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

Two months before his resignation, Carter told Brown to approve about US $2,000 in expenses, which would soon be submitted by two people involved in the union project. Brown was unfamiliar with this project. When they were submitted, the expense reports consisted of two handwritten lists without any substantiating receipts. All meals were listed for US $5, and there were hundreds of dollars in mileage expenses. Sensing that something shady was occurring, Brown did not approve the reports, but rather held on to them. Later, Carter noted they had not been paid and instructed Brown to approve them. Instead, Brown reported the incident to a high-ranking officer at Scout's.

Brown, along with Hunt and Patsy Swift, an assistant who helped in the scheme, was terminated but no charges were filed against him. He claimed whistleblower status under the U.S. Sarbanes-Oxley Act of 2002. However, the company claimed that another employee had already reported the suspicious gift card activity, thereby nullifying Brown's immunity claim. Scout's also made a number of other claims against Brown, which ultimately rendered his whistleblower status irrelevant, including that he had personally approved five expense reports that were just as suspicious as those he finally reported; he submitted forged college transcripts to get his job; and he resubmitted the same expense reports for himself, thereby stealing money from the company. The company claimed he was reimbursed three times for the same car rental. Brown claimed an assistant submitted them and that he had three different assistants during that time.

When the fraud became public knowledge, Carter insisted the funds had been used for the union project. However, Scout's vehemently denied that any such project existed and denied anyone had ever been authorized to make such payments. It would have raised serious questions about the company's labor practices, and may have been illegal if it did exist. The company, and importantly the relevant union, said there was no evidence of any such payments. Furthermore, at trial no mention was made of this project. Carter pleaded guilty to five counts of wire fraud and one count of filing a false tax return. In so doing, he stated that he "accepted responsibility for serious personal mistakes in judgment." He was sentenced to 27 months of home confinement, five years' probation, and restitution of US $411,000. Of this amount, 75 percent went to Scout's and the rest went to the U.S. Internal Revenue Service. Hunt was also charged for his part in the scheme; he pleaded guilty to three counts of wire fraud and agreed to testify for the government in return for parole.

LESSONS LEARNED

As with many frauds, the scheme at Scout's was uncovered practically by accident, rather than by any audit procedures or internal controls designed to detect theft of corporate assets. However, internal auditors can help their organization avoid falling victim to this type of scheme by incorporating the following lessons into their fraud-fighting efforts: