Your Company Uncovers Financial Fraud. Now What?
Imagine you are the CEO of a company, and there is a knock at your office door. You tell them to come in, and your CFO and HR Director quickly enter your office and close the door behind them. The CFO tells you that Mary, an Accounts Payable Supervisor who has been with the company for over 15 years, is in the main conference room crying.
You know Mary, she is the employee that everyone likes and trusts. In fact, Mary is so well respected that you let her plan the annual Christmas Party, and she handles purchasing gift cards to give out to the employees. Mary also helps get ready for the annual audit when the outside accounting firm shows up, and pays the monthly credit card statements for you, the CFO, and the 6 salespersons that work for the company.
The CFO states that it appears Mary has misappropriated approximately $15,000 from the company.
Now, you feel like you got hit by a semi-truck that just kept going. Not Mary. She wouldn’t steal from the company, nor from me. We are not just co-workers; we are a family here. You then ask the CFO a thousand questions.
How did this happen?
Who discovered it?
Why would Mary steal from the company?
Is there anyone else involved?
How long has this been going on?
How come our outside Auditors didn’t find anything in the annual audit?
The CFO’s answer to all these questions is the same, “I don’t know…”
Then you start to realize that your shock has turned into anger. You order the CFO and HR Director to fire Mary at once and have her escorted off the property. After that’s done, you want to speak to the head of the accounting firm that conducted your yearly audits and find out why this wasn’t detected sooner. Then you want to talk to your lawyer to discuss your legal options regarding suing Mary and the accounting firm. Somebody is going to pay for this, and you want to lash out at everyone. You have been deeply hurt by Mary, but most of all, you feel a deep sense of both personal and professional betrayal.
These events that I just described were taken from an actual case that my agents and I worked on several years ago from the Financial Crimes Unit of the North Carolina State Bureau of Investigation. For those of you who like to skip to the last chapter of a book, I’ll be glad to summarize it for you. Mary had an on-line gambling addiction, which grew into trips to the casinos in Las Vegas a couple of times a year. Mary used 3 of the company credit cards assigned to the 6 salespersons. At some point, 3 of the salespersons left the company to pursue other jobs. Since she was the Accounts Payable Supervisor, no one was going behind her looking at monthly credit card bills for 3 employees that were no longer there. The 3 former employees’ credit cards also showed expensive dinners, vacation trips, rental cars, airfare, hotels, name brand purses, and various other items that could be easily explained if she was ever questioned about them. As for the gift cards for the employees at the Christmas party, Mary did purchase about $2,000 in gift cards for the party each year that were given out to the employees. However, she also purchased an additional $8,000 in gift cards for herself that she used throughout the year for meals, electronics, or just general shopping. We found stacks of gift cards, wrapped in rubber bands in her kitchen drawers when we executed a search warrant at her residence.
We went back and traced every transaction that Mary did for the past 5 years while she worked at the company. She stole approximately $1,000,000 in each of these years, for a total loss of $5,000,000. I asked the CEO and CFO of the company how they did not miss $1,000,000 in revenue each year. The CEO said, “Mike, our company brings in a half billion dollars in revenue each year. If you had five hundred, $1 dollar bills on a table, regardless of if they were stacked up or scattered around, would you be able to easily see that one of them was missing?” He made an excellent point. This is one of the most profound statements I have ever heard, and I have shared it with clients who are in a similar situation. The more successful your business becomes, the more important it is to stay on top of your finances.
So how did $15,000 grow into $5,000,000? The obvious answer is no one was going behind her. So, the next question is, why wasn’t this picked up in the yearly audits conducted by the outside accounting firm. That’s because audits are designed to look at a company with a high-level view, to determine if the company is making more money than it is spending. Most audits do random sampling of invoices, credit cards, and expenses. Mary was smart enough to use the salespersons’ credit cards that were still working at the company, and of course, all those expenses and payments were properly documented for the auditors. Mary has become comfortable and adept at covering her tracks after all these years.
As the HR Director of a company, what happens next if you unfortunately find yourself in a similar situation? There are many questions to consider: including suspension versus firing the employee; when do we interview the employee; who conducts the interview, how can we recoup the stolen money, and when do we need to notify law enforcement?
I encourage you to find an expert to guide you through this extremely critical point in your company’s history and to help evaluate and navigate this terrain. Your company’s survival and reputation are at stake.
Author: Michael East, CFE
SafeHaven Security Group