Fraud at the top: a prominent executive, aided by several employees, embezzles US $500,000 over a 10-year period

Internal Auditor, April, 2007 by Gordon Heslop

AFTER 27 YEARS OF EMPLOYMENT WITH Scout's, a large retailer, Tom Carter had risen through the ranks to vice chairman--the second highest position in the company--and was also a board member. He was a protege of the company's late founder. Carter had witnessed firsthand the massive growth of the company. His vast experience and long tenure made him a larger-than-life figure within the organization.

During his final year of employment, Carter's salary was more than US $3 million. He also owned US $20 million in company stock, plus options, and was eligible for a substantial retirement income. His impressive career at Scout's ended when he retired as vice chairman and was forced to resign from the board after he was accused of embezzling US $500,000.

Upon investigation, the company determined that Carter's theft scheme had been going on for about 10 years, and that he had been aided by Robert Hunt, Scout's former director of operations development. Over an eight-year period, Hunt had manipulated employee travel reimbursements and vendor invoices to embezzle cash, gift cards, and products for Carter's personal benefit. At Carter's command, Hunt altered or prepared fraudulent vendor invoices for Carter's personal expenses to show that they were incurred by the company for business purposes. These false invoices were then run through Scout's accounting system, causing the company to issue checks to vendors or creditors as payment for the vice chairman's personal receipt of money, goods, and services. Hunt claimed he followed Carter's orders because he was afraid that otherwise he would be fired.

Carter also invented what he called the "union project" as a cover to submit additional fraudulent invoices. He claimed the bills were for anti-union activities, including payments to union staffers who informed him of any pro-union workers in company stores. Because of the sensitive nature of such activities, he told Hunt, the fake invoices were simply a roundabout way of reimbursing him for such payments.

For his own record-keeping purposes, Hunt created a handwritten ledger for the union project to ensure that the reimbursements matched the amounts Carter claimed. One item shown in the ledger was a US $1,359.50 payment to a boot manufacturer. Upon inquiry, the manufacturer's owner stated that Terry Price, Scout's vice president of operations, asked him to make a custom pair of hornback alligator skin boots in Carter's size. The boots were shipped to Price's home and billed to Carter, care of Price. To get Scout's to foot the bill, Carter directed a company employee to create a fake invoice from the boot company listing five boot samples sent to Scout's at US $271.90 each--a total of US $1,359.50. However, despite the fact that Scout's often bought expensive products to create cheaper alternatives, it was discovered that no samples were ever made by the boot company for the retailer. Price was fired three months before the fraud was discovered for unrelated violations of company policy.

Another example of Carter's theft involved a fax that was received by a company employee from an equipment maker, stating they were pleased to accommodate "your executive's request" for a steel dog pen at the dealer price of US $2,589.64. Although the equipment company didn't normally perform installations, a representative installed the dog pen at Carter's ranch in the hope of getting its products into Scout's stores. It never did. To pay the manufacturer for this dog pen, a Scout's employee created a fake invoice for the amount of the purchase and listed the reason for the payment as hotel, dining, and mileage expenses.

Semi-annual payments of US $6,500 on Carter's hunting lease contract provided more examples of creative accounting. After Carter received the bills, an employee created invoices with the hunting ranch's logo, addressed to Scout's. Different explanations were used to justify payment, such as the ranch being used for winners of contests involving managers in the stores' sporting goods departments, for meetings, and for a summer hunt by department managers and contest winners.

Eventually Hunt was promoted, and Jared Brown, who had started working for Scout's 12 years earlier as a cashier, took his place. Carter requested 51 gift cards at US $100 each from Brown for presentation to 51 managers at a company meeting. Brown requested that the presentation be placed on the meeting agenda but Carter refused, stating that last year no cards were given.

These gift cards eventually led to the discovery of fraud. Carter purchased contact lenses using one of the cards, and a sales clerk called the head office to inquire about the gift card program. An employee at the head office noticed that the cards had been issued as a reward for top performing managers and therefore wondered why Carter would have one. She reported her observation to an internal investigation team, which looked at Carter's spending, focusing on the operations development department, now led by Brown.