Fifty Shades of Fraud

By Ben P. Lee, CPA, CFE, CFF, CGMA, CGFM, CGFO Managing Member, Coastal CPAs, LLC

Within my 42 years of service, I have been involved with many cases involving fraudulent activity. In this two-part series on Fraud, I will share with you some of my experiences and explain how to deter fraud in all types of organizations. Within almost all the fraud cases with which I have been involved, ironically there has also been some form of intimate activity by the fraudster who is committing the fraudulent activity. Hence, the title “Fifty Shades of Fraud.”

CASE 1: QuickBooks users beware!

This first case deals with an Office Manager for a group of professionals. This Office Manager was the only person in the corporation in charge of the accounting with no oversight of his actions and accounting duties. Mr. Deception wrote all the checks, made deposits, recorded all transactions in QuickBooks, received the bank statement, reconciled the bank statement, and prepared monthly financial reports to the corporate board. Mr. Deception also had a corporate credit card in his name. In my initial review of the credit card statements I noticed several hotel charges for one-night stays for hotels directly across the street from the office. These were quite numerous. I also noticed many trips to Las Vegas (hotel and airline charges) in his name and the names of other individuals.

The next phase of the investigation was interviews. This corporation hired a lot of young college girls on a part-time basis for various administrative duties. For the first interview, I happened to select the receptionist first, only because she happened to be immediately available. In the interview I inquired about the hotel charges and credit card charges. The response for the hotel charges was “this is where he takes the girls.” Without expanding on the details, suffice it to say that this first interview resulted in an enormous amount of evidence. Mr. Deception was using the stolen funds to induce a lot of the young girls into intimate favors by cash payments, purchase of cars, loans, and other gifts. The Las Vegas trips were gambling trips for Mr. Deception, his pastor, their wives, and other friends. He would come back to the office and boast about the trips and how his pastor had gotten hooked on the gambling. Other funds were used to remodel his home, build a swimming pool, etc.

Mr. Deception was getting an extra “non-taxable” income of approximately $250,000 per year for 10 years. How did he do this?

QuickBooks has inherent issues of Fraud Risk. Any transaction can be changed at any time and in any time period. Most accounting software does not allow a change in a transaction after it is posted to the general ledger detail. An adjusting entry has to be made to reflect any changes, which produces an “audit trail.”

Mr. Deception was writing checks to himself, forging the payor signatures, and cashing those checks. Copies of the checks were included with the bank statements, which were a laser printed copy. He opened and controlled the bank statements and prepared reconciliations. He would cut out the checks to himself, paste over his name as payee with a name of a proper vendor and paste a copy of the actual signature over his forged signature and then tape the check back in place on the page of cancelled checks. He would then photocopy the bank statement to include in the monthly package to the board. In QuickBooks he would change the payee to a proper vendor. He presented a package to the board every month that included a financial statement, general ledger, and copy of the bank reconciliation and bank statement, all manipulated to agree. A masterful deception!

The credit card fraud was just a complete lack of oversight and trust without verification of trust. The professionals thought he was buying things for the office and never asked to look at his credit card statement. The credit card account from the bank included a credit card for all the professionals and Mr. Deception and was paid with one check for all the cards.

Stay tuned! Next month’s article will deal with investigations I’ve done of constitutional officers in County governments and how an organization can have a Fraud Prevention Program to deter fraud.

Coastal CPAs, LLC is a local full-service accounting firm in the Golden Isles. One of the many services of the firm is Fraud and Forensic Investigations, Fraud Prevention consulting and litigation support. Ben Lee is a Certified Fraud Examiner and Certified in Financial Forensics.