Former Microsoft Executive sentenced to 28 months for embezzlement and stealing

A former executive at Microsoft got caught with his hand in the cookie jar. Warning, your forehead may sustain a dent after you hit yourself wondering why he did it!

Jeff Tran pleaded guilty to soliciting $775,000 from a vendor and depositing the payment in his own bank account, according to an article in the June 28th Seattle Times.  Then he requested help from the vendor, threatening to kill the preferred status the vendor enjoyed with Microsoft, if the vendor did not help cover up the theft.

Part of Tran’s job was deciding which Microsoft employees received tickets. Tran also  admitted stealing blocks of 2017 Superbowl tickets and tailgate party tickets and selling them for $208,200. This was after he had successfully sold a dozen 2016 Superbowl tickets for $41,200, and no one noticed. As is true for the typical fraudster, the defrauded amount grows over time.

The most interesting fact about this fraud is that Tran  never spent any of the embezzled funds. There was not any perceived financial pressure. The stolen money was all recovered, untouched! Jeff Tran will lose his freedom for 28 months of jail time and a large annual salary, seemingly simply for the short-term rush that accompanied the theft.

 

What was he thinking?

Fraud can also be small in dollars, but large in impact.

The NEWDaily online edition reported that the CEO of the largest bank in New Zealand resigned. Exact details were not given, though the bank said that an internal investigation had raised concerns over travel expense reimbursements. Media “widely reported” that Mr. Hisco billed the bank for thousands of dollars — worth of chauffeured car trips.

The thirty-year veteran Hisco said he did not agree with all of the board’s concerns, but “accepted accountability” and forfeited any unvested stock options. It is interesting to note that Mr. Hisco earned around $3.5 million in the last full year. This is a minor fraud in dollar terms, but we might wonder why a person would throw away $3.5 million over what may be a few thousandth of his annual compensation.

Is there more to the story?

The Financial Times clarified, quoting Sir John, a former New Zealand Prime Minister, that Hisco had the authority to spend the money, but it was his mischaracterization that got him into trouble. Mr. Hisco had spent the money on wine storage and chauffeur-driven cars over a period of several years.

Part 10 of 10, Fraud Inoculation by Paul Updike, certified fraud examiner

Part 10 of 10, Fraud Inoculation

Other Possible Areas of Fraud

One of the areas of possible fraud, despite the above level of monitoring, includes employing the assets for personal use and not reimbursing the firm. Another is stealing either assets or inventory. Unless there is a 100% physical inventory every day, inventory remains vulnerable to fraud. Therefore, walking around can help.

The cash registers are another area open to refund fraud, etc., though daily cash register balances are reported to accounting and physical scanning and reconciliation of cash register tapes several times a week restrains this potential avenue. Credit card fraud is possible too, though any significant drop-off of credit card deposits is quickly picked up in the weekly cash forecast to actual comparison as well as monitoring daily bank balances.

As stated in Part 1 of this 10 Part post, there are creative ways to commit fraud that have not yet been invented. However, if a firm really wants to drastically reduce the likelihood of material fraud from happening to their firm, then the combination of the detailed fraud inoculation/monitoring plan outlined in these ten parts, along with implementing the good suggestions garnered through a Fraud Risk Assessment, will help immensely.

Other anti-fraud techniques found on my web site include implementing an anonymous Tip Hotline. Communicating with employees and vendors better is also essential. One of the best ideas I have heard is sending around to all employees email stories of local fraudsters who have been caught and prosecuted, along with their prison terms. These are actions which can help maximize the perception of detection of fraud, which perception of detection is critical to deterring future fraud.

The bottom line is that if you balance your cash daily, your chance of business success for your small business increases dramatically while your likelihood of material fraud drops to near zero.

Part 9 of 10, Fraud Inoculation

Part 9 of 10, Fraud Inoculation

The Payoff for this Intensive Monitoring

The owner of the firm that suffered this large-scale embezzlement never wants to be materially defrauded again. He has the cash balance in his head, every day. In effect, by going over the cash flows in and out regularly, and having a reporting system that carefully tracks and matches monies in and out in all areas of his business, he thoroughly checks for material fraud every week and every month. No more surprises, ever.

Is the daily/weekly/monthly cost worth it? If one includes the extra burden of regular monitoring, the owner’s extra time may only average an hour extra per week. Because the fraud trauma cut so deeply into his personal psyche as this is the only company he has worked for in his 30-year career, the extra time spent by him is simple prudence. While the accounting department probably spends several more hours per week generating the reports and the information and the cross checks required.

No, there are really no guarantees that material fraud will not happen again at this firm, but such an unhappy event is highly unlikely. Why? Because the owner is continually auditing his firm, comparing the reports and information the accounting department generates with the cash balances in the bank. Either this comprehensive information approximately matches or there is an error in the calculation.

In addition to fraud avoidance, there are other less obvious, even unspoken benefits as the accounting information is now robust enough that internal accounting will not be the cause of restraining future growth, as often happens in small businesses. Another benefit is that this business survived a potential killing blow, which survival status allows for the employees to feel an atypical sort of loyalty and a camaraderie  which contributes to employee long-term efficiency.

 

Part 8 of 10, Fraud Inoculation

Part 8 of 10, Fraud Inoculation

Fraud Inoculation

May I put approximate time requirements on the necessary monitoring activities? First of all, to start such a comprehensive program requires a 100% physical inventory, perhaps involving every employee for one day. Setting up this forward-going scenario would require a one-time investment of time of 10 to 40 hours, depending on the complexity, the size and the numbers of items involved, plus perhaps a day in the life of all the employees. And of course the tickets used to count the inventory has to be audited by an outside auditor.

Taking a look at each and every check face as checks are cut and payrolls paid, might require ½ hour per week, while carefully reviewing all bank reconciliations monthly, might add another hour per month.

Scanning/watching all receipts of weekly inventory in (including drop shipments) might require another ½ hour per week. (Spreadsheet macros could be written to catch the salient information, but walking around is needed too.) Each vendor must be known, though most small business owners already know all of the vendors. This re-acquaintance might require a one-time 2 to 4 hour time allotment. Likewise, each customer who is granted credit, becoming an A/R, needs to be known before being added.

Then, as vendor checks are written and receivable checks are received and posted, both the AP and AR aging reports can be carefully scanned every week to match the increase or decrease of check amounts in or out to each account. Again, spreadsheet macros can be written to track and somewhat explain any non-matching issues.

Before too long, the scanning of aging AP and AR reports does not take much time, while scrutinizing the spreadsheet information becomes the focal point, because those spreadsheet macros track and match all cash flows in and out to AP and AR every week.

Ditto with every employee, as every check written to an employee matches only employees known to be on the payroll paid a known periodic amount. Again, spreadsheet macros can be written to track and explain any non-matching issues.

Finally, every checking account, credit card account, (as well as Petty Cash) needs to be independently monitored. This might take 2 to 4 hours per month. Again, spreadsheet macros can be written to track and explain any non-matching or unusual issues each month.

The meaningful issue here is to know the actual cash flow in and out, perhaps within $500 at any point in time. This knowledge requires a weekly cash flow forecast which clearly reflects the cash cycle for this specific business with changing cash expectations built into every weekly forecast. Then the spreadsheet macro reports on all the flows in and out are reconciled both on paper and in the owner’s head with what the cash balance is now and what the cash balance is expected to be in the near-future.

 

Part 7 of 10, Fraud Inoculation

Part 7 of 10, Fraud Inoculation

Fraud Risk Reduction

Because material fraud rears its ugly head mostly over cash issues, we need to identify cash activities, thereby identifying the fraud risk candidates.

The main areas of cash flow out, in small businesses are:

Payroll checks

Vendor checks

Cash register refund transactions – checks/cash/credit cards

Loan repayment plan checks

Auto pays in checking account

Pension/401k payments uploads

Unusual checks

Inventory product checks

Asset purchases, asset payment plans

Credit card charges

Petty cash out

Unusual/manual checks out

Postage machine/shipping charges

The main areas of cash flow in, in small businesses are:

Account receivable checks

Cash register transactions – checks/cash/credit cards

Employee COBRA checks

Loan/equity proceeds

Auto deposits in checking account

Asset sales

Credit card credits

Petty cash in

Unusual checks/cash in

If all the above avenues of cash flow in and cash flow out are monitored tightly, assuming such a scenario is possible, then only the cash-flow monitor has opportunity to commit material fraud. And if the owner, the monitor and the largest stockholder are all the same person, and he or she reports to the board of directors on a monthly basis, then his or her fraudulent opportunity could decrease to near zero.