Part-time job, full-time losses: a shoe salesman in an upscale store makes the most of a major lapse in controls

Internal Auditor, April, 2005 by Toby J.F. Bishop

JONAS WORKED AS A PART-time shoe salesman at a Midwestern U.S. department store for nearly five years before it was discovered that he was embezzling by ringing up fictitious returns. His shrewdly simple scheme allowed Jonas to exploit weaknesses in the department store's customer credit procedures and share the ill-gotten gains with his family and friends. Unfortunately, by the time his transgressions came to light, he had managed to pilfer hundreds of thousands of dollars from his unsuspecting employer.

Over time, the fraud grew to such proportions that detection became inevitable. At the victim store, records showed that the shoe department was losing money because it had an exceedingly high rate of returns. Upon noticing this anomaly, Ruston, an internal auditor for the department store chain, requested five months of sales data for the department from 10 sales terminals. Ruston divided the returns into categories of cash, proprietary credit cards (i.e., the department store's cards), and third-party credit cards such as Visa and MasterCard.

From these reports, he noticed a trend: Around the 28th of each month, certain credit card numbers would be credited for a return of approximately $300. There was never a corresponding sale recorded for the returns. And every month, each credit card number was credited only once. Thus, if Ruston had chosen to study only one month's data, the crime would not have been discovered.

Ruston eventually found that one part-time employee--Jonas--was crediting more than 200 credit cards belonging to 110 persons. Each week, Jonas credited $2,000 to $3,000 in returns to the cards belonging to his friends, neighbors, and relatives. Ruston conducted an investigation to determine Jonas's modus operandi. He found that, at the credit card holder's request, Jonas would merely punch in the refund credit at the cash register and then call the recipients to let them know the amount was credited to their account. Some accomplices even made their request for illicit funds by paging Jonas on his beeper and simply entering the credit card number to be credited into the paging system. Furthermore, Jonas would occasionally give the co-conspirator a $300 pair of shoes--clearly this was an upscale store--to go along with the $300 credit. That way, the accomplice could go to another store location, return the shoes, and get an additional $300. For his services, Jonas was paid up to 50 percent of the credit amount.

Ruston avoided the temptation to confront Jonas immediately. Instead, the internal auditor had video surveillance equipment installed throughout the shoe department and at the point-of-sale registers. The first day the equipment was up and running, Jonas was up and running too, crediting $5,000 that day. At one point, Jonas simply reached into the inside pocket of his expensive suit jacket, pulled out a list, and started ringing up credits. On another day, he gave one customer a $300 cash refund, a $300 credit refund, and a pair of $300 shoes.

Armed with more than just suspicions, Ruston turned the case over to the authorities, who conducted a surveillance of Jonas to reveal how he was making his contacts. Throughout the day, friends, relatives, and neighbors streamed in and out of the home that Jonas shared with his girlfriend. In essence, his 15-hour-a-week job demanded far more than 15 hours a week. Jonas apparently had started his "side" job as a lark and initially charged a fee of only 10 percent of the fictitious refund. As the scam and his renown grew, he increased his percentage to 25 percent, then 50 percent.

When finally confronted with the crime, Jonas had $5,000 in cash stuffed into his socks. In his coat pocket, he had a list of 15 third-party credit card numbers with dollar amounts to credit. Ruston later learned that $60,000 in refunds had been credited to those 15 numbers over the previous two years. Eventually, the internal auditor documented at least $150,000 in losses, but believes it was closer to $500,000, and wouldn't be surprised if the fraud exceeded $1 million. One customer alone was credited $30,000 in a single year. Jonas was fired and his case turned over to the local prosecutor. He pled guilty to theft, and he is currently awaiting sentencing.

After further review in other departments, it was discovered that another 50 to 60 employees were pulling off the same scam at losses of $10,000 to $30,000 each. Needless to say, the store quickly implemented new controls.

CONTROL WEAKNESSES

Unfortunately, fraud can never be eliminated entirely. But in this case, if the store had instituted and followed a few simple controls, Jonas never would have been able to pull off his schemes to such a degree, and he would have been caught much sooner.

For example, the department store did not require an original store receipt to accompany each customer refund. Therefore, Jonas was able to give credits to customers for items they had never purchased. If the store copy of every refund receipt was required to be attached to the original sales receipt, Jonas' fictitious refund scheme would have been much more difficult to accomplish.