Chief Fraud Officer

A large paper company, (think Dunder Mifflin), whose primary revenue model is through franchising is in need of accounting assistance. So, in 2008 they take on a young good-looking female CPA as a temp. She quickly fits right in and excels at her function. Within a year or so she is offered the full-time position as the CFO. She is now head of the accounting department which includes a staff of four. Things continue to go well for the next five years, or so it seems…

 

In 2013 business becomes a bit tight, the owner is faced with the dilemma of laying off an employee or asking employees to take a pay cut. The employees pool together to share the burden so no one looses their job, including the CFO. Things eventually level out by 2014 and it seems the worst has passed.

 

The CFO continues to attend multiple CPA and CFO training events around the country, totaling multiple weeks per year on fully funded expense reimbursed company approved travel. Finally, one fateful day as the CFO is out for a week on a local AICPA conference, the company president casually inquires with a friend who is a CPA why he is not attending the local conference?

 

“There is no AICPA conference this week”, the friend replies.

 

The confused president goes back to do some research and begins to reconcile the dates of travel with supposed conferences. As he pulls the expense files, he sees the invoices for the conferences and associated back up, everything appears to look OK. As he digs deeper, searching the internet, he finds multiple inconsistencies with event locations and dates and decides to assign a trusted employee in the accounting department, Jane, to follow up with the listed vendors. Jane now continues to carry on her regular duties while secretly researching the actions of her own direct supervisor. She discovers that the CFO had not been registered for attendance at any of the events or conferences for which the company supposedly paid.

 

Jane then begins to put the pieces together in her own mind. As she looked back over the past two years, it had been some time long ago when her duties to reconcile the bank accounts were stripped from her by the CFO. As time went on the accounts were changed and Jane lost access to the accounts all together. The CFO had become increasingly short with the staff in the accounting department to the point the staff was walking on egg shells. They had all felt that something was not quite right but knew the CFO had the trust of the owner so they dare not say anything so as to put their jobs in jeopardy. There was no mechanism by which to report anonymously or training provided to know when it is appropriate to do so.

 

Jane ended up discovering approximately $60,000 in expense fraud which had been used to fund elaborate vacations and living expenses for the CFO. But they string revealed so much more. Jane found a $500 payment to the CFO’s personal credit card, but there was no reason that should have happened. As she looked deeper and pulled the bank statements, she noticed the statements kept on site differed from copies she had received from the bank. Multiple line items had been photo shopped to have different transaction descriptions than what was on the bank provided statements. She identified an additional $80,000 in payments to the CFO’s personal credit card concealed in the records as tax payments, rental payments and a host of other business-related expenses.

 

I came on board soon after and it only got worse. Through the diligent efforts of Jane, a new outside accountant, and myself, we discovered the true source of the company’s financial troubles. The payments sent to franchisees were being manipulated. There were franchises who did not get regular work being paid for work that was not done. Conversely there was manufactured debt holders being strategically written off at the CFO’s guidance for tax purposes. Upon looking into where the misdirected franchisee money was being wired to, it was the CFO’s shell company. In total we identified approximately $1,100,000 of cash theft in a five-year period. The amount started small the first year but nearly doubled in size each year thereafter.

 

The CFO was driving a Maserati, taking friends and family on lavish vacations, and generally living the good life on the backs of her co workers who had to take a pay cut. And for the record, she did reduce her theft considerably after the layoff talk from about $30k a month to only $10k, but that was short lived.

 

She is in jail now, and will remain there for years to come. The take away is to have policies in place to enforce internal controls, have employee training on what to look for and when to report, have an anonymous mechanism by which to allow those employees to report, and you as an owner have to take some role in reviewing bank statements directly from the source on a regular basis. This type of fraud only occurs when the perpetrator knows no one is looking.