Phantom vendors: using a fictitious payment scheme, one employee manages to fluff his nest with company funds

Internal Auditor, August, 2003 by Alan M. Langley

PAUL PIGEON WAS A MANAGER of training who had been with Canadian-based Example Corp. for more than 12 years. His primary duty was to identify the training requirements of the company and then, when needs dictated, arrange for outside consultants to aid in course development and implementation.

The Example Corp. had approximately 3,000 employees who reported through more than 45 different departments to five division heads. Each year, Pigeon would sit down with various managers throughout the organization and assess their training needs for the coming year. After reviewing the available company resources, Pigeon would determine the aggregate cost for all divisions of the company and develop, or update, one-, three-, and five-year plans for each area that were then approved by his supervisor, the director of human resources. Pigeon's bottom line would be consolidated into the human resources budget and then folded into the company's overall financial plan.

At month-end, the Example Corp.'s finance department produced division and department budget-versus-actual reports for expenses incurred during the course of the month and distributed them to the responsible departmental employee. In this case, the responsible employee was the director of human resources, who had to signify her approval by signing the report.

One day, the company's chief audit executive (CAE) was called to the corporation president's office where he was introduced to a Canadian law enforcement officer, Detective Sgt. Carruthers. The detective was there to brief the president on a suspected fraud recently discovered at one of the local banks.

Having run a routine editing program on its accounts to determine which appeared to be legitimate clearing accounts and which did not, the bank feared that one of the accounts might be in doubt and consequently turned it over to local law enforcement. Opened in the name of one of the consultants used for training at Example Corp., Dr. Jayson Fitzsimmons, the account showed regular deposits were made between $5,000 and $45,000. The same sum was then withdrawn within four days. After a thorough investigation, Carruthers had determined that the account signatory was in fact Paul Pigeon, who, it later turned out, had opened the account using false identification.

After leaving the president's office armed with this information, the CAE tasked one of his senior auditors with obtaining the last three years' statements from the account in question as well as a list of the last three years' deposits made to the account. He also asked her to collect all invoices from Fitzsimmons.

Once the information was gathered, the CAE's first observation was that the invoices were not identical as to form or design. Seven were neatly typed on printed stationary. The other 26 invoices were handwritten on paper with Fitzsimmons' name and address rubberstamped on the top. The seven typed invoices totalling $35,000 were dated during the first six months of the three-year period under review. The remaining 26 handwritten invoices, obtained from the accounts payable department, totalled $490,000 and had been paid over the following two years. Pigeon had approved all the invoices for payment.

Although the human resources director had signed every month-end variance report, which signified her review, the CAE noted that, for the last three years, the account was consistently over budget from 200 percent to 700 percent. The internal auditor couldn't understand why this variance had not been pursued earlier by the director, but suspected it was because she didn't understand what she was signing.

Next, the CAE expanded his tests to include any other areas within the company to which Pigeon had access. After obtaining a copy of his position description and the check-signing authority list, the CAE concentrated his investigation on Pigeon's last three years' expense accounts.

The results were interesting. Pigeon had presented his expense account report for approval to his director and then, in her absence, to her second in command. In essence, he was presenting the same report twice. The first report would be substantiated with actual vendor receipts or invoices supporting allowable expenses. For the second report, Pigeon used his credit card receipts to support his expenses. He would add a small invoice to alter the bottom line so that no one in the accounts payable department would become suspicious of identical reimbursement amounts. In addition, he changed the date so no one would question multiple reimbursements for the same time period. Over a three-year period, Pigeon managed to obtain an additional $32,923 for inflated travel claims.

With his backup data in tow, the CAE asked for another meeting with Detective Carruthers. The originals of the three years of checks deposited to the account, all of Fitzsimmons' invoices, and copies of the bank account statement printouts were turned over to the officer, who provided a receipt for the materials.