How to Catch a Thief

By Ernie Cooper, CPA/CFF, CFE, Former FBI Agent

Fraud continues to be a prevalent issue within all types of business organizations today. This includes not only commercial businesses, but also government agencies, school districts, not-for-profits and other organizations where funds are collected and disbursed. Simple as that!

This “fraud cost” can amount to thousands of dollars and in some cases disrupt operations, significantly damage the organization’s reputation, negatively impact the culture of the business, and impact an organization’s going concern. And don’t just think it can happen to Enron-type organizations. It can happen to any organization. In my thirty-plus years of dealing with the “fraud world,” not only as a forensic accountant but also as an FBI Special Agent for over twenty years, I have seen first-hand many sad cases, where just an ounce of fraud prevention could have minimized and in some cases prevented these losses from ever occurring.

While every organization runs the risk of being subject to fraud, there are some basic, key steps an organization can take to “catch a thief” before a fraud is committed.

Understand the Prevalence of Fraud

One of the best ways you can help protect your organization is to first of all understand that fraud can and probably is happening in your organization.  Don’t bury your head in the sand. It is real and it is happening in today’s environment.

Understand Where Fraud “Breeds”

Fraud breeds where there is a breakdown of internal controls. The City of Pasadena scandal, which made headlines at the end of 2014, is a classic example of a typical fraud scheme seen today. According to the Los Angeles Times, former Pasadena employee Danny Wooten was arrested in December 2014 on suspicion of embezzling at least $5 million from Pasadena coffers over the course of a decade. While this fraud scheme occurred in a city, it could just as easily have happened at any other governmental entity, school district, not-for-profit, or commercial business.

The jury is still out as to how this happened to a distinguished city like Pasadena, known for many wonderful things like our annual Rose Bowl Game and Parade. How was this possible? What happened to allow such a major fraud scheme to take place?

As we all know, Mr. Wooten is presumed innocent and he will have his day in court. However, according to published reports in newspaper articles it appears that many “opportunities”—also known as internal control breakdowns—may have existed within the City of Pasadena’s financial operations. This created an environment where financial irregularities can occur without detection. According to published reports, here are just a few of the internal control issues that came to light in this case, which unfortunately are far too common:

  1. Excessive responsibility, control, and authority given to an employee perceived as being trustworthy
  2. Lack of written and documented policies and procedures
  3. Approval for payments of invoices without a proper purchase order, contract, or agreement
  4. Acceptance of vendor invoices lacking sufficient information
  5. Lack of segregation of duties in approving vendor invoices for payment, preparing invoice payment requests, and picking up check payments

I have observed first-hand many frauds where these same basic internal control breakdowns were in existence. Some cases I have recently worked on resulted in a Director of Facilities using district funds for a personal house remodel, another Director of Facilities dating a consultant and paying her extra benefits, and a Financial Manager using funds to support her daughter’s dance education.

I also recently worked a fraud case involving embezzled funds from a commercial business used to help pay for the medical tuition of the fraudster’s niece, who eventually became a medical doctor in Los Angeles. Was this just a case of a “Robin Hood” or a greedy, corrupt employee? Stand by for more on this quite interesting story in one of our next newsletters.

Be Aware of Resources for Fraud Prevention

Finally, there are many more tools and techniques that you can implement fairly easy in your organization to stop or at least minimize fraud. A great source and starting point is the Association of Certified Fraud Examiner’s (ACFE) website. Also, feel free to give us a call at (213) 550-5422 to personally discuss your particular question or concern. Remember, just a few basic steps can save you from a large cost to fraud!

Ernie Cooper leads the Vicenti Forensic Services Team and heads the Vicenti Los Angeles Office. He served as an FBI agent for over 20 years and is an active member of the Society of Former FBI Special Agents. Ernie’s FBI experiences involved working with the “mafia,” bank robbers, kidnappers, undercover operations and white collar criminals all over the country. Ernie’s extensive background and multiple credentials provide a unique and invaluable combination of expertise that has contributed to his success in managing financial fraud investigations for his clients. Ernie can be reached at ECooper@vicenticpas.com.