Gus Jackson was hired away from a Big Four public accounting firm to start a new internal

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Question:

Gus Jackson was hired away from a “Big Four” public accounting firm to start a new internal audit function for ABC Company, a newly acquired subsidiary of a large organization. His first task involved getting to know ABC’s management and supporting the public accountants in their year-end audit work. Once the year-end work was finished, Gus started an audit of the accounts payable function. Jane Ramon, who had worked on the parent company’s internal audit staff for about four years, supported him in this activity.

The accounts payable audit went smoothly, although many employees made no effort to conceal their hostility and resentment toward anyone associated with the new parent company. One exception was Hank Duckworth, the accounts payable manager. Hank was extremely helpful and complimentary of the professional approach used by the auditors. Gus had actually met Hank four years earlier, when Hank had been an accounting supervisor for an audit client where Gus was the junior accountant.

As the audit neared completion, Gus reviewed an audit comment Jane had written—a statement concerning some accounts payable checks that lacked complete endorsement by the payees. Both Gus and Jane recognized that in some situations and in some organizations less-than-perfect endorsements were not a critical concern; but these checks were payable to dual payees, and the endorsement of each payee was required. Gus asked Jane to make some photocopies of the examples so the evidence would be available for the audit closeout meeting with management.

Jane returned 20 minutes later with a puzzled expression. “I pulled the examples,” she said, “but look at these!” Jane placed five checks on the desk in front of Gus. “What do you make of these?” she asked.

“Make of what?” asked Gus.

“Don’t you see it? The handwriting on all the endorsements looks the same, even though the names are different! And these are manual checks, which in this system usually means they were pushed through the system as rush payments.”

“They do look similar,” Gus replied, “but a lot of people have similar handwriting.”

It hit Jane and Gus at the same time. All five checks had been cashed at the same convenience store less than five miles from the home office, even though the mailing address of the payee on one of the checks was over 200 miles away!

Jane decided to pull the supporting documentation for the payments but found there was none! She then identified other payments to the same payees and retrieved the paid checks. The endorsements did not look at all like the endorsements on the suspicious checks. To determine which of the endorsements were authentic, Jane located other examples of the payees’ signatures in the lease, correspondence, and personnel files. The checks with supporting documentation matched other signatures on file for the payees.

Gus and Jane decided to assess the extent of the problem while investigating quietly. They wanted to avoid prematurely alerting perpetrators or management that an investigation was underway. With the help of other internal auditors from the parent company, they worked after normal business hours and reviewed endorsements on 60,000 paid checks in three nights. Ninety-five checks that had been cashed at the convenience store were identified.

Still, all Gus and Jane had were suspicions—no proof. They decided to alert executive management at the subsidiary and get their help for their next step.

The Follow-Through

Since the subsidiary had little experience with dishonest and fraudulent activity, it had no formalized approach or written fraud policy. Gus and Jane, therefore, maintained control of the investigation all the way to conclusion. With the help of operating management, the auditors contacted carefully selected payees. As is often the case involving fictitious payments to real payees, the real payees had no knowledge of the payments and had no money due to them. The auditors obtained affidavits of forgery.

In order to identify the perpetrator, the auditors documented the processing inmore detail than had been done in the original preliminary survey for the routine audit. There were seven people who had access, opportunity, and knowledge to commit the fraud. The auditors then prepared a personnel spreadsheet detailing information about every employee in the department. The spreadsheet revealed that one employee had evidence of severe financial problems in his personnel file. It also showed that Hank Duckworth’s former residence was three blocks from the convenience store.

Armed with the affidavits of forgery, the auditors advised management that the case was no longer merely based on suspicions. Along with members of operating management, the auditors confronted the convenience store owners to learn why they had cashed the checks, and who had cashed them.

The convenience store manager had a ready answer. “We cash those for Hank Duckworth. He brings in several checks a month to be cashed. He used to live down the street. Never had one of those checks come back!”

The rest is history. Hank was confronted and confessed. The fully documented case was turned over to law enforcement. Hank pled guilty and received a probated sentence in return for full restitution, which he paid.

Questions

1. What clues caused Jane to suspect that fraud was involved?

2. Why is it important for fraud examiners to follow up on even the smallest inconsistencies?

3. In an attempt to identify possible suspects, the auditors researched the personal files of every employee in the department. What things might they have been looking for to help them identify possible suspects?