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Fraud and the Forensic Matrix, Part 1: What is Fraud?

Jun 13th 2016
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Gary German is a CPA licensed in the state of North Carolina. Some of the more interesting accounting stuff he does involves fraud investigation. Many of his fraud stories are included in a presentation he calls “Fraud and the Forensic Matrix.” His audiences have included CPA groups, Fortune 500 companies, the Federal Reserve, the Secret Service, and other professional and law enforcement groups around the country. You can reach him at: [email protected]

I’d like to start out with a quick survey that will help us get to know each other a little better. 

First question, how many of you think there’s a lot of fraud going on now-a-days? Sure, most of us agree that there’s a lot of fraud out there.

Second question, how many of you have actually encountered fraud in the course of your professional life? Most everybody, I would guess. I’m not surprised. I meet very few CPAs or business people that have not seen fraud at one time or another.

Finally, how many of you have actually committed fraud? Nobody? Come on now, can’t we be honest with each other? Are you sure that you’ve never pushed the ethical envelop a little too far?

Perhaps this is a good place to start. What are we going to call “fraud”? How are we going to define it? Early in my own career things happened which forced me to ponder these questions.

When I was in public accounting, our meal reimbursement for travel was a per diem basis: we collected the same amount no matter what we actually spent. Then I went to work for a Fortune 500 company and its reimbursement policy was “actual”. Furthermore, for anything under $25, a receipt was not required.

My first week on the road, one night I just craved McDonald’s. Dinner was $5.87 and, anal accountant that I am, I attached the receipt to my expense report. There are two things you have to know to fully appreciate this story: (1) $25 back then would be the equivalent of $100 today; (2) it was difficult for one person to spend $5.87 in one sitting at McDonald’s, but I was up to the challenge.

I got a call from my boss. He said, “Don’t ever do that again. Executives with this company do not spend $5.87 for dinner; furthermore, I do not want to see your expense report cluttered up with receipts for anything under $25.”

So, from that point on, all my dinners cost between $23 and $24.99, I didn’t have to prove it and everybody was happy.

Now … are we going to call this “fraud” or is this one of those “generally accepted” things that’s covered under GAAP?

A few years later I’m working for another company. This company has a great travel policy. We can come home every weekend, and if we’re in the air more than three hours, we are eligible to fly First Class. In addition, if we’re on the road two or more consecutive weeks, there’s some flexibility as to what we can do on the “middle weekend” as long as it doesn’t exceed the cost of the plane ticket. Most everyone I worked with was married and they always went home for the weekend. I was single.

My dilemma? What can a single North Carolina boy do for a weekend if he’s out on the West Coast and he has the price of a First Class plane ticket in his hip pocket? How about: fly from LA to Salt Lake City on Friday afternoon, rent a car, check into the best hotel in town, eat at some really great restaurants, ski Alta on Saturday, ski Snowbird on Sunday, fly back to LA Monday morning, and still have a couple hundred dollars left over. Anal accountant that I am, I attached a Cost Justification Worksheet to my expense report showing how much money my ski weekend had saved the company.

I got a call from my boss. He said, “As far as I’m concerned, what you did is in accordance with company policy. You told me about it before you did it and I approved it but, now that I see it in writing, can you make it look different? This is supposed to be a job and it looks like you’re having too much fun.”

I told him that I had a good friend who was a travel agent and she could give me receipts to make it look like anything he desired. He said, “Good. From now on just put down the price of the plane ticket and don’t tell me what you do.”

Now … are we going to call this “fraud” or is this one of those “politically correct” things?

And then I was down in San Antonio doing an audit. I stumbled across a situation where I suspected that three guys had conspired to embezzle $1 million. Going through proper channels to get the proof I needed would take a long time. I wanted to talk to customers and these guys were in the position to prevent me from doing that. So I grabbed a handful of customer files, went back to my hotel, and started making phone calls. I told the customers that I worked for a market research firm that had been hired by the company to review the sales function and would they mind answering a few questions. They didn’t mind and within 30 minutes I had all the proof I needed that, in fact, these three guys had embezzled $1 million.

I confronted the head guy the next morning. At first, he denied everything. Then I told him what I knew and how I found it. He became very angry and said what I had done was probably the most unethical thing that he had ever encountered in business.  Coming from him, I took that as a compliment.

But this made me think: did I commit fraud to catch a thief? Or was this one of those “vigilante justice” things that we’re OK with from time-to-time?

It seems that we have a problem before we even get started on the subject of “fraud”. What are we going to call fraud?

Fortunately, our system has developed a venue of ultimate arbitration for these difficult-to-define issues. That venue is called the Supreme Court. Back in 1964 the Court was hearing arguments on obscenity in the case of Jacobellis vs. Ohio and Justice Potter Stewart uttered this famous quotation:

“I shall not attempt to define the kinds of material I understand to be (pornographic)… but I know it when I see it.”

That’s the way I feel about fraud. I know it when I see it. We’d all like our frauds to be black and white but, in reality, they are usually many shades of grey. They depend largely on the people involved, the time, the place, the circumstance, and I know it when I see it.  Everybody draws the line in the sand in a little bit different place.  Everybody’s moral compass points in a slightly different direction.  I call these variances the “personal doctrine of fairness”.

A few years ago I was doing a series of projects for a large company, some of which involved fraud investigation.  The guy I was reporting to called and said he wanted me to join a particular industry association.  I informed him that it cost $200 and I saw little value in it.  He responded that it would “look good” for me to belong to an association in the company’s business segment and that I should go ahead and join, and put it on my next expense report.

A few weeks later he called me again.  He said someone at the Corporate office had seen the association thing and didn’t think it was proper that the company should pay association dues for an outside consultant.  I reminded him rather gently that he asked me to do it and he approved it in advance.

He said, “Look, this is not a battle that I’m willing to fight right now.  Besides, if anybody can figure out a way to get the $200 back without getting caught it’s you.”

Fraud? I know it when I see it. Rest in peace, Justice Stewart.


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Rowan Webb
By Rowan Webb
Jul 15th 2016 02:06 EDT

It's scary to think that there might be fraud going on right under your very nose until you realise that it just is happening. Saddest to think about, is that it mostly happens either right at the bottom where the employees are disgruntled with their low pay or their family situations, or right at the top when they are already flooded with so much money, there couldn't possibly be anything else to do except misappropriate more money. It is really sad to think about.

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