It's not often that a conference session feels like a true-crime show. And yet Angela Morelock, a forensic accountant with the accounting firm BKD, delivered material like that and more in a talk here that detailed the bad, the really bad, and the mind-bogglingly bad in the fraud and embezzlement cases that her firm has investigated.
Her presentation was designed to educate administrators, gathered here at the annual meeting of the National Association of College and University Business Officers, about common fraud scams and patterns that might indicate something is wrong.
But before going into the statistics, she posted on a screen a ditty, scribbled out by, and found in the office of, a fraud perpetrator in the accounting office of a pharmacy chain: "Oh, what a tangled web we weave when first we practice to deceive. But once we've practiced for a while, oh my, how we've improved our style!"
"Fraud cases, every single time, are hindsight 20/20," she said. "It's a little bit amazing to me—the subtle clues, the small things, that we will miss. Tell me how this hangs in the cubicle of someone in an accounting department for an extended period of time without someone asking about it."
That was one of the big takeaways from Ms. Morelock's talk: Fraud perpetrators will leave lifestyle clues that they are up to no good. In her experience, criminals tend to follow recognizable patterns. They like to give gifts, and they are compulsive shoppers. Gambling problems are common among them.
They tend to be long-term employees, who start small and rationalize their thefts over time. They can be male or female, but statistics say that the big losses usually happen with more-educated, high-ranking employees. That is in part because there are all sorts of checks and controls on the financial transactions handled by low-level employees, whom some assume to be more prone to fraud and theft. However, the supervisors of those employees are often not subjected to the same controls and scrutiny, opening a window for abuse. Ms. Morelock told of a supervisor at one business who collected the cash drawers from various clerks, and took one home every day for 10 years, until she had collected $1.3-million.
And then there are the things that just don't add up, Ms. Morelock said, and she related another of her many war stories: A bookkeeper at a church organization went on vacation, and a diamond certificate in her name arrived at her work, which set off alarm bells. Right off the bat, Ms. Morelock found that the employee, who was making $45,000 a year, had purchased a $390,000 house, which her co-workers knew about.
The employee had paid for the house in cash, skimmed off of the organization. And she bought a lot more, like big-screen TV's, video games, and appliances. "These lifestyle clues are the best early warning signs," Ms. Morelock said.
Schemes Involving Vendors
One common oversight, where fraud dwells, is where employees choose vendors. "That power, to be the one who chooses the vendor, is a significant power that we often don't focus on enough," Ms. Morelock said. "That is where fake vendors, conflicts of interests, kickback schemes, and straw-vendor schemes originate."
Here is how a straw-vendor scheme works, based on another real case: A graphic designer can pick a printer for his work with an organization. He sets up his friend, who is not a printer, as the vendor and places printing orders through the friend. The friend goes out and finds a real printer to handle the actual printing. The friend gets the job printed and bills the organization at an inflated price, and the organization pays. Then the graphic designer and his friend pay the printer's lower cost, and split the profits.
For Ms. Morelock, the case proves that you can find fraud in the most unlikely corners of an organization. "Most of us would look a graphic designer and think, What kind of fraud risk could that person possibly be?" she said. In the case Ms. Morelock uncovered, the graphic designer and his friend netted $600,000 in their five-year scam.
Fraud cases in higher education tend to be lower than in other organizations, she pointed out, but certain parts of higher education have been more troublesome. "We have seen a lot of athletic-department scams recently, that go everywhere from travel expenses and ATM cards to misuse of booster funds," she said. "Although many organizations consider booster funds to be separate from the college or university, guess whose name hits the front page of the paper when there is a problem?" she said. She also alluded to a ticket-scalping scandal that has plagued the University of Kansas.
And she noted that she doesn't expect her work to slow down. Her current work concentrates on scams that started when the economy was still good. Unfortunately, she said, the cost-cutting at many organizations has focused on some of the internal-control bodies, like accounting units. She is concerned about how the workload will change when cases that started after the 2008 crash, when folks were really desperate, start showing up.