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A Peek Inside a Forensic Fraud Investigation

As part of a conspiracy to profit from phony expense reports, a company's CEO relieved its honest CFO of his responsibilities for overseeing reimbursements.
Caroline McDonald, CFO.com | US
August 13, 2012

When Chris Giovino began investigating a U.S. manufacturer, the company knew funds had been embezzled but not how much or who was involved. But during the process, Giovino discovered a systematic fraud, totaling more than $3 million, that was perpetrated by two rather key employees: the chief executive officer and the head of human resources.

The CEO had set up a scheme that involved removing the company's CFO from its expense-reporting and reimbursement processes, says Giovino, a partner with forensic accounting firm Dempsey Partners. He then assigned oversight of the company's credit cards to the HR leader, and both parties set about charging the company for personal expenses. (CFO learned of the case from Giovino, who spoke on condition that the identity of the company not be divulged in this article.)

The responsibilities were taken away from the CFO because he "always demanded proper documentation," says Giovino, a former official with the U.S. Drug Enforcement Agency. Ultimately it was the CFO who discovered the discrepancies after the board laid off the HR leader during a downsizing.

After being hired by the company, Giovino's team conducted 28 interviews in two weeks and accumulated bank statements, credit-card statements, payroll records, and employee records. The investigators concluded that the two high-ranking employees alone committed the theft over a span of three to five years.

The CEO lost control of the situation when the board fired the HR leader, it was discovered. Once his accomplice was gone, credit-card statements began to pile up in the reception area. Eventually they were sent to the CFO's department, which discovered the fraudulent charges as well as credit cards the company didn't know it had. "The CEO had directed the company's overseas entities to acquire credit cards for his travel use, and the bills for those were sent to HR," Giovino explains. The HR leader spent company funds on motorcycles and jewelry, among other items.

Giovino adds that it is common for one person acting alone or as few as two conspirators to steal from a company, but such crimes are typically perpetrated by finance workers. Usually there are other people who unwittingly help out, and in this case there were five or six.

The company was insured against employee theft and had assembled a fraud-risk team that included a risk manager and one representative each from internal audit, corporate security, the general counsel's office, and HR, Giovino notes. The company's team either investigated a fraud and its recovery aspects internally or retained outside counsel or forensic accountants.

But as is often the case, the team was inexperienced in dealing with fraud and made the common mistake of sending the insurance carrier a completed proof-of-loss form without a sufficiently detailed narrative or documentation. That can delay an investigation from beginning as the carrier waits for the needed information. The carrier finally paid the claim more than a year later.

The insurance settlement was for more than $1 million, and the company also had coverage that allowed it to pay about half of the professional fees incurred. "Many don't know that kind of coverage exists," Giovino observes. In fact, organizations that are most likely to suffer a fraud typically have the least amount of coverage and almost never have fee coverage.

Maureen Richmond, senior vice president with insurance brokerage Aon Financial Service Group, sees that her clients are insured for investigative costs. Underwriters will add an endorsement to the policy providing funds, generally $100,000 to $250,000, to pay for investigations the company is required to perform in such cases, she says.

Richmond adds that although theft and embezzlement are nothing new, "We've seen an uptick in the number of claims reported. Some people may be encouraged to steal when the economy shrinks or companies close. We are seeing a high frequency of losses, and I think it parallels the bad economy."

Meanwhile, the CEO and the HR leader later received prison sentences of seven years and four years, respectively. Financial constraints arising from the theft caused 43 employees to lose their jobs. The CEO also was ordered to pay restitution of $1.7 million and back taxes, interest, and penalties totaling $1.37 million. And the two co-conspirators jointly had to pay $450,000 to cover the company's legal fees and other costs it incurred as a result of the crimes.

Even though organizations should be thinking of "when" rather than "if" an internal fraud will happen, many are unprepared, Giovino says. "There are patterns. It's not atypical for people in high levels to be caught" and for the company to later find out that the same people committed similar crimes elsewhere. In fact, he says, the CEO of the midsize manufacturing firm had been accused of an expense-reimbursement fraud years before at a prior company, but he was allowed to resign and there was no criminal record.

It should be rote for companies to conduct background and credit checks on job candidates, particularly executives, before hiring them. But when Giovino did so after the fact on the CEO, he found "someone with a very dicey credit history" that included a number of arrests for financial-related crimes, check-kiting, and DUIs.


A common mistake that companies make is firing a suspected fraudster too soon, which can make it harder to find out the extent of the crime or whether other parties are involved. "The immediate reaction of terminating an employee is worthless," Giovino says. "It's better to try gaining information from that person while he or she is still an employee."

Giovino also recommends consulting law enforcement before terminating an employee. "The police may want the employer to get a signed statement detailing his or her involvement while the thief is still an employee," he says.

 




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