You are a newly hired fraud examiner. You have been asked to write a preliminary report on the scenario below,
You are a newly hired fraud examiner. You have been asked to write a preliminary report on the scenario below, using the information presented in Units 1 to 4 and findings from your additional research. Purell magazine and publishing house decided to outsource much of its direct-mail operations to specialized mail vendors. As a result, the company began converting its plant in Oakville, Ontario, from a direct-mail-order factory to an office complex. Part of the office complex construction involved building an auditorium identical to another auditorium in its European offices. As a recently hired Auditor and fraud examiner, this is your third day on the job. In an effort to get to know your new company, you had scheduled a series of interviews with all the vice presidents. The first interview was with the vice president of administrative services, Richard Green, who oversaw many construction projects and maintenance services. Because of the massive renovation project, it was not unusual for hundreds of invoices to be forwarded to Green. Coincidence one: You stopped by the accounts payable department and retrieved a series of recently submitted invoices for various trade expenses related to the auditorium construction project. “One of the things you wanted to accomplish was to understand how the accounting codes worked—what was capitalized; what was expensed; how it was recorded, etc.” So, you grabbed a stack of processed invoices with accounting codes and went up to the construction site to meet with the vice president for an hour-long interview. As the two of you walked around the grounds, you asked the vice president if he could explain the accounting codes to you: “He stared at the [top] invoice for approximately 30 seconds and said: ‘That is not my signature on the invoice!’ As he looked through the stack, he found what appeared to be about three or four other forgeries. He was completely baffled.” The initial investigation revealed that all the forgeries were in the painting division, budgeted at approximately $800,000 a year. In addition, the company employed only one person to oversee the painting operations in its facilities department: James Small. Small, a 35-year-old from New Fairfield, Ontario, earned about $30,000 a year. It was his job to coordinate time-and-materials contracts with the scores of painters, carpenters, electricians, and plumbers who toiled daily on the renovation, repair, and construction of the building complex. As facilities supervisor, Small regularly forwarded invoices to the vice president of administration services for approval. Small launched his scheme by crafting false invoices for the jobs done by the painters. He took a copy of a trade invoice from an existing painting contractor and, using his home computer, created a replica into which he would record slightly different hours for the trade contractors’ work. A probable scenario of how Small executed his scheme. “Let’s say he knew that during the month of February, as an example, there were twenty-seven painters on the grounds during the course of one week.” Small also knew the total number of hours and the volume of materials used in that time. “He would create invoices that were similar in nature but record only eleven painters on the grounds. Small would not reinvoice exactly the same work done during a week, but he would make it look so similar that no one’s suspicions were ever aroused. Effectively, there were no work orders on the “phantom work” he created on these invoices. Small always listed fewer painters on the false invoice than the actual number who had worked that week, and he registered less time for their services than they had actually worked. As part of his job, he regularly brought the trade invoices into the administrative VP’s office for signature approval. After delivering a stack of these invoices, he would return to collect them within the next day or two and deliver the approved invoices to the accounts payable department. This opportunity allowed this individual to go and collect the approved invoices and insert his own replicated fraudulent invoices as approved. This was the first piece of an ‘electronic circuit’ that allowed him to commit the fraud. The second piece of the circuit for the fraud to ignite, was allowing this same employee to transport the invoices to the accounts payable department, and ultimately to collect the cheque. After seeing how easy it was to slip in his own false invoices in the stack of approved ones, Small became bolder in his scheme. He began calling accounts payable, claiming that a carpenter or painter had arrived on the grounds and needed his cheque “immediately.” To keep the project flowing, the employees in the accounts payable department accommodated him. Many employees knew and liked Small, who had worked for the company for nearly 15 years. Eventually, this routine became so familiar to employees in accounts payable that Small did not even need to make up an excuse to pick up cheques. Each time he would collect them, he stashed the cheques for the false invoice in his pocket. When he returned home to New Fairfield, Ontario, he took the cheque to his bank, forged the contractor’s name on the back, then endorsed it with his own name and deposited the cheque. Small’s first transaction totalled $1,200. His second transaction jumped to $6,000—his third, $12,000. His largest single transaction came to over $66,000. Small refined his strategy by pacing, on a parallel basis, a certain amount below the total due to the painter. “If the painter submitted an invoice for $20,000 a month,” Small would submit an invoice for, say, $14,000. If the painter submitted a $6,000 invoice, he’d submit one for $3,000.” The individual invoice amounts, because of the continuing construction, would not have alarmed even an auditor. Small’s behaviour at the office was the same as ever. He dressed the same way, drove the same car to work, and shared little of his private life with other workers. He had not taken a vacation in over four years, and his boss thought he should be promoted (a move Small resisted, for reasons now obvious). After hours, however, Small was a different person. Coincidence two: the secretary for the audit department, Joyce Williams, was not only on Small’s bowling team, but she was also his neighbour. They saw each other regularly at the local bowling alley. She took notice when Small’s behaviour became somewhat extravagant. At first, he took to buying the team drinks, a habit most appreciated by his teammates. However, the secretary began wondering where all the money was coming from when he showed up in his new Mercedes (one of five cars he bought) and talked about a new $18,000 boat. He also invested in real estate and purchased a second home costing $416,000. Joyce approached Small one night after he had spent some $800 on drinks for the team. “Did you win the lottery, or what?” she asked. He explained that his father-in-law had recently died and left a substantial inheritance to his wife and him. Small’s father-in-law was actually quite alive, but no one ever bothered to check out the claim. No one suspected Small of doing anything sinister or criminal. All of his associates considered him “too dumb” to carry out such a scheme. One person described him as “dumb as a box of rocks.” Coincidence three: After four years without a vacation, Small took what he considered a well-deserved trip to Las Vegas. But he wasn’t there long before he was called back to Oakville Ontario. One can imagine his chagrin at having to leave the casinos and boardwalks and head back to the office. Little did he know that things were about to get a lot worse. Upon his return, Small found himself confronted by the auditor, the vice president, and two attorneys from the district attorney’s office. He readily admitted guilt. “He said he had expected to get caught,”. Small claimed there was no one else involved, and the sum total of his fraud was about $400,000.” But based on your review you found that Small had forged endorsements on more than fifty checks in those four years, totalling $1,057,000. Small served only two years of an eight-year sentence in a state penitentiary. At the time of his indictment, his wife filed for divorce, claiming she knew nothing of her husband’s crimes. Small told a reporter in jail that the loss of his family and the public humiliation had taught him his lesson. “For a dollar or for $5 million, it doesn’t pay,” Small said. “You enjoy the money for a while, but you lose your pride and your self-respect. It ends up hurting your family, and no money can ever change that.”
In writing your response the following points must be addressed fully:
A) Determine the type of fraud committed and describe with examples the symptoms of fraud that are evident in the case study.
b) As discussed in units 1 to 4, all frauds involve key elements. Identify and describe using examples the elements of the Purell’s magazine fraud.
c) What role did trust play in allowing this fraudulent scheme to transpire? What elements contributed to this trust? Outline two positive and two negative consequences that this might pose to the company in future fraud prevention?
d) Describe Purell Magazine and Publishing House fraud prevention programme and identify any improvements that might be necessary to prevent this type of fraud or at least discover it sooner.