Most of the time, fraudulent activities only involve one person, or at the most, two people. But what is happening up north in Canada, involves nearly 10% of the 1800 people who run the Health Care Facility. So far, around 150 people have been fired or willingly resigned. Baycrest Health Sciences said their Toronto-based geriatric Baycrest Hospital suffered between $4 million and $5 million in losses over an eight-year period. This does not include the cost of fixing the mess, which is still to happen.
According to the July 11, 2019 Toronto Sun, the losses were caused by employees filing bogus claims by submitting receipts for products and services that were never received. Perhaps an employee would submit a reimbursement claim for an authorized product and then use the funds to buy something unauthorized. Local politicians like the spokesman for Provincial Health Minister Christine Elliott, are blaming the fraud on loose internal controls. The quote is “… long-standing auditing weaknesses [which] allowed this … to go unchecked for too long.”
A different take might be that in Canada the notion of personal responsibility is heavily diluted. Does the notion of “free” national health care affect behavior? Whose money was actually embezzled? Not to be overly political, but when a fraud involves 150 different people, at one company, different dynamics seem to be at work. When 150 people misbehave over an eight-year period, then the typical notions about keeping the fraud hidden from public view as long as possible, goes out the window. Everyone at the facility likely knew what was happening. What really caused such a large mess?
July 19, 2018 Based on a story from the July 17, 2019 ACFE Newsletter.
At the closing session of the 2018 29th annual ACFE conference, a convicted felon, who spent 22 months in jail, explained how his accidental fraudster persona, actually happened. Ryan Homa discusses why, as chief accountant for a Midwest manufacturer, he had intimate familiarity with his firm’s accounting system. Specifically, Ryan discovered a glitch in his company’s check writing application.
The accounting software allowed for the amount to be manipulated, after the check amount had been entered in and the amount stored internally. All one needed to do was answer “no” to the question whether the check printed correctly. Then, before the check actually printed externally, a new amount could be placed on the face of the printed check. Being a good employee, Homa went to the IT department and reported the glitch. They told him the fix would cost $3,000 and was not worth the effort.
Over the next three years Homa proceeded to write checks to himself totaling $1.3 million. Perhaps the IT department had undervalued the worth of the glitch fix? But he did not start stealing immediately. Only after several months passed. He considered the pressure caused by needing to meet a mortgage payment. Even though the unpaid mortgage loomed large because of his poor cash planning. So Homa finally started his misappropriation. Of course, at first, he intended to repay the stolen money, but the ease of stealing far outweighed his guilt, as it is for almost all accidental fraudsters.
Donald Cressey’s Fraud Triangle explains this fraudulent behavior well. On one side of the triangle we have opportunity (the glitchy software). On another side we have financial pressure (insufficient cash on hand for a mortgage payment). On the third side of the triangle, we have rationalization (“I will just borrow the money now and then quickly repay it”). Because each of us have an imperfect human nature, we are easily capable of rationalization. Plus almost all of us feel we are under financial pressure from time to time. This reality means that the only real way to significantly reduce the common nature of fraud is to significantly decrease the opportunity in our own firm.
Is your firm actively reducing fraud and embezzlement opportunity?
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.
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
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
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.