Thanks to tuition paid by her employer, Mary
Jane pursued an accounting degree and learned how to embezzle more than
$400,000 over six years. The company discovered her fraud one year after she
received her degree.
By Greg Wright, MBA, CFE, CFP, CLU, ChFC
Mary
Jane looked like most embezzlers: unremarkable. She was 40 years old;
medium-length brown hair; short, unpolished nails; drab clothing; and, a muffin
top. She was a faithful 16-year bookkeeper at ABC Manufacturing — a small,
family-owned business In Indiana. She
and Tom, married since she was 19, had three children.
However,
Mary Jane was anything but ordinary. Actually, she was extraordinary because
the company discovered that in more than six years she had casually stolen more
than $400,000 and had altered checks and credit card statements to conceal her embezzlement.
Ironically, her employer unwittingly paid her to rob them blind — it reimbursed
her tuition for her college education in accounting and even gave her paid time
off to attend classes.
Her
asset diversion fraud benefited from an overly complex accounting system, a
lack of separation of duties, and inadequate management oversight — classic
problems of a family company. Here’s the story of Mary Jane, an examination of
her fraud, and how a small business painfully learned anti-fraud principles
after it trusted a “normal” employee.
The embezzler in the next cubicle
The average
value of property stolen per strong-arm robbery is $1,244 (the FBI’s “Crime in
the United States,” http://tinyurl.com/74zm2po ). However, the median loss from an occupational
fraud case is $140,000 (ACFE’s “Report to the Nations on Occupational Fraud and
Abuse: 2012 Global Fraud Study,” www.ACFE.com/RTTN ). The scary street criminal that ripped you off likely has a police
record. But the person who embezzles from your company usually is someone you
see every day and has never been arrested. It’s someone who has a spouse and
kids, a college degree, appears proficient and always seems on top of his or
her game. The worst part is it’s usually one of your most trusted long-term
employees who’s betrayed your trust.
After the
company discovered Mary Jane’s fraud, a team of three Certified Fraud Examiners
interviewed witnesses, collected key documents, assisted the business in filing
for and collecting its crime insurance coverage, provided information to the
police and prosecutor, and presented several weeks of ongoing accounting and
financial management remediation to the business.
(The company
gave its permission to write this article if I protected its privacy. I’ve
changed the names of the business and current and past employees. The use of the name “Mary Jane” in this
article was chosen because another Mary Jane - Mary Jane Allen - was the first
embezzler I identified in 1981 while developing a client’s business financial
plan.)
Red flags flying
Red
flags often are hidden in “silos” — managers and employees in separate
departments might detect suspicious activities, but if they don’t communicate with
each other, then a fuller picture of possible fraud might not emerge. That
probably happened at ABC Manufacturing.
Here
are the circumstances and red flags that led up to the discovery of this
embezzlement. During recent tough economic times, the firm took steps to keep itself
financially afloat, which included reducing staff and hours of the remaining
employees. Everyone had to do more with less. Also, the business owner’s wife,
let’s call her Sarah, went back to work in the family business to be in charge
of all administration.
Sarah first asked Mary Jane to
decipher the Byzantine accounting system, but Mary Jane was no help. Many
employees observed Mary Jane’s obstinance.
The
company IT tech said, ”Looking back now, I think Mary Jane was hiding her
wrongdoing, and Sarah was a threat for finding it. Mary Jane had this attitude
that Sarah was snooping in things that didn’t concern her. ‘An owner snooping
in company affairs that didn’t concern her.’ What a joke.”
The plant manager said to me, “Mary
Jane did not let any of the office help do anything in the books when she was
gone.” The inside sales manager said, “Many
people had attitude problems with her.” The purchasing manager said, “She
didn’t want certain things done while she was away.”
Based on employee and owner interviews,
I found that Mary Jane was intelligent and a hard worker but also a complainer,
irritable, defensive, disgruntled and unwilling to share her duties. Later it
was found she was living beyond her means (a new car and swimming pool even
though her husband was disabled and unable to work), had family problems, and
was having an affair with a co-worker. All classic personal characteristics and
behavioral red flags that often point to business fraud. The probability of
fraud is heightened if a sufficient number of these attributes are combined
with opportunity and the capacity to rationalize fraudulent behavior.
Of course, if ABC Manufacturing had
looked for these red flags in their employees’ behavior and conducted a fraud
prevention inventory, it might have deterred some of Mary Jane’s damages.
Boss’ wife is tenacious
Mary
Jane wasn’t answering Sarah’s requests for financial information and
information about the accounting system. Sarah sensed that something was wrong.
She spoke with a former company accountant, now long retired; he suggested she
obtain some basic financial documents directly from the bank and credit card
vendor.
The company credit card invoices
provided by the bank indicated multiple charges to a cable TV company and
Western Union cash transactions. Cancelled petty cash checks provided by the
bank were thousands of dollars higher than identical check number copies and
information recorded in company cash disbursements files.
An attorney referred the company
owners to the private investigation agency for which I worked at that time. Our
job was to investigate the alleged embezzlement, interview key employees and
document the evidence.
Checks and credit cards
Two areas of asset
diversion were identified: check alteration and credit card fraud. Mary Jane
used the general ledger to try to conceal these frauds. She also altered and
cashed petty cash checks for amounts higher than the amounts indicated in the
company check register. Mary Jane used a company credit card to pay personal
expenses. She altered the credit card statements to exclude her personal
expenses and made general ledger entries to asset accounts and prepaid items to
further conceal the transactions and close the books.
Accounting system failure
The accounting
system’s insufficient separation of duties was a major deficiency. The use of
one company credit card number for multiple employees invited irregularities.
Mary Jane’s immediate supervisor had insufficient accounting experience and
training to provide adequate oversight.
Mary Jane
submits to confession-seeking interview
Often fraudsters don’t consciously
realize it; but, except for clinical psychopaths, they psychologically seek
release from the stress of ongoing frauds and often express feelings of
remorse. Sometimes their need to unload the guilt is larger than facing the
consequences of the crimes. A fraud examiner’s successfully profiling the
target, techniques and strategies will directly influence the probability of a
confession. There’s no substitute for interviewer training and experience. Establishing
rapport through pacing the subject, stories, suggestions, asking open
questions, discerning motives, etc. often may provide an environment in which
the subject does confess. That’s what happened one Monday morning in the spring
of 2011 when Mary Jane was interviewed.
She had no idea that we were
investigating her. There was less than a month between the time we began our
investigation and her one interview. The
interview narrative is the actual words spoken and were taken from its audio
tape.
Mary Jane was questioned about the
apparent difference between petty cash checks in the company files and
identically numbered cancelled checks furnished by the bank. Check No. 33921
was recorded as $296.48 in company records; however, according to a copy
obtained from the bank, the check amount was $3,296.48 — $3,000 more. Mary Jane
acknowledged the check was payable to her and that she endorsed the check.
After several false attempts during the interview, she realized that she couldn’t
successfully explain the $3,000 difference. She realized that she’d been
exposed. After a short break to allow her to regain her composure, the recorder
was turned back on. Following is the transcribed dialogue of that interview:
Investigator: “Let me ask you about the petty cash again. Did you divert the
cash for personal use?”
Mary Jane: “Yes.”
Investigator: “All right. How much? How
long’s it been going on?”
Mary Jane: “Probably three years.”
(Evidence indicated that it had been going on for
six years or more.)
(Evid Investigator: “All
right. Has anybody else been involved in it with you?”
Mary Jane: “No.”
Investigator: “Okay. … On the [company
credit] card … there are items that were on the charge card that you say are
part of [an asset] account and part of that included your mortgage payment.
What other kinds of charges … were you doing on [the company credit card]?”
Mary Jane: “Cell phone and electric
bill.”
(Evidence indicated that other personal expenses
were paid with the company credit card including cable TV bills of more than $200
per month.)
Investigator: “All right. On … [your
personal] payments from month-to-month — the bills paid online — did anybody
review the actual bill and sign off on that?”
Mary Jane: “No.”
Investigator: “Okay. And besides … the petty
cash stuff, did you create any vendors?”
Mary Jane: “No.”
Investigator: “Okay. So you haven’t been
making vendor payments — “
Mary Jane: “No.”
Investigator: “ — under anything that you
created? Do you know of … payments being made to any vendors that are in your
accounting system that are not actually vendors — “
Mary Jane: “No.”
(At Ma (At
Mary Jane’s request, a brief discussion was held off the record.)
Mary Jane: “I truly am [sorry] and
I know this is not an excuse, but … I didn’t have — I don’t want to make
excuses, so I guess I won’t even tell you that.”
Investigator: “Well, you’ve had financial
difficulties, haven’t you?”
Mary Jane: “My husband … he’s been
very sick. I didn’t know what to do. I know I could have probably went to [business
owner] like I did in the past and asked for help, and I am truly, truly sorry,
and I will do whatever it takes to make this right, and nobody else was
involved, it was all me. And it started, and I thought — like I’m sure
everybody thinks — it’s just a little bit [I’m taking], I can catch up, and
then it just kept up. I don’t know how else to explain it to you other than I
am truly, truly sorry.”
Affair with
an older man (who was also a manager)
Employees told us
that Mary Jane began having an affair with a
manager, Robert, from another department during the time she was embezzling. He
was 14 years her senior. Robert also had check-signing authority. Here is part
of that interview:
Investigator: “Okay. Who signed that [petty
cash] check?”
Mary Jane: “It was Robert
________.”
Investigator: “Okay. So why would Robert
sign a $2,349.50 check to petty cash?”
Mary Jane: “Well, probably because sometimes I
would give him the checks, he would sign extra checks that weren’t filled out.”
Investigator: “In advance?”
Mary Jane: “Uh-huh.”
Investigator: “Okay. Just signing blank checks in case
he wasn’t around, and you needed one?”
Mary Jane: “Yeah.”
(Mary Jane said Robert wasn’t
involved with her crimes. We later interviewed Robert who said that he didn’t
know that she was committing fraud. We didn’t have evidence to the contrary,
but he might have been withholding information.)
Mary Jane is shown the door
(The owner of ABC Manufacturing now joined the
interview.)
Company owner (reading from prepared script):
“You shall immediately leave the property of ABC Manufacturing
Incorporation and may not return to the property. You may not access or otherwise
use any computer programming or networking, including email accounts used by
ABC Manufacturing Incorporation or used in your employment with ABC
Manufacturing Incorporated. Your personal effects will be sent to you as soon
as reasonably possible.”
Mary Jane: “Okay.”
Investigator: “Okay. … We’ve got a fellow sitting in a room over
here. I’m going to ask him to step out. He’s going to walk you down to your
work space. If you have a purse down there, he’ll pick up your purse.
Everything else in your work space will be photographed, inventoried, and
what’s identified as personal will be packaged and sent to your house. We’re
not going to make a scene about this, we just ask that in accordance with what
was just read, that you not have any contact with any of the employees, and if
you would come back, you know, on the property or around any of the peoples’
homes or anything like that, it could be a criminal violation, and so we don’t
want you to inadvertently, you know, do something that would cause or create
that situation, and that’s why this statement was read that to you, so — okay?”
Mary Jane: “Okay.”
Investigator: “Go ahead.”
Mary Jane: “What’s going to happen to me?”
Investigator: “That won’t be up to me. We just put the information together and then
submit it to the company, and then they’ll make a determination on how they
want to proceed going forward. It’s possible that the police could be involved;
it’s also possible that … there could be a civil action. So — we’re talking
about a lot of money — I mean you know that better than I do. Okay? We’ll tell
the law enforcement officers that we have this interview and that you indicate
you want to make this right.“
Mary Jane: “I do, I do. I will do whatever.”
Investigator: “There’s no — there’s no promises.
I mean nobody can sit here and make you a promise.”
A
security guard hired for this occasion escorted Mary Jane out of the building. Mary Jane’s computer was secured, and our forensic computer technician mirrored its hard drive. We audited the specific accounts in
question and conducted tests of other accounts. We didn’t find irregularities
in the other accounts.
Analyzing Mary Jane’s behavior with fraud triangle
We can scrutinize
Mary Jane’s behavior with the three sides of Dr. Donald Cressey’s fraud triangle:
·
Financial pressure: The fraudster determines that a personal
financial problem can’t be solved through legitimate means; this tends to be
the initial crime motivator. In this case, the evidence points to Mary Jane’s
husband’s illness and her extramarital affair as the elements.
·
Opportunity: The fraudster sees the solution to her
financial problems with a minimum perceived risk of disclosure. Mary Jane was a
trained accountant intimately familiar with ABC Manufacturing’s overly complex
accounting systems. Internal controls were nonexistent. Her supervisor provided
little professional oversight; the company didn’t employ an outside accountant
or auditor.
·
Rationalization: Fraudsters see themselves as ordinary people
who are caught in a bad set of circumstances. In her confession testimony, Mary
Jane cites her husband’s illness as the reason for the asset diversion.
Remediation
and a bright future
One team member provided ABC
Manufacturing with part-time onsite remediation and acted as a temporary
accountant while bringing internal controls to the system. The team also
continues to cooperate and assist local law enforcement and the prosecutor’s
office. ABC Manufacturing is cash-flow positive and appears to have a bright
future.
We believe
that Mary Jane has sold her home, moved closer to her parents and is working as
a bookkeeper at another firm. We haven’t found any record of her arrest, and we
believe that she’s working out a financial settlement with ABC Manufacturing.
During
our interviews, a female employee told us, “I had lunch with Mary Jane almost
every day for years and had no idea that she was stealing from us.” Everybody
at ABC Manufacturing felt betrayed. However, morale has picked up and will stay
that way if the company can prevent anymore Mary Janes.
This article was originally published by
Fraud Magazine in its July/August 2013 issue.
The author retained the rights to the article. He thanks his team members, Jack E. Sandlin, CFE, and Jean R.
Patterson, CFE, CPA, for their contributions to this article.
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