When Reality Bites

October 7, 2015  •   Uncategorized  •   3 comments

The FBI recently reported that after six years on the run, their search for a Kentucky-based large bottling company’s controller ended in an arrest. The alleged embezzler who is suspected of stealing in excess of $8.7 million from his employer was confronted in 2009 by his bottling company employer about missing funds exceeding $8.7 million. Immediately afterwards, the alleged suspect disappeared leaving behind a wife (who later divorced him) and his daughter. The affidavit prepared by an FBI agent revealed information that [employer] funds were deposited into an unauthorized vendor account that was opened in 1998. The suspect allegedly wrote company checks to the fraudulent account, and then quickly transferred those deposits into his own bank account.

Just think, . . . nearly $9 million embezzled over a period of approximately eleven years!

Sure, this crime allegedly involved a division executive for a Midwestern-based employer. Top executive or not, you would think that all major organizations would—at the very least—have sufficient systems, internal controls and auditing staffs in place to quickly identify even the slightest sign of such misappropriations. Yet, apparently no one at that division or in corporate took notice! This employer was able to survive such a costly loss because of its huge size; many companies would never been able to rebound from such devastation.

As I have often said, no organization large or small is immune to internal fraud and embezzlement! So, what went wrong in the above situation? To answer this question, I am going to refer to Chapter 8 of my award-winning non-fiction book, Business Fraud: From Trust To Betrayal. This chapter focuses on actual embezzlement cases involving key management personnel.

One of my case examples had so much in common with the scenario described above that I decided to introduce you to Joe Davies: Joe Davies, a well-liked, hardworking man, had been with his employer for thirty-nine years, rising through the ranks to a managerial position of considerable responsibility. During a nine-year period, Joe defrauded his employer out of more than $6 million by running a continuing scheme that involved checks being written approving payments for fake invoices.

The above employer gave Joe Davies everything that he needed to commit internal fraud. Joe had the authority to:

compile his own “approved vendor list”

order and acknowledge receipt of product or services

approve invoices for payment and submit those invoices to accounts payable for check processing

Since the above case involved a key executive depositing checks into an unauthorized vendor account, let’s go to page 95 of Business Fraud: From Trust To Betrayal, and quote another snippet: “Approve Invoices for Payment: Joe Davies also had authority to approve invoices for payment and submit them to accounts payable for check processing. This practice, combined with his ability to act alone both in ordering and receiving products and services, almost guaranteed the fraud that occurred.

Again, no individual should be allowed to authorize any invoice for payment without second-party verification that the product or services was actually delivered.”

Anyone reading Joe’s case and examining the flaws that were identified would likely think that Joe’s employer was a small operation in which there were only a few employees, with very limited knowledge of the need for internal controls. Not true! Joe’s employer was an internationally known multibillion-dollar corporation that had a worldwide staff of hundreds of managers and many corporate and field security and audit personnel.

Joe’s case is no exception to the kinds of internal-fraud cases that are occurring throughout the United States. Hundreds, if not thousands, of business operations are engaged in risky practices primarily revolving around “multiple-tasking,” the single-most-critical red flag for risk of fraud in all types of organizations. (Accountants generally refer to multiple-tasking as a “failure to segregate duties”).Multiple-tasking gives individuals—as part of their job function— the ability to affect every stage of a particular work process.

So, I leave each of my blog’s readers who are involved in business-related ventures with this question: When confronted with a questionable or suspicious situation, will you recognize that the possibility of internal dishonesty exists, or will you choose to ignore it?