“The Wire” – a complex case of fraud

Posted on Oct 13, 2014

By Pete Miller, CPA, CFE

Some frauds are frighteningly simple and are made possible by a lack of critical internal controls or a real poor tone at the top.  Other frauds are extremely complicated and make us think (1) why in the world would someone go to all this trouble and/or (2) how are we supposed to catch something with so many moving parts?

[click on the graphic for a larger image]

[click on the graphic for a larger image]

These are good questions, and I don’t think the answer to the second question necessarily lies in crafting some new and complicated network of controls (although that doesn’t usually hurt). In my eyes, the most effective answer will come from a combination of three things that start at a level much higher than a review of individual transactions.

The first step is communicating with your employees and creating outlets for you to become aware of “life-events” impacting your team.  As to the question of “why in the world would someone go to all this trouble,” fraud has shown time and time again that personal needs exist and if perpetrators find a path to cash – no matter how complicated and winding the road – they will address their personal and private needs by perpetrating a fraud.  A life event – like medical bills, an ailing parent, kids going to college, or a host of other circumstances – is a frequent catalyst for fraudulent behavior. Develop appropriate and meaningful ways to understand what is going on in the lives of your employees, and you will increase your awareness of these risks.

Second, having a defined set of duties and a job description that is fairly formal can help fend off some of the more complicated frauds.  I am not sure how big of an operation PBS39 is, but my guess is that they had more than 1-2 people in their accounting department. This should provide sufficient resources to separate duties into defined roles.  This process needs to be intentional and should absolutely consider departmental efficiency.  But, it should also consider segregation of duties and the potential that a fraud could occur.

Lastly, the performance of the defined duties that you have lined out in job descriptions should be monitored in a consistent and meaningful way. If the central figure in this case was so involved in perpetrating the scheme, she must have been missing some of her other performance requirements.  If you see an employee slipping on performance and you are aware that they have a life-event they are dealing with, and they have access to every system under the sun, your antenna should go up.  Your antenna will probably go up anyway because you will empathize with the plight of your employee.  As a person in a position to safeguard your company’s assets, you need to also consider the idea that some improper behavior may be taking place as well.

© Clark Nuber PS and Focus on Fraud, 2014. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Clark Nuber PS and Focus on Fraud with appropriate and specific direction to the original content.

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This article or blog contains general information only and should not be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. Before making any decision or taking any action, you should engage a qualified professional advisor.

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