The Alarming Facts — Multiple Tasking
American businesses are in a dire situation! As the economy fails to improve, troubled businesses are taking a number of drastic steps to survive. High on their expense-reduction hit list are cutbacks in personnel. Staff reductions generally mean that existing employees must take on additional responsibilities and workloads. Many times this means that internal controls are set aside, thus increasing opportunities for internal theft and fraud. For example, just last month, two former managers pleaded guilty to two totally unrelated financial embezzlement acts against each of their former employers. Here are a few brief facts:
Manager One: As a seven-year employee of a trucking deliveries broker, this individual, over a period of four years, allegedly stole $6 million through a scheme of creating fictitious companies and invoicing his employer for services never rendered. Prosecutors said this individual also created invoices by entering false information into [company’s] computer system. After entering a guilty plea, this individual was sentenced to 63 months in federal prison. As result of inadequate controls and monitoring, this manager was able to: 1) create his own fictitious companies without any second-party confirmation that those vendors were legitimate and approved to provide services to the organization; 2) He also had the ability to access the company’s internal computer system and input fake entries that fraudulently confirmed all invoiced services were rendered.
Manager Two: This former CPA and regional controller/corporate accounts payable manager of a national commercial construction company allegedly submitted fake invoices from legitimate [company] vendors. Once fraudulent checks were issued to BOTH himself and those business entities under his control, he would cash them at his personal bank. This CPA had been an employee of the corporation for seven years. He entered a guilty plea to two of the twenty counts filed against him. With sentencing scheduled for mid-May, this CPA faces up to 30 years in prison and a fine of up to $1 million on each count. In addition, he will be required to forfeit all the embezzled money or face forfeiture of his personal property.
This manager also was able to: 1) Create/submit fraudulent invoices without second-party confirmation of the actual delivery of goods; 2) While functioning as the manager of Accounts Payable, this trusted individual had the ability to exercise control and distribution over processed checks without adequate oversight.
Now let’s look at four facts regarding these two totally unrelated crimes:
1. Both managers were highly trusted by their employers;
2. Both had authority to approve invoices for payment and submit them for check processing;
3. Both had the ability to affect every stage of a particular work process; AND,
4. Both victimized their trusting employer.
Lessons Learned: Anytime an internal fraud, embezzlement, or theft is uncovered, much can be learned. Multiple tasking and extensive opportunities for fraud often go hand-in-hand. Keep in mind that whenever any employee has the ability to 1) initiate a transaction, 2) authorize the transaction, 3) confirm the validity of the transaction, 4) generate payment, and 5) maintain custody of the asset resulting from that transaction without an independent review and approval by an individual of higher rank, that employee has the ability to both carry out a significant and costly irregularity and conceal that wrongdoing for a substantial period with little chance of detection.
The Alarming Facts — Multiple Tasking
The above crimes could have been prevented or discovered within a very short period if management had avoided allowing a single employee to control every stage of a particular work process without adequate safeguards and oversight. Furthermore, anytime a company fails to assure adequate due diligence in the selection of a vendor, the company is at serious risk. Such inattention exposes the company not only to internal fraud but to vendor fraud, vendor incompetence, and improper behavior by vendor representatives.
Vigilance Is the Watchword
The job of management is not to catch an internal fraudster in the act. That is the job for auditors and investigators. The most important undertaking for managers in the fight against fraud is to be aware that this problem can occur within their operation, identify those areas most prone to internal fraud and theft, and then take whatever reasonable actions are necessary to prevent these crimes from happening in the first place.
Experience has taught me that when an employee is assigned to a high-risk position, that employee must be told that the operation has a series of internal controls that must be complied with and that management is required to regularly conduct random reviews or audits to ensure that company policies and procedures are in place and operating. it must be made clear in advance that the practice of management oversight and spot audits does not signal suspicion of the individual whose work is to be checked—but, rather, that such checks are part of the organization’s policies and procedures and that complete compliance is required.