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

Carruthers mentioned that he had been to see Fitzsimmons and was in possession of his seven legitimate invoices, totalling $35,000. The detective also had a written statement from the trainer indicating that he had suffered a heart attack two years ago and had subsequently retired from his professional consulting practice. The statement went on to say that Fitzsimmons had informed Pigeon of his circumstances not only verbally but in writing, a copy of which he allowed the CAE to read.

The monies paid via the fraudulently produced invoices were eventually traced to Paul Pigeon's lavish lifestyle. Unknown to the Example Corp., Pigeon, whose annual salary was $85,000, had joined a private club where yearly membership totaled $25,000, gone on vacations to exotic locations, and purchased a $350,000 cottage in a very exclusive area.

Although the company recovered, many of the people involved did not. Pigeon was subsequently charged and convicted of fraud. His superior, the director of human resources, was unceremoniously discharged with cause. The second-in-command to the director was demoted for approving duplicate expense reports without adequate support. The accounting group responsible for monitoring the budgets was chastised for not leaping on the budget overruns.

LESSONS LEARNED

* Fictitious payments can be to fictitious companies or, as in this case, fictitious payments can be to real payees who have no knowledge of the transaction.

* A change, such as the consultant giving up his practice for health reasons, can create opportunities for crooks.

* A budget review process is not effective if managers and finance professionals don't follow up on budget variances. Here, neither the director of human resources nor the accounting department questioned the budget variance.

* Willful blindness and ignorance have been contributing factors in many major cases. The director of human resources and the accounting staff ignored the budget variance, but the accounting staff also failed to notice anything amiss when the doctor, who had previously presented professional-looking invoices, started presenting handwritten invoices on rubber-stamped stationery.

* Managers often don't understand the fraud implications of their processes and reports. This organization would have benefited from yearly training courses for their management team that would include addressing the fraud implications of processes and reports.

Please send your fraud findings to: COURTENAY THOMPSON & ASSOCIATES 10,000 North Central Expressway Suite 1006, Dallas, TX 75231 1-214-361-8346

Fax: 1-214-361-0632

E-mail: CMT@ctassoc.com

ALAN LANGLEY, CFI, is the executive director of The Association of Certified Forensic Investigators of Canada.