never took vacations and who was now refusing to provide simple financial documents.
My interviews discovered that Betty was the sole person responsible for billing insurance companies and patients, collecting funds and taking them to the bank, writing checks, reconciling the bank account, processing payroll and managing the financials. Sounds familiar? Surely I would find fraud, right?
We scoured the bank statements, canceled checks and payroll records. We didn’t find any fraudulent disbursement schemes. We searched the billing system and analyzed customer credits. Betty had supported them with appropriate documentation. We traced funds to the bank with no exceptions. After all that, we still didn’t find fraud.
We recommended stopping the investigation, but the medical practice asked us to keep going back further. More records, more expense but still no fraud.
When I finally talked to Betty, she said she had “hurt feelings” when the new physician began asking questions. Why wouldn’t he trust her when she’d worked there for so long and gave all of herself to her job? However, I gently reminded Betty that her sole custody of these funds meant that she was unsafe in her job, and any missing money would point to her. Betty’s demeanor changed immediately, and she was suddenly ready to start offloading some of her responsibilities.
We didn’t take this job as a true defense engagement, but our work resulted in effectively clearing someone who was “on the defense” against potential criminal allegations.

Fraud examiner’s role
As fraud examiners, our roles are the same in plaintiffs’ or defendants’ cases: We’re fact finders. We conduct interviews, examine documents, identify evidence, prepare reports, and, yes, even work on obtaining confessions.
I’ll never forget the first time a defense attorney called me. My firm was new and I, too, thought my role was to go after “the bad guys.” A call from a new attorney, Steve, changed all of that. His client was accused of taking nearly $10 million from a publicly traded company. She was looking at significant jail time. I wrongly assumed he was calling to ask me to “defend her” (i.e. find some angle or story to get the charges dropped). I couldn’t have been more wrong.
“Ms. Couch, I need help here. The government is telling me she’s taken millions. My client is telling me she didn’t, and it can all be explained. I don’t know who to believe.”
Admittedly, the government’s case was terrible. The feds’ work-up of the case was cumbersome and confusing. The CPA firm that’d originally handled the case hadn’t prepared a written report. I accepted the case, and Steve’s client became my client.
I traced millions of dollars of the public company’s funds into our client’s account. I told Steve the facts — what had happened and how. I had no plausible explanation for these funds being in this account. Amazingly, I worked with our client (the defendant) to confess and admit to her wrongdoing. Steve then could negotiate a plea deal with the government. Our client went to prison for many years. And since then, the attorney has brought or referred countless cases to us .

Communicate your role
Some attorneys will want to pay you to testify to certain positions early in cases. Run away. Fast. Not only do I disengage from these matters, I refuse future calls from these people. Clients pay us for our expertise and our time. They don’t pay us for our opinions or for “prescribed” testimony.
Testimony is based on facts and work performed. You don’t need to worry if cases are for “plaintiffs” or “defendants” when you’re clear in your role and responsibilities and you’re able to communicate that role via your engagement letters and in meetings with your clients. You only need to be concerned that you have the resources to perform the work well.

For those of us in private practice, we also have a business reason to take on cases from “both sides.” Opposing counsel is going to immediately question your credentials and experience to see if you’re working for “our side” or the “other.” He’s going to try to infer a perception of bias. But he can’t do that if you have had a healthy balance of clients who are plaintiffs and defendants.
Working for the defense can help you construct better plaintiffs’ cases. You’ll better understand your work, the necessity for simpler and easily comprehended reports, and that all findings need to be documented with evidence.

The ‘why’ of my job
In the decade I’ve had the privilege of calling myself a Certified Fraud Examiner, I’ve discovered my “why”: I work hard for my clients — whether plaintiffs or defendants — who trust me to assist them through what can be the most difficult times in their lives and who thank me for support and expertise.
When we’re able to take complex and confusing information and turn it into clear and concise deliverables, then our clients are able to make educated decisions. When a client thanks you for doing that, you can’t receive a better compliment.