What To Do, and What Not To Do when you uncover Fraud
Imagine you are the CEO of a company, and there is a knock at your office door. You tell them to come in, and your CFO and your HR Director quickly enter your office and close the door behind them. You think to yourself, “Well this is not going to be good…” The CFO tells you that Mary, an Accounts Payable Supervisor who has been with the company for over 15 years, is in the main conference room crying, with her Supervisor.
You know Mary, she is the employee that everyone likes, is always friendly, is always one of the first people to arrive at the office, and one of the last to leave at the end of the day. Mary is always willing to help her co-workers out with their jobs, but she never asks for help with her job. In fact, Mary is so well respected that you let her plan the annual Christmas Party, and she handles purchasing gift cards to give out to the employees. Mary is also a very trusted employee because she not only helps get ready for the annual audit when the outside accounting firm shows up, but she also pays the monthly credit card statements for you, the CFO, and the 6 salespersons that work for the company.
Your mind races as you think, what could be wrong with Mary? Does she have cancer? Has something bad happened to her parents or children? You have heard through the grapevine that she got divorced last year, but she hasn’t missed a beat at work, and she is still one of the nicest and friendliest employees that you have. What could it be?!!
The CFO states that it appears that Mary has misappropriated approximately $15,000 from the company. The CFO added that Mary was willing to pay back the money from her 401K account.
Now, you feel like you got hit by a semi-truck that just kept going. Not Mary. She wouldn’t steal from the company, nor from me. We are not just co-workers; we are a family here. You then pepper the CFO with a thousand questions.
How did this happen?
Who discovered it?
Why would Mary steal from the company?
Is there anyone else involved?
How long has this been going on?
How come our outside Auditors didn’t find anything in the annual audit that we pay a lot of money for?
Who else knows about this?
The CFO’s answer to all of these questions is the same, “I don’t know…”
Then you start to realize that your shock has turned into anger. You order the CFO and HR Director to fire Mary at once, and have her escorted off of the property. After that’s done, you want to speak to the head of the Accounting firm that conducted your yearly audits, and find out why this wasn’t detected sooner. The Auditors need to be fired, and if they aren’t then you will cancel the contract with the Accounting firm, and get a new firm to conduct your yearly audits. Then you want to talk to your lawyer to discuss your legal options in regard to suing Mary and the Accounting Firm. Somebody is going to pay for this, and you want to lash out at everyone. You have been deeply hurt by Mary, but most of all, you feel a deep sense of both personal and professional betrayal.
These events that I just described were taken from an actual case that my Agents and I from the Financial Crimes Unit of the North Carolina State Bureau of Investigation worked several years ago. For those of you who like to skip to the last chapter of a book, I’ll be glad to summarize it for you. Mary had an on-line gambling addiction, which grew into trips to the casinos in Las Vegas a couple of times a year. Mary was using 3 of the company credit cards that were assigned to the 6 salespersons. At some point, 3 of the salespersons left the company to pursue other jobs. Since she was the Accounts Payable Supervisor, no one was going behind her looking at monthly credit card bills for 3 employees that were no longer there. The 3 former employees’ credit cards also showed expensive dinners, vacation trips, rental cars, airfare, hotels, name brand purses, and various other items that could be easily explained if she was ever questioned about them. As for the gift cards for the employees at the Christmas party, Mary did purchase about $2,000 in gift cards for the party each year that were given out to the employees. However, she also purchased an additional $8,000 in gift cards for herself that she used throughout the year for meals, electronics, or just general shopping. We found stacks of gift cards, wrapped in rubber bands in her kitchen drawers when we executed a search warrant at her residence.
We went back and traced every transaction that Mary did for the past 5 years while she worked at the company. She stole approximately $1,000,000 in each of these years, for a total loss of $5,000,000. I asked the CEO and CFO of the company how they did not miss $1,000,000 in revenue each year. The CEO said, “Mike, our company brings in a half billion dollars in revenue each year. If you had five hundred, $1 dollar bills on a table, regardless if they were stacked up or scattered around, would you be able to easily see that one of them was missing?” He made an excellent point. This is one of the most profound statements I have ever heard, and I have shared it with clients who are in a similar situation. The more successful your business becomes, the more important it is to stay on top of your finances.
So how did $15,000 grow into $5,000,000? The obvious answer is no one was going behind her. She was able to maintain this yearly series of thefts because she had been with the company for many years, everyone liked, and TRUSTED her. So, the next question is, why wasn’t this picked up in the yearly audits conducted by the outside accounting firm. That’s because audits are designed to look at a company from the thousand foot view, to determine if the company is making more money than it is spending, and costing to keep the company running. Most audits do random sampling of invoices, credit cards, and expenses. Mary was smart enough to not use the salespersons’ credit cards that were still working at the company, and of course, all of those expenses and payments were properly documented for the auditors. Mary has become comfortable and adept at covering her tracks after all these years.
As the officer of a company, regardless if it is privately held, publicly traded, a non-profit, or a governmental entity what happens next if you unfortunately find yourself in a similar situation? There are many questions to consider while you are overwhelmed in a hurricane of emotions. For example, should we speak with Mary before we fire her, and if so, who is going to interview her? Do we have to report this to law enforcement right away, and what are the pros and cons of doing so? Do we have to report this to our shareholders or the governing board, and how does this financial loss affect our financials, and those we have filed with the IRS and state government for the past several years? Are any of our vendors out and money, and do we have ghost employees or shell companies in our master vendor file? How do we go about trying to recover all or part of the stolen funds?
There are many more questions to consider, but at the end of the day as the CEO, you are worried about the financial health of your company, the potential reputational damage this incident will cause, and can your company survive? At SafeHaven, we have the expertise to guide you through this extremely critical point in your company’s history, and help evaluate and navigate this terrain. It’s not easy, but if you have to swim an ocean, or climb a mountain, you want someone you can trust who has been there before to guide you, so you can get back to running your company again.
Give us a call and let us know what we can do to help.