Category Archives for "Fraud"

Thrift store theft
Jan 30

Nonprofit Embezzlers Sell Donated Goods for Millions

By Charles Hall | Asset Misappropriation

Sometimes nonprofit embezzlers sell donated goods. Today, we examine how nonprofit employees can steal assets rather than cash and how you can prevent such thefts.

The Theft

Several workers at a California Goodwill pled guilty to taking over $15 million. Their scheme involved the selling of donated goods by the barrelful to private dealers who sometimes wheeled tractor trailers up to the rear of Goodwill stores.

nonprofit embezzlers sale donated goods

Picture is courtesy of AdobeStock.com

The dealers sold most of the goods in Mexico. The thefts–involving seven primary culprits, four of whom were sisters–occurred over a twenty-year period that started in the mid-70s.

So how were the fraudsters caught?

One culprit went through a bitter divorce, and the husband disclosed the scheme to authorities.

The Weakness

The article describing this case did not provide details of the store operations, but it appears–at the time–inventories of donated goods were not properly documented. When assets, of whatever form, are not inventoried, they are more likely to disappear.

The Fix

Account for all inventories. Also, clothing that is sold in bulk should be documented. So each time a truck backs up to a store, the activity should be recorded—who received the goods, the sales price, who approved the sale, why the goods were sold in bulk. The store should have a policy that cash is not to be received for such sales.

Consider adding a whistleblower hotline. Nonprofit employees sometimes see signs of theft. Make it easy for them to report fraudulent activity. Doing so creates the camera effect

Also, install a security camera that records all loading dock activity.

Note–This case was adjudicated in the 1990s, and Goodwill has, since that time, made significant improvements to its controls.

Library fraud
Jan 26

Do (Some) Librarians Steal? Yes (and With Vigor)

By Charles Hall | Asset Misappropriation

Do some librarians steal? While most don’t, some do. Today we see that some guardians of knowledge take that which belongs to the general public.

I remember my childhood librarian, Ms. Adams. She was a lady of rectitude, dignity, and uprightness. Never one to harm or take from her patrons—or the library. Theft by her? Unthinkable. The memory of her colors, in a positive way, my view these public servants. But not every librarian is Ms. Adams.

Recently I spoke to about 50 librarians about fraud prevention and was shocked by their stories of thefts from libraries. It appears library fraud is alive and well in the United States. No place is immune. The following is a story of one such librarian, Bob Rice Jr.

librarians steal

This picture is courtesy of AdobeStock.com

The Theft

Bob Rice Jr. served as the director of the Revere Public Library for twenty-seven years before he pled guilty to twenty counts of fraud and embezzlement. So, how did he steal?

Mr. Rice apparently could approve purchases by issuing requisitions and purchase orders. The library paperwork would reflect the acquisition of dictionaries, for example, but the real purchase might be a Rolex watch.

Rice also purchased items that appeared to be for the library such as computer software, but he would–after receiving the goods–sell them on eBay. Then, with the cash, he would purchase items for personal use.

Lastly, in some instances, he requested reimbursements for items he never received. Those reimbursement checks were cashed and placed in his bank account.

How Rice Used the Funds

And how was the money used?

Mr. Rice purchased personal items including:

  • A model of the Star Trek’s Starship Enterprise
  • A replica Tommy Sub-machine gun
  • Robo-Pets
  • A vacuum
  • A Leica camera
  • Star Wars collectibles
  • Rolex watch
  • An ice cream making machine
  • An elephant tusk sculpture

His total theft was estimated at $236,000.

The Weakness

And what internal control weakness allowed the theft? No one was comparing the purchase orders with the payments made or to cleared checks. (This same weakness allowed a $16 million theft from a bakery.) It also appears that Mr. Rice could issue purchase orders and sign checks.

The Fix

The person authorizing payment (e.g., issuing purchase orders) should not also make the payment. Supporting documentation (e.g., purchase requisition, purchase order, bids) should be provided to a second person for review. Thereafter, the reviewer can issue the check or authorize payment.

Check signers should not issue purchase orders. For instance, board members might sign the checks, while operating personnel request the purchase.

When possible, have a central receiving department. Goods received should be recorded upon receipt by a person that did not issue the purchase order. Why? Segregation of duties. One person authorizes the purchase and another receives the physical goods. Such a procedure makes it more difficult for someone to buy products and then sell them on websites such as eBay.

Finally, require appropriate documentation (e.g., invoice) for all reimbursements. A second person should approve these payments. The person buying the goods should not also approve the reimbursement payment.

What Happened to Mr. Rice?

Though he initially denied the charges against him, Mr. Rice pled guilty to 20 counts of fraud and embezzlement. He did provide $230,000 in restitution, which led to a reduction in his sentence. He received six months in jail. 

Nonprofit fraud
Jan 23

Nonprofit Fraud: Bid-Rigging, Kickbacks and Faulty Payments

By Charles Hall | Corruption

We sometimes think of nonprofit fraud as nonexistent. After all, these are the good guys. But today we see that nonprofit theft does occur–and to the detriment of those most in need.

The Nonprofit Fraud

We think of nonprofits as lovely places where only noble things happen. But some nonprofit leaders prey on not-for-profit entities, harming the very people the organization is designed to help.

One such nonprofit leader was charged with bid-rigging, receiving kickbacks, and making fraudulent payments to vendors.

Nonprofit fraud

Picture is courtesy of AdobeStock.com

The Department of Justice charged a “former director of operations at…a Manhattan substance abuse treatment center, with bid rigging, conspiracy to defraud, and income tax evasion, in connection with a conspiracy to embezzle approximately $2.34 million from the organization over an eight-year period.”

The Department of Justice stated the charges stemmed from the director “conspiring with several outside vendors to rig bids and allocate contracts awarded by”  the nonprofit “for the supply of food, meat, health and beauty supplies, baby supplies, office supplies, printed materials, janitorial supplies, and medical supplies from 1990 until at least April 1998.” According to the charge, the director “steered nearly $10 million in contracts to those vendors.”

The director was charged with taking kickbacks totaling at least $364,000 in cash or goods and services from vendors to ensure receipt of contracts. 

The Department of Justice went on to say, the director and seven vendors embezzled at least $2 million from  the nonprofit “by issuing false and fraudulent purchase orders to each of the seven vendors, who in turn issued corresponding invoices for goods and services that were never delivered or provided.”

Later, the director pleaded guilty to bid rigging, fraud, and tax charges.

What was the harm to the nonprofit’s 600 substance abuse patients? Well, money that should have aided the needy went into the pockets of fraudsters.

The Weaknesses

The first weakness was having a leader who was concerned more about his wealth than the people he served. Auditors often refer to this as the tone at the top–it’s the ethical makeup of those in charge. COSO calls it the control environment. Without a positive, honest culture, fraud is more likely to occur.

The second weakness was the bidding process never happened. There’s a reason for bidding: It keeps everyone honest, and it ensures the lowest price for the organization.

The third weakness was a lack of accounts payable controls (or the circumvention of such policies, if they existed). Collusion between an organization’s leaders and vendors can wreak havoc. In such cases, the vendors send invoices, but no service or product is provided. Since someone in the nonprofit is approving the invoice (with knowledge the invoice is fictitious), there is no gatekeeper, no one to prevent the theft. The person approving the invoices is aiding in the fraud.

The Fixes

First, fire unethical leaders. Nonprofits can’t afford the reputational damage.

Second, solicit (real) bids. Sealed bids should be received and opened in a public meeting.

Third, ask board members to review and vet the nonprofit’s vendor list, especially those vendors receiving payments over a certain threshold (e.g., $50,000). Alternatively, ask your external or internal auditors to verify the work of key outside vendors.

$16 million stolen from a bakery
Jan 17

How $16 Million was Stolen from a Bakery

By Charles Hall | Asset Misappropriation

Is it possible to steal over $16 million from a bakery? Today we see that large sums can be taken from a small, mundane business. And the scheme can be so very simple.

The Theft

Sandy Jenkins, the controller of Collin Street Bakery in Corsicana, Texas, made off with more than just fruitcakes. He took over $16 million, so says the FBI. And what did Mr. Jenkins do with the money?

He used the funds in the following ways:

  • $11 million on a Black American Express card
  • $1.2 million at Neiman Marcus in Dallas
  • 532 luxury items, including 41 bracelets, 15 pairs of cufflinks, 21 pairs of earrings, 16 furs, 61 handbags, 45 necklaces, 9 sets of pearls, 55 rings, and 98 watches (having an approximate value of $3.5 million)
  • Wine collection (having an approximate value of $50,000)
  • Steinway electronic piano (having a value of $58,500)
  • 223 trips on private jets (primarily Santa Fe, New Mexico; Aspen, Colorado; and Napa, California, among other places), with a total cost that exceeded $3.3 million
  • 38 vehicles, including many Lexus automobiles, a Mercedes Benz, a Bentley, and a Porsche
  • And more…

How the money was stolen

You might think that stealing $16 million would require an elaborate scheme. But did it? 

Here’s an example of his method: Jenkins would print a check to his personal credit card company, but he would void the check in the accounting system. (He still had the printed check.) Then, he would generate a second check for the same amount to a legitimate vendor, but the second check was never mailed. Next, Jenkins would send the first check to his credit card company.

The result: Jenkins’ credit card was paid, but the general ledger reflected a payment to an appropriate vendor.

$16 million stolen from a bakery

The picture is courtesy of AdobeStock.com

The Weakness

No one was comparing the cleared check payees to the general ledger. 

The Fix

Someone other than those who create checks should reconcile the bank statements to the general ledger. As they do so, they should compare the cleared check payees to the vendor name in the accounting system. Some businesses have hundreds (or even thousands of checks) clearing monthly. Therefore, they may not desire to examine every cleared check. 

Alternatively, the business could periodically sample the cleared checks, comparing the cleared checks to the vendor payments in the general ledger. The persons creating checks should know that this test work will be performed. Doing so creates the camera effect. When people know their actions (in this case, the creation of checks) are to be examined, they act differently–they are much less likely to steal.

If you desire a preventive control, you could require a second-person review of cancelled checks.

Lastly, when segregation of duties is not possible, have the bank statements mailed to someone outside the accounting department such as an owner. That person should review the cleared checks before providing them to the accounting department. Alternatively, provide online access to the reviewing person. The reviewer should examine the cleared checks and provide documentation of his or her examination to the accounting department.

What Happened to Sandy Jenkins?

Sandy Jenkins was sentenced by U.S. District Judge Ed Kinkeade to serve a total of 120 months in federal prison. His wife, Kay Jenkins also pleaded guilty to one count of conspiracy to commit money laundering. Ms. Jenkins was sentenced to five years probation.

Cash receipts theft
Jan 08

Is Your Cash Receipts Supervisor on the Take?

By Charles Hall | Asset Misappropriation

Sometimes the person you hire to prevent theft is the one stealing. This is one of the dangers of a trusted bookkeeper. Below I provide a real-life story of a cash receipts supervisor on the take.

The Theft

Is your cash receipts supervisor taking your cash? I once worked on a case where this person took over $300,000.

Cash receipts supervisor on the take

The picture is courtesy of AdobeStock.com

Cash Receipts Supervisor

Many businesses funnel cash receipts to a supervisor who counts the money from each cash drawer and compares the funds to the daily receipts. The purpose of this step is to ensure no front-desk clerks are stealing.

The cash collections supervisor has usually worked a cash drawer in the past. So she knows all about how the receipts enter the system and how they are deposited.

Typical Deposit Cycle

The collections process often works as follows:

  1. Money is collected at the front cash-collection desks and placed in the cash drawers that are assigned to each clerk; receipts are written for each payment
  2. These clerks tally their collections at the end of each day and reconcile the monies in their cash drawers to the receipts written
  3. The daily reconciliation for each cash drawer goes to the cash receipts supervisor who recounts the funds received and reconciles collections to the receipts written (performing the same reconciliation as the front desk clerks)
  4. The cash receipts supervisor creates a deposit slip for all funds collected (if there are seven cash drawers, then the deposit slip represents the total collections for all seven cash drawers)
  5. The cash receipts supervisor gives the checks and cash and deposit slip to a courier to take to the bank
  6. The courier receives a bank deposit receipt from the bank
  7. The courier provides the bank deposit receipt to the cash receipts supervisor (so she can compare the bank deposit receipt with the copy of the deposit slip–to ensure the courier did not steal any funds in transit)

The Cash Receipts Supervisor Steals

So how can the cash receipts supervisor steal funds in the above scenario?

In the case I worked on, the supervisor also reconciled the bank statement. After step 3., but before step 4., she would steal the cash and then lessen the deposit slip accordingly. So, if she took $2,200, the deposit slip would reflect the total daily collections less $2,200.

You’re thinking, “But then the bank account would not reconcile since the computers have recognized the front-desk collections?” You are correct—unless someone monkeys with the bank reconciliation. And that’s what she did. The supervisor adjusted the reconciling items–on the bank reconciliation–to cover up the stolen funds. The scheme worked until the annual audit.

When the auditors tested the outstanding items on the bank reconciliation, they could not tie substantial amounts to the subsequent bank statement. Generally, outstanding reconciling items clear the subsequent month’s bank statement—but large amounts on the year-end bank reconciliation could not be accounted for (because they were fictitious).

When confronted, the clerk confessed to her theft and method.

The Weakness

The weakness was the cash receipts supervisor who had custody of assets (cash) also performed the reconciliation of the related bank account.

The Fix

The person reconciling the bank statement should not also handle cash. It’s also a good idea to perform surprise tests of the receipting records. Doing so puts everyone on notice. The receipt employees know someone can appear at any time and review their work.

For additional assistance, see my article about how to audit cash.

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