Fraud Lurks Case Study: Time for Another Raise

Fraud Lurks is a series of case studies of frauds/defalcations which I personally investigated.  This month’s case study is entitled “Time for Another Raise.” Much like last month’s, the plan is simple – as most successful frauds are.

Before Going Further, Remember Our Three Items:

1. A well-designed, well-executed fraud is a thing of beauty in a perverse sense. Properly executed, a fraud such as this one can go on for years without detection provided the fraudster doesn’t get too greedy, as they often do.
2. The point of describing the case is not to poke fun at the targeted company, but rather to introspectively ask “Can this, or something similar, happen to my company?”
3. A common thread of identified frauds is someone saying, “I never would have suspected him/her.” This has to be true – you’re watching the ones you might suspect!

Time for Another Raise

Perpetrator:

• Female
• Late 30s
• 3 year employee

Position:

Internal Accountant

Described as:

• Quiet
• Detailed/organized
• Kept to herself; a bit of a loner
• Nervous

Scheme:

The company utilized an outside payroll company.  The perpetrator called in the payroll and the reports, along with any checks not electronically deposited were returned to her.  The control system called for the office manager to review the payroll and distribute the checks but, since she was very busy, this task was often delegated back to the internal accountant perpetrator.  Later, the company required direct deposit and, since there were no “live” checks, the office manager rarely looked at the payroll.  Perpetrator was a degreed professional and was treated as an exempt employee, not subject to overtime compensation.  She initiated the scheme by changing that fact in the payroll system and reported overtime hours for which she was paid.  Her plan was to say this was an “error” if identified but it never was.  Later, needing additional short-term funds, she paid herself for vacation weeks not taken (they were, but never in a payroll period) and unauthorized bonuses.

What Went Wrong?

• Established internal controls were voluntarily overridden by the office manager
• Overreliance on the outside payroll company
• Lack of management involvement in monitoring control procedures
• No review of W-2s. (editor note: this is such a simple, easy to perform control feature, I cannot believe how many companies do not utilize this control)

How Was It Detected?

An employee noticed several instances where she or someone else would walk by the perpetrator while she was working on payroll. The perpetrator became very nervous and defensive. After numerous instances, she advised the office manager who had observed similar behavior but had assumed it was the internal accountant being confidential with payroll information.   The office manager investigated the issue and discovered the defalcation.

The defalcation was detected by an employee tip.

After you’re done smiling and shaking your head consider if something like this can occur in your company.  Do you encourage your employees to report suspicious behavior?  If not, why not? Make reporting suspicious behavior part of your employee handbook.

@2021