This is the second in a series of case studies of frauds/defalcations which I personally investigated. This month’s case study is entitled “I Love eBay!” Similar to the first article, the plan is simple – as most successful frauds are.
Remember our three items related to defalcations:
- 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.
- 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?”
- 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!
I Love eBay
Perpetrator:
- Male
- Late 50s
- 25 year employee
Position– Purchasing Manager
Described as:
- Dedicated
- Reserved, detail-oriented
- Company man
- Trusted
Length of defalcation – 4 years (might have been longer, except some company records were purged)
Scheme:
The perpetrator was in charge of virtually all purchasing for this relatively large privately owned company. His work was always documented with several quotes and he took pride in obtaining the best products at the best prices. He inadvertently ordered too high a quantity of an office supply and hid the excess in a storage room. When no one noticed, he decided to support his gambling habit by purposely over-ordering goods used by the company (often partial orders were sent to a second location – his home) and selling the excess on websites such as eBay and Craigslist. Over time he refined the fraud and some goods were shipped directly to eBay customers by the suppliers. To make matters worse, the perpetrator committed the fraud while at work, using the company’s computer.
What went wrong?
- Poor internal controls over the purchasing function
- Overreliance on a long-time, seemingly dedicated employee
- Lack of management involvement in monitoring the purchasing function
How was it detected?
The perpetrator became greedy. The owner/check signer questioned the need for what he viewed as an excessively high volume of computer supplies. He threatened the controller with “going back to paper and pencils”. The controller investigated and discovered the fraud. Interestingly, the outside entities which served as “fences” were not particularly helpful in his investigation. The controller contends the scheme could have gone on forever if the perpetrator had kept the volume of purchases lower.
Can a similar scheme happen in your company? I would be surprised if many of you can honestly answer no. I suggest you take another look at your purchasing controls and make sure they are being followed. As always, if you would like some assistance designing or monitoring internal controls, contact me or your HW&Co account professional.
CPA, CGMA
Principal
olejarski@hwco.com
