ACCT341, Chapter 9, Reference 9c
Assignment 9c
1. Read the article below entitled “Lapping It Up” by Joseph Wells.
(A) Define lapping.
(B) Why do virtually all lapping schemes eventually reveal themselves?
(C) In the story, what were the:
(1) incentives/pressure to commit the fraud.
(2) opportunities to commit fraud (i.e. which controls were weak)
(D) How was Nelson punished?
2. Read the article below entitled “. . . And One For Me” by Joseph Wells.
(A) Define skimming. Give an example.
(B) What are the three principal skimming targets?
(C) In the story, what were the:
(1) incentives/pressure to commit the fraud.
(2) opportunities to commit fraud (i.e. which controls were weak)
(D) How was Roger punished?
3. Read the article below entitled “Billing Schemes, Part 1: Shell Companies That Don’t Deliver”
by Joseph Wells.
(A) What steps need to be taken to create a “shell” company?
(B) What are four billing ploys used by employees to cheat an employer?
(C) In the story, what were the:
(1) incentives/pressure to commit the fraud.
(2) opportunities to commit fraud (i.e. which controls were weak)
(D) What ended up happening to Stanley?
4. Read the article below entitled “Billing Schemes, Part 2: Pass-Throughs” by Joseph Wells.
(A) In the story, what were the:
(1) incentives/pressure to commit the fraud.
(2) opportunities to commit fraud (i.e. which controls were weak)
(B) What ended up happening to Lincoln?
5. Read the article below entitled “Billing Schemes, Part 3: Pay-and-Return Invoice” by Joseph
Wells.
(A) In the story, what were the:
(1) incentives/pressure to commit the fraud.
(2) opportunities to commit fraud (i.e. which controls were weak)
(B) What ended up happening to Veronica?
(C) How effective are hot lines? What are three kinds?
6. Read the article below entitled “Billing Schemes, Part 4: Personal Purchase” by Joseph Wells.
(A) In the story, what were the:
(1) incentives/pressure to commit the fraud.
(2) opportunities to commit fraud (i.e. which controls were weak)
(B) Approximately what percent of employees who commit fraud did so at previous jobs?
Journal of Accountancy
A skimming method doomed to failure over time.
Lapping It Up
BY JOSEPH T. WELLS
elson, a computer programmer for a financial institution in New Orleans, sat
across the desk from his boss. Nelson flinched when the boss told him the news that
he, an 11-year company veteran, was in trouble with the home office in Dallas
because of irresponsible behavior.
More than a year ago, Nelson had accepted a promotion requiring a transfer to New Orleans
from Dallas. The company extended him a $15,000 bridge loan, temporary funds to cover
moving and household expenses. Nelson never paid back the loan, however, even after
repeated requests to do so.
Unbeknownst to the company, Nelson had been in serious hock for years. He and his wife just
couldn’t seem to control their spending. With creditors hounding him, Nelson had taken the
$15,000 and paid some of his most pressing debts. Now, with the boss facing him, he didn’t
know what excuse to use this time for not paying back the company.
But the boss was beyond being mollified with any more excuses. “Nelson,” he said, “the
company has made it pretty clear: If you don’t get this debt taken care of, it’s going to cost
you your job. Do you understand?” Nelson understood.
Necessity being the mother of invention, Nelson concocted a plan made possible only by an
internal control deficiency at the company big enough to drive a truck through: unrestricted
access to “live” data (read: customer accounts). Even as the bank’s chief programmer, Nelson
never should have had access to such data, but he did. That could have been because he was
the principal architect of the entire computer system.
Skimming Schemes
Comparison of median losses
Source: Occupational Fraud and Abuse, by Joseph T. Wells, Obsidian Publishing
Co., 1997.
The first step of Nelson’s plan involved opening a savings account at the bank under someone
else’s name. In this case, he chose the ID of his own elderly, infirm uncle. Once the account
was active, Nelson set about reprogramming the bank’s computers to accommodate a highly
complex and seemingly foolproof lapping scheme.
Because Nelson needed $15,000 all at once, he easily located a customer checking account
with a large balance. But since he knew a funds transfer would create a record on the
customer’s statement, he removed the funds from the “ending balance” field on the statement
itself. He transferred the money to the uncle’s account, over which he had signature authority.
Nelson debited the uncle’s account and credited his own, using the proceeds to pay his bills.
The bank’s computers were programmed to print account statements throughout the month
(for example, customer A’s statement mailed on the first day of the month, customer B’s on
the second and the last one on the 30th). That being the case, Nelson figured he would have
use of the funds for 29 days—no more. So he programmed the computer to simply “roll” the
$15,000 through the ending balance field on other checking accounts according to a
predetermined schedule. Nelson’s plan, in effect, was to let the money bounce throughout the
computer program until he could legitimately repay his “loan.”
Alas, this method was too easy for Nelson, and therefore too tempting. He rationalized that the
bank wouldn’t find out or even miss the cash. So he continued to “loan” himself more money
to pay off other pressing obligations.
When the amount ballooned to $150,000 and involved thousands of customer checking
accounts, Nelson’s ingenious 29-day computer program failed to reverse some transactions in
time to avoid detection. In his haste, he forgot there were only 28 days in February. Customers
started pouring into the bank with statements in hand showing a major discrepancy: Their
ending balances last month were different from the beginning balances this month—a
mathematical impossibility.
Although Nelson initially blamed the problem on a programming error, he finally confessed to
his boss what happened. He had always planned to pay the money back, Nelson promised
solemnly, but he was at a loss to explain exactly how he could do that.
Ever the nice guy, Nelson helped the authorities gather the evidence to convict him of
embezzlement. It’s a good thing he did, too. Chasing down every single transaction would
have been extremely time-consuming. Nelson’s cooperation got him only 15 months as a
guest of the Louisiana penal system.
ROBBING PETER BUT FORGETTING TO PAY PAUL
If Nelson had been anything other than a rank amateur, he never would have picked lapping as
the scheme of choice for covering cash thefts. Although he managed to lap customer checking
accounts for about nine months—no small chore—Nelson’s plan was probably doomed from
the outset.
That’s because lapping almost always goes beyond robbing Peter to pay Paul. Once the first
attempt is successful, lapping tends to increase at exponential rates. Now, the fraudster has to
steal from other customers. Then, there are many accounts to keep track of. Therein lies the
fraudster’s pact with the devil: The more lapping occurs, the greater the chance of making a
mistake.
That’s exactly what happened to Nelson. In his case, even his “move-the-money-around”
program couldn’t keep track of the thousands of transactions. So when an accounting student
once asked me the best way to detect lapping schemes, I couldn’t help myself: “Time,” I
replied, only partially in jest. “In time, lapping schemes will invariably reveal themselves.”
A LIST OF SINS
Because of Nelson’s sins, a lot of people in his company suffered. The boss lost a valuable
computer programmer and long-term employee. Since the prosecution of Nelson drew
headlines, the bank lost credibility with some of its customers, likely costing it many multiples
of the $150,000 he stole. Nelson’s coworkers at the bank suffered a loss of morale.
Management was embarrassed. Nelson’s family had to ask for public assistance while he was
imprisoned.
But Nelson wasn’t the only one at fault in this case. Take, for example, the bank’s upper
management. It is ultimately responsible for the flawed system of internal control that
permitted Nelson to commit his crime in the first place. Not only were there computer system
problems, but the bank never should have allowed Nelson to open an account using the
identification of a relative 40 years his senior.
And management did not recognize the signs of a financially strapped employee. Had
someone done so, the company might have sought an alternative to forcing Nelson into a tight
corner; desperate people do desperate things. Many large companies, for example, provide
financial counseling to troubled debtors.
The bank’s external auditors should have detected the fact that Nelson could both program and
modify customer accounts—a serious deficiency. The internal auditors should have spotted
the glaring control weakness long before that.
TURNING WATER INTO WINE
To the bank’s credit, it decided to do something positive after Nelson’s fall from grace. First,
it closed the internal-control hole. Second, the company appointed an ombudsman to counsel
employees in times of stress—financial and otherwise. Most important, it implemented
companywide antifraud training to sensitize its managers and employees to not only how
workers commit fraud, but why they do it in the first place.
When putting together its employee video-training program, the bank went looking for an
expert to talk about the fraud problem. It found one: From behind prison walls, Nelson—now
full of remorse—volunteered. He looked directly at the camera and, through the tears, told his
own story.
The Lap Trap
Lapping is the fraudster’s version of “robbing Peter to pay Paul”
skimming. It is the extraction of money from one account to
cover shortages in another account. For example, a fraudster
steals the payment intended for customer A’s account. When a
payment is received from customer B, the thief credits it to A’s
account. And when customer C pays, that money is credited to B.
Repeated many times, lapping is difficult for the dishonest
employee to keep track of. As a result, almost all lapping
schemes quickly reveal themselves.
All material cash misappropriations send telltale signs: reduced
cash combined with increased expenses and/or decreased revenue
(see “Enemies Within,” JofA, Dec.01, page 31). Most lapping
occurs because of inadequate control over incoming payments.
Following are some classic “red flags” of lapping:
Excessive billing errors.
Slowing accounts receivable turnover.
Excessive writeoffs of accounts receivable.
Delays in posting customer payments.
Accounts receivable detail doesn’t agree with general
ledger.
A trend of decreasing payments on accounts receivable.
Customer complaints.
2002 Joseph T. Wells
JOSEPH T. WELLS, CPA, CFE, is founder and chairman of the Association of Certified
Fraud Examiners, Austin, Texas. Mr. Wells’ article “So That’s Why They Call It a Pyramid
Scheme” (JofA Oct.00, page 91) won the Lawler Award for best article in the JofA in 2000.
His e-mail address is joe@cfenet.com.
Journal of Accountancy
Skimming is by far the most popular method for
stealing an organization’s cash.
… And One for Me
BY JOSEPH T. WELLS
oger had worked hard to earn his CPA. He had big dreams—he had planned to use his
newfound financial expertise after college to build a fortune. But 10 years later, here he
was, stuck as the controller for a midsize soft drink bottler and distributor in the South,
going nowhere fast. It wasn’t fair, Roger reasoned. Besides, he thought his boss was
ignorant and didn’t have a fraction of Roger’s accounting knowledge.
A beverage company generates a lot of currency, and Roger’s primary responsibility was to keep track
of it. The cash came from three principal sources: customer payments on accounts receivable, direct
sales to customers (supermarkets) and vending machine collections. Payments on account usually came
through the mail, while customer sales and vending machine currency was collected by route salesmen.
No matter where the cash came from, it all arrived on Roger’s desk daily. He was the last person to see
the money before it was deposited in the bank.
At the end of one particularly distressing day, Roger noticed a deposit slip with a math error: There was
exactly $1,000 more in cash than reflected on the deposit. At first irritated at the notion of having to
correct the mistake, Roger stopped and smiled. And then he put 50 twenty-dollar bills in the top of his
desk drawer, locked it, went home and didn’t look back. Two years and $475,000 later, Roger still
didn’t feel good about his job, he hated working in this company, and he despised the boss more than
ever.
For Roger, being able to skim money had been no real challenge. He thought the boss should have
noticed the glaring internal control deficiency in the operation and that his controller had unrestricted
access to cash since he had unrestricted access to the books. On top of that, the company wasn’t
audited. But so it is with many small to midsize businesses.
Roger’s skimming scheme was the essence of simplicity. The daily bank deposits that arrived on his
desk had already been prepared by a bookkeeper. Attached to the deposit slip was documentation in
two forms: The bookkeeper prepared a list of payments on accounts receivable and each route salesman
prepared a deposit for the cash he had collected. Roger left the accounts receivable alone. But for the
route deposits (cash sales) he kept a handy supply of blank forms in his desk. After everyone went
home, Roger simply removed cash from one of the route deposits and prepared a new form showing the
lower deposit amount. Then he’d throw away the deposit slip prepared by the bookkeeper and fill out
another in his own handwriting. In an effort to avoid detection, Roger rotated the route salesman he
shorted and he took cash on an irregular basis. His scheme seemed to be working. But despite all of that
money, Roger still had a serious attitude problem.
Source: Reprinted from “Occupational Fraud and Abuse,” by Joseph
T. Wells. Obsidian Publishing Co., 1997.
The boss noticed how screwy Roger had been acting for months. Things weren’t getting done.
Financial statements were late. Tax returns were overdue. Roger had not conducted a serious inventory
in a year. He was missing more and more work. When the boss would point out all these problems,
Roger would just glare at his desk. But in one final fit of anger, the boss fired Roger—effective on
Friday. The following Monday, the boss called his CPAs for some temporary help until Roger could be
replaced. By that afternoon, one of the CPAs spotted a journal entry of just over $380,000 made by
Roger the previous Friday: He debited cost of sales and credited the same amount to inventory. Roger
described the reason for the journal as, “To adjust inventory to actual value.” That one journal entry
wiped out half the bottling company’s profits.
Prevention and Detection
Skimming, the single most common form of cash misappropriation,
occurs when employees of organizations steal incoming funds. The
term comes from the fact that money is taken off the top, the same
way cream is skimmed from milk. By understanding the basics,
auditors can more easily recognize skimming schemes.
There are three principal skimming targets: revenue, refunds and
accounts receivable Revenue or sales skimming is by far the most
popular method, accounting for two-thirds of the incidents and
preferred by the crooked employee because the other two schemes
require alteration of the books and records to avoid immediate
detection. Since any employee who comes in contact with cash can,
in theory, skim money, the usual suspects are salespeople, cashiers,
mail clerks, bookkeepers and accountants. But be aware that top
executives, who can easily override controls, also skim. When they
do, the losses are invariably large.
Regardless of who skims money or the method used, the
accounting effect is the same: Revenue will be lower than it should
be but the cost of producing that revenue will remain constant.
Therefore, be alert to the following indicators. The greater the
number of indicators, the greater the risk that skimming is
occurring:
Flat or declining revenue.
Increasing cost of sales.
Excessive or increasing inventory shrinkage.
Ratio of cash sales to credit card sales decreasing.
Ratio of cash sales to total sales decreasing.
Ratio of gross sales to net sales increasing.
Discrepancies between customer receipt and company receipt.
Customer complaints and inquiries.
Forged, missing or altered refund documents.
It was a pretty simple matter for the CPAs to unravel the scheme. First, they conducted a complete
physical inventory of the operation. Next, they examined—by hand—every deposit slip for a three-year
period. They located over a hundred bank deposit slips seemingly prepared in Roger’s own
handwriting. Then, the CPAs traced the bank deposits to their corresponding route deposits. In each
case, at least one route deposit was prepared in Roger’s writing. Finally, they pulled the deliverymen’s
copies of their original route deposits. In each and every case, the copy of the original route deposit was
higher than the forged copy by exact multiples of $1,000. The CPAs’ report helped prosecutors convict
Roger of embezzlement. Roger had used the proceeds of his thefts in the classic manner: a new car, a
better lifestyle and frequent trips to Las Vegas. Roger’s trial defense was twofold: First, he’d won quite
a bit of money gambling, and second, anyone could have taken the money. He was unable to explain
the stupid journal entry he made on his last day of work. Perhaps he had a compelling need to be
precise. Because he was a first-time offender, Roger didn’t do any jail time, but he now owes Uncle
Sam about $1.4 million. The boss learned a very important lesson about the value of independent
oversight. Although the size of the business did not justify a full audit, the CPAs convinced the boss to
do three simple things: First, separate the accounting functions from cash handling; that becomes
especially important if the CFO is in a position to seriously abuse the trust placed in him or her.
Second, hire an independent contractor on an annual basis to take a complete inventory. Finally, have a
CPA review the company’s bank statements on a regular basis.
JOSEPH T. WELLS, CPA, CFE, is founder and chairman of the Association of Certified Fraud
Examiners, Austin, Texas. Mr. Wells’ article “So That’s Why They Call It a Pyramid Scheme” (JofA
Oct.00, page 91) has won the Lawler Award for best article in the JofA in 2000. His e-mail address is
joe@cfenet.com.
Journal of Accountancy
These scams are among the most costly asset
misappropriations.
Billing Schemes, Part 1:
Shell Companies
That Don’t Deliver
BY JOSEPH T. WELLS
This is the first article in a four-part series on identifying false
invoices and their issuers. This and next month’s columns focus
on billing schemes that involve shell companies. Articles in the
September and October issues explain how to detect and prevent
two scams that use other, completely different phony-bill
strategies.
s he left the county clerk’s office, Stanley, a creative writer at a large
advertising firm, gazed at the paper he’d just obtained and smiled to himself. For
$35, it was easily the best investment he had ever made. Stanley pocketed the
document and drove straight to his bank. Less than 30 minutes after presenting the
paper to an official, he opened a business account in the name of SRJ Enterprises—a
title that reflected his initials. The simple document—known as a fictitious-name or
DBA (doing business as) certificate—was the key to his grand plan to defraud his
employer.
Such documents, available for a modest cost at any county courthouse, allow a person to do
business under a different name. Many small business owners choose to obtain an assumedname certificate instead of incorporating, which can cost thousands of dollars. For example, if
Bob Black wanted to open Bob’s Body Shop, all he would have to do is go to the courthouse,
fill out a simple form and pay a small fee for a document he could use to open a bank account.
Voila! He’d be in business.
In this study of an actual case, CPAs will learn the first of two ways employees use shell
companies to defraud organizations. Moreover, auditors will learn how to set up effective
internal controls to prevent these costly occupational crimes.
EASY AS 1-2-3
Maybe starting a business was
what Stanley had in mind when
he established SJR Enterprises,
maybe not. But, fiddling with his
wedding ring when he opened
the bank account with a $100
cash deposit, Stanley said his
“business” was located at what
was actually the home address of
his girlfriend, Phoebe, a
disgruntled colleague from his
employer’s accounting
department.
Ways to Cheat an
Employer
In billing schemes a company
pays invoices an employee
fraudulently submits to obtain
payments he or she is not
entitled to receive. There are
four major types of such ploys,
which are by far the most
expensive asset
misappropriations.
Shell company schemes use a
fake entity established by a
dishonest employee to bill a
On one occasion Stanley had told
company for goods or services
Phoebe of his latest brainstorm:
it does not receive. The
If he submitted phony invoices to
employee converts the payment
the company they worked for,
to his or her own benefit.
she could get them approved and
paid. It didn’t take them long to
Pass-through schemes use a
conclude there was little risk of
shell company established by
getting caught, especially if they
an employee to purchase goods
discreetly saved their illicit gains
or services for the employer,
in a local bank and later used
which are then marked up and
them to start new lives
sold to the employer through
elsewhere.
the shell. The employee
converts the mark-up to his or
SMOOTH SAILING
her own benefit.
Implementing the scheme was
simple. On his home computer
Pay-and-return schemes
Stanley printed an invoice under
involve an employee purposely
the name of SJR Enterprises.
causing an overpayment to a
Following Phoebe’s instructions,
legitimate vendor. When the
he billed their employer $4,900
vendor returns the overpayment
for “services performed under
to the company, the employee
contract 15-822,” a description
embezzles the refund.
similar to that found on many
other invoices. Phoebe had
Personal-purchase schemes
chosen that amount because the
consist of an employee’s
company rarely scrutinized
ordering personal merchandise
invoices for amounts less than
and charging it to the company.
$5,000. She then created a “new
In some instances, the crook
vendor” file and phony
keeps the merchandise; other
documents to go with it. Once
times, he or she returns it for a
SJR Enterprises was recorded in
cash refund.
the computer as a vendor, Phoebe
simply put the SJR invoice into a
stack of much larger invoices for
approval and payment. Right
from the start, their plan worked
flawlessly.
In fact, the scheme worked so well Phoebe and Stanley tried it again—and again and again.
Ultimately, they bilked the company out of almost $700,000 in cash over two years. To Stanley
and Phoebe, it was a lot of money. But as far as the company’s total revenues were concerned,
it was insignificant. As long as they didn’t get too greedy, Stanley and Phoebe could have gone
on billing their $100 million advertising agency indefinitely. But soon two people would foil
Stanley and Phoebe’s plans—Vivian, Stanley’s wife, and Dennis, the advertising agency’s
internal auditor.
Fake Billing: It’s Not Small Change
Source: Occupational Fraud and Abuse, by Joseph T. Wells, Obsidian Publishing
Co., Inc., 1997.
SUSPICIONS GROW
Vivian had known for some time Stanley was being unfaithful. He displayed the classic signs:
a lack of interest in her, late “meetings” at the office, vague business trips on the weekend. But
Vivian knew there was more. For the last two years, Stanley had ceded control of their joint
checking account to her and no longer asked for spending money.
Vivian considered the possibility that Stanley was stealing from his company. Where else
would he get money? If Stanley was embezzling funds to support a girlfriend, that would be
the last straw, Vivian thought. In a fit of anger, she called Dennis, whom she had met several
times at company social functions.
Dennis, who was also a CPA, listened carefully to Vivian’s sketchy evidence and said he
would look into it. After her call, Dennis gave the matter some thought and reasoned that if
Stanley was stealing company money, he most likely was engaged in some sort of fraudulent
disbursement scheme. Since Stanley didn’t work with the company’s money himself, Dennis
figured he would need an accomplice who did. And that person would have left a paper trail of
phony records. The challenge would be to find the bogus paperwork among all the company’s
legitimate transactions.
CRACKING THE SHELL
Acting on the fraudulent
disbursement theory, Dennis
took three separate steps to
uncover the billing scheme.
First, he examined the
company’s line-item costs over a
five-year period, looking for
anomalies. This revealed a small
uptick in consulting expenses,
which led him to the second
step: a detailed examination of
vendors.
The billings from SJR
Enterprises stood out like a sore
thumb. Phoebe had put SJR on
the books as a vendor nearly 24
months earlier. Since that time,
its billings had increased in both
frequency and amount. Dennis
correctly reasoned that
consultants generally don’t bill
more than once a month, nor do
they normally quadruple their
billings in one year’s time. He
also noted that some SJR
invoices weren’t folded and
wondered whether that meant
they hadn’t even been mailed.
Furthermore, SJR Enterprises
wasn’t in the phone book.
The third and final step in
Dennis’s plan was to compare
vendor addresses with
employees’ home addresses.
Bingo! Dennis knew he had
found Stanley’s accomplice.
Before consulting legal counsel,
Dennis went to the courthouse
and obtained a copy of Stanley’s
assumed-name certificate—a
document of public record. One
look at it removed any doubt
that Stanley and SJR Enterprises
were one and the same.
Red Flags
Signs of billing schemes
include
Invoices for
unspecified consulting
or other poorly defined services.
Unfamiliar vendors.
Vendors that have only a postoffice-box address.
Vendors with company names
consisting only of initials. Many
such companies are legitimate,
but crooks commonly use this
naming convention.
Rapidly increasing purchases
from one vendor.
Vendor billings more than
once a month.
Vendor addresses that match
employee addresses.
Large billings broken into
multiple smaller invoices, each
of which is for an amount that
will not attract attention.
Internal control deficiencies
such as allowing a person who
processes payments to approve
new vendors.
Upon reviewing the evidence, the company’s lawyer didn’t need much convincing. He gave
Dennis the go-ahead to confront Phoebe and Stanley. They both confessed and returned their
nest egg—practically all of the $700,000 they’d stolen. Due to the magnitude of their crime,
the pair faced jail time, but—because they were first-time offenders—the judge sentenced them
to probation.
The story doesn’t end there, though: Both Phoebe and Vivian dumped Stanley. And today,
menially employed, he lives in a cramped garage apartment. Alone, he wonders where he went
wrong, both morally and strategically.
But Dennis, the internal auditor, knows where he erred and realizes he should’ve seen the
connection between the internal control deficiency that allowed Phoebe to add new vendors
and the small increase in consulting expenses. “Soft” billings—for consulting, advertising and
similar services—are ripe targets for this kind of fraud because they typically describe
functions that are difficult to quantify, which makes it harder to assess their validity.
Simple procedures might have prevented this scheme. A credit check on SJR Enterprises would
have revealed this shell company had no history. And looking in the phone book would have
shown there was no listing for the bogus enterprise. Plus, comparing vendor addresses with
home addresses of employees before approving new vendors would have drawn attention to
SJR immediately.
In retrospect, Dennis considers himself lucky. Unlike most fraud cases, the company got most
of its money back. Dennis also learned how to prevent future billing schemes. But he feels
especially fortunate to still have his job.
JOSEPH T. WELLS, CPA, CFE, is founder and chairman of the Association of Certified Fraud
Examiners in Austin, Texas, and professor of fraud examination at the University of Texas. Mr.
Wells’ article, “So That’s Why They Call It a Pyramid Scheme” (JofA, Oct.00, page 91), won
the Lawler Award for the best article in the JofA in 2000. His e-mail address is
joe@cfenet.com.
Journal of Accountancy
Auditors should scrutinize steep fluctuations in the
cost of goods sold.
Billing Schemes, Part 2:
Pass-Throughs
BY JOSEPH T. WELLS
This is the second article in a four-part series on identifying false
invoices and their issuers. July’s and August’s columns focus on billing
schemes involving shell companies criminals set up to facilitate fraud.
Articles in the September and October issues will explain how to detect
and prevent two scams that employ other, completely different phonybill strategies. This month’s case study shows auditors and CPAs how
to recognize the pass-through billing schemes crooked purchasing
agents and others sometimes use to illegally line their pockets.
en, a recent accounting graduate, was on his first real auditing assignment at
a West Virginia manufacturer of prepackaged cement. Because Ben was a rookie,
his supervisors naturally assigned him tasks they didn’t want to perform. That
explains why he was standing atop one of the company’s seven huge cement silos
on the morning of December 31, his teeth chattering in the cold wind as he
observed employees taking inventory. As workers sounded, or measured, each
silo’s contents, Ben watched dutifully and then double-checked every
measurement they made.
Later that day, he reported the
inventory tallies to Julia, his
audit supervisor, and vouched for
their accuracy. But on January 3,
Julia called Ben into her office to
talk about the cement
manufacturer’s expenditures for
raw materials; they were much
higher than in previous periods.
MAKING SENSE OF THE
NUMBERS
How to Sniff Out Phony
Vendors
CPAs can help prevent false
billing schemes by establishing
good controls over their
employer’s or their clients’
vendor-approval processes.
Ensure those involved in
purchasing cannot approve
“Are you sure these inventory
counts are correct?” Julia asked.
“The client’s total spending on
raw materials soared last year.
So, I expected a roughly
proportionate increase in
inventory. But the numbers you
reported are only slightly
different from the prior
period’s.”
vendors.
Before approving a new
vendor, evaluate its legitimacy
by
Obtaining its corporate
records and other relevant
documents.
Checking its credit rating.
Ben nodded affirmatively, but
hoped he had not made any kind Confirming that it is listed in
of egregious error. He was
telephone directories.
mindful of his lack of experience
and had been careful, gazing into Contacting its references from
each silo and confirming every clients and others.
sounding.
Julia frowned. “Well, if the
ending inventory is correct, then
we need to look at what the client
is paying to manufacture cement.
Maybe the unit cost of raw
materials has gone up sharply.
Let’s go talk to the client’s
purchasing department.”
Soon Ben and Julia were sitting
across a desk from Lincoln, the
manufacturer’s chief purchasing
agent. He confirmed the cost of
limestone—a key ingredient in
cement—had jumped nearly 50%
in the last year. As they were
about to leave, Lincoln
volunteered something that
caught Julia’s attention: “I don’t
know why the price increased so
much last year, but it’s probably
temporary.”
As soon as the two auditors were
out of earshot, Julia pulled Ben
aside. “Something’s fishy about
this,” she said. “If anyone in the
company should know why the
cost of limestone has jumped so
Being particularly cautious
about a vendor with a postoffice-box address or a name
composed entirely of initials.
Determining whether its
business address matches any
employee’s home address.
Once the company approves a
new vendor, the CPA should
closely monitor the account by
Watching for increases in the
amount or frequency of
billings.
Observing variances from
budgets or projections.
Comparing its prices with
those charged by other sources.
much, it’s Lincoln. And since he
didn’t know why the price went
up, how could he know it’ll go
down?”
SIFTING FOR CLUES
All weekend, Ben and the rest of the audit staff pored over the company’s limestone
purchase invoices. By Sunday night, they had a pretty good picture of what was happening.
For one thing, about a year ago, Lincoln had personally authorized the addition of a new
limestone supplier—Majors and Co.—to the company’s list of approved vendors.
The audit’s documentation also reflected that—within just a few months—Majors had
become the company’s sole source of limestone, at prices approximately 50% higher than
the company had been paying elsewhere.
Close-Up on False Billing
Source: Occupational Fraud and Abuse, by Joseph T. Wells, Obsidian
Publishing Co. Inc., 1997.
Julia came right to the point: “I think we might find Lincoln is connected to Majors and Co.,
which may be buying limestone from someone else, marking up the price and reselling it to
the cement company.”
On Monday morning, carrying a large stack of invoices from Majors and Co., Julia met with
the company president, who listened to what she had to say. After a few minutes, the
president said: “I wonder if Lincoln is trying to get back at us. About a year ago, the board
of directors passed him over for a promotion to vice-president.”
POURING THE FOUNDATION OF A CASE
Julia, a CPA and certified fraud examiner, explained to the president how she could expand
the current audit to detect any fraudulent business practices or transactions. The president
quickly authorized the additional work.
As proper evidence-gathering procedures require, the audit team collected every original
invoice from Majors and Co. along with the vendor file showing Lincoln’s approvals. The
team prepared a log describing each document and its source. They photocopied them and
stored the duplicates at their offices.
Next, Julia assigned Ben to take a close look at Lincoln’s personnel file. In it he discovered
a name that stood out like neon: Linda Majors—Lincoln’s wife. Other members of the team
turned up even more evidence: Majors and Co. was legally incorporated, and related
documents from the Secretary of State’s office bore the signatures of both Linda Majors and
Lincoln as corporate officers.
Finally, the team obtained price quotes from five nearby limestone suppliers. On average
Majors and Co. charged 60 percent more than its competitors. Julia was satisfied she had
enough documentary evidence to prove the existence of a pass-through billing scheme.
COMING CLEAN
Julia arranged a face-to-face meeting with Lincoln that began with an exchange of
pleasantries. As Ben watched, Julia posed carefully constructed, point-blank questions. (For
examples, see ‘“Why Ask?’ You Ask,” JofA, Sep.01, page 88.) She also showed Lincoln a
copy of Majors and Co.’s articles of incorporation, which bore his name and signature.
Lincoln’s face fell. For a few minutes he acted as if he didn’t understand, but gradually he
admitted everything, encouraged by Julia’s low-key technique. Not once did she show any
disapproval of Lincoln or what he had done. Instead, Julia was personable and professional
throughout the two-hour interview, allowing Lincoln to present his side of the story. In this
unthreatening setting, Lincoln told a classic tale of revenge, revealing all the details of his
pass-thorough billing scheme and why he set it up. Sure enough, the whole thing started
about 18 months ago when Lincoln realized the company wasn’t going to promote him to
vice-president. He saw this as a betrayal of his more than 10 years of service.
Like many purchasing agents, he was a constant target for temptation—vendors made it no
secret they’d be glad to pay him under the table for favorable consideration when the
company awarded business contracts—but he had never accepted.
LESSONS LEARNED AND IGNORED
Ben’s participation in this audit and investigation taught him never to judge the significance
of current findings without examining prior-period results and looking for suspicious
changes that could indicate fraud.
But the client company was interested only in getting its money back. In just over a year,
Lincoln’s “take” had been a cool $1.3 million, which he had saved to finance a new business
for himself. In exchange for his returning it all, the company agreed—against Julia’s
advice—not to prosecute Lincoln. Even worse, the company kept quiet about his
transgression, enabling him to move up to a better job—ironically, as chief purchasing agent
for a limestone vendor.
JOSEPH T. WELLS, CPA, CFE, is founder and chairman of the Association of Certified
Fraud Examiners in Austin, Texas, and professor of fraud examination at the University of
Texas. Mr. Wells’ article, “So That’s Why They Call It a Pyramid Scheme” (JofA, Oct.00,
page 91), won the Lawler Award for the best article in the JofA in 2000. His e-mail address
is joe@cfenet.com.
Journal of Accountancy
Anonymous tips are an important source of
information on employee theft.
Billing Schemes, Part 3:
Pay-and-Return Invoicing
BY JOSEPH T. WELLS
This is the third article in a four-part series on identifying false
invoices and their issuers. It explains the pay-and-return billing
scheme, in which an employee creates an overpayment to a
vendor and pockets the subsequent refund. The other stories
focus on shell companies (See JofA, Jul.02, page 76 or
www.icpa.org/pubs/jofa/jul2002/wells.htm), pass-through billing
schemes (See JofA, Aug.02, page 72 or
www.aicpa.org/pubs/jofa/aug2002/wells.htm) and personal
purchase schemes, which will be the subject of “The Fraud Beat”
in October.
philosopher once said the road to hell is paved with good intentions. As all
fraud examiners know, given the right circumstances—for example, a personal
financial crisis coupled with weak internal controls on the job—many otherwise
law-abiding employees will rationalize their way into stealing from the companies
they work for.
The following case study illustrates such a situation and shows how CPAs can protect their
clients and employers from pay-and-return billing scams. This particular ruse shouldn’t have
lasted as long as it did; a simple, inexpensive service could’ve stopped it much earlier.
NO WAY OUT
As Veronica, an accounting clerk at a dental supply wholesaler, hung up the phone, her
cheeks reddened with anger and embarrassment. She knew her coworkers at the dozen or so
desks nearby had heard everything—as usual. This call had been from yet another of her
husband’s many frustrated creditors, who demanded money she didn’t have. The outstanding
debts arose from a business that was operated strictly by her spouse, not her. But as
Veronica knew so well, in the community property state where she and Les lived, his debts
were her debts, too.
When Veronica married Les eight years ago, he had been a fast-talking hustler. But success
had eluded him; one after another his business ventures failed. Then, three years ago, to get a
fresh start, the couple filed for personal bankruptcy. Yet, somehow, they again had gotten
over their heads in debt. This time, though, because you can declare bankruptcy only once
every seven years, they became desperate.
AN APPARENT IMPROVEMENT
In the office, Veronica’s colleague, Jenny, had tried not to eavesdrop. But the low partition
between their cubicles ensured she would hear most, if not all, of the calls Veronica received
from creditors. Since Jenny knew her friend was in trouble, she wasn’t surprised when
Veronica time and again shared her tale of financial woe. But as the months passed,
Veronica simply stopped talking about her debts.
A DIFFICULT CHOICE
More than a year later, Jenny accidentally discovered why Veronica was silent on the
subject. At the end of one workday, when no one else was around, Jenny clearly saw
Veronica slip a vendor check into her purse. Now it began to make sense: Veronica was
stealing from the company. Jenny was incensed and couldn’t think of anything else for
several days. Still, the thought of turning in Veronica made her ill. But after being with the
company nearly 10 years, Jenny had a personal stake in it. However, she reasoned, if
Veronica kept stealing, it
would only worsen her
problems, so Jenny decided to
report her friend
anonymously. First she
thought of phoning her boss
but realized he’d recognize her
voice. Then it hit her: She
would call the company’s
CPA firm; they surely would
want to know about this, and
they wouldn’t know who she
was.
Calling from a pay phone,
Jenny was questioned by a
manager at the firm.
“How do you know she’s stealing?” he demanded.
“Because I saw her,” Jenny replied defensively.
“And who are you?” the manager wanted to know.
The conversation ended when Jenny refused to identify herself.
The manager said: “You tell me you witnessed a theft, but you won’t say who you are. You
could be anybody. I can’t take this further unless I have more evidence.”
Jenny refused to say anything more and hung up.
Jenny never confronted Veronica with what she knew, but she wanted no more to do with
her. Although Jenny saw Veronica steal another check about six months later, she clenched
her teeth and kept her mouth shut. That is until several weeks later when Claude, a CPA
recently hired as the company’s internal auditor, invited her into his office.
ON THE TRAIL TO DISCOVERY
With records in his cubbyhole office already piled high around him, Claude explained to
Jenny that—as part of his new responsibilities—he was meeting with a number of
employees to get their opinions on the company’s accounting operation.
During his discussion with Jenny, Claude wanted to focus on fraud by company employees.
So he introduced the subject by asking her if she had known one of the company’s
purchasing agents took several hundred thousand dollars in kickbacks to award favorable
manufacturing contracts. Jenny said everyone in the company had heard the rumor. To avoid
publicity, the company had decided not to prosecute. It also hired Claude to help prevent
such future incidents.
Finally, he got to the point. “Has anyone in the company ever asked you to do something
that you thought was illegal or unethical?” Jenny didn’t have to think long about that. “No,”
she said quickly.
Then Claude asked, “Do you suspect anyone in the company is committing fraud?” Jenny
sat silently for a moment. “Should I tell him what I know?” she wondered.
Looking at Jenny’s face, Claude didn’t need to hear an answer. He knew something was
wrong and started digging further. Although Jenny said nothing more, Claude immediately
reviewed Jenny’s job functions and those of the accounting clerks who worked with her. He
found nothing unusual until he came to Veronica’s job description, which was disturbing:
Her primary responsibility was processing invoices for payment, but she also handled the
occasional overpayment received in the mail. This was clearly a breach of security that
needed prompt attention.
Claude’s subsequent investigation revealed that Veronica was processing certain invoices
twice. When confronted, she seemed relieved and confessed everything, admitting her
favorite target was her employer’s largest supplier, a dental appliance manufacturer that
printed its simple invoices in black ink on plain paper. When strapped for money, Veronica
said, she’d make a copy of the manufacturer’s invoice before stamping the original. The two
were almost indistinguishable. Then she’d process the first invoice, send it on for approval,
and process the invoice again a few days later using the copy she’d made. To further
disguise her scheme, Veronica always put the copied invoice in a stack of others waiting to
be processed for payment.
The company would pay the bill twice. When the supplier realized the overpayment, it sent a
refund check that landed on Veronica’s desk. She in turn slipped the extra check into her
purse and later turned it over to Les, who forged her company’s endorsement with a
specially made rubber stamp and deposited the check in his business account.
In less than two years, Veronica had embezzled more than a quarter-million dollars. True to
form, she saved her husband from jail by claiming the whole scheme was her idea. But
because Veronica was a first-time offender, she got several years’ probation and served only
six months in a halfway house.
BETTER LATE THAN NEVER
Claude took some basic steps to prevent such fraud in the future. First, he instructed the
accounting department to be on the lookout for copies of original invoices. Poor quality
duplicates can be detected with the naked eye, but some reproductions are good enough to
escape all but the most detailed inspection. So, as an added safeguard, Claude installed
controls that would warn him if the accounting department tried to process the same invoice
amount and/or number twice. This required nothing more than adding an automated
procedure to the invoice payment system. Before printing a check, the system would scan
previous payments to see whether any were issued for the same bill. If questionable items
turned up, Claude would review them and determine how to proceed.
Second, he reassigned the responsibility for depositing refund checks to a staff member who
didn’t deal with invoices, thus separating critical job functions and correcting a serious
control deficiency.
Finally, because some of the most valuable information on suspected employee crime comes
from workers concerned about reprisals, Claude established a telephone hot line (see
“What’s So Hot About Hot Lines?”) so employees can report suspicions promptly without
fear for their personal safety or job security. He also recommended that management instruct
the CPA firm to accept and immediately inform the company of all calls and reports of
suspected fraud.
What’s So Hot About Hot Lines?
From the search for the Unabomber to the Enron inquiry, investigators have found
“inside” information from family members and coworkers to be especially valuable.
One way to obtain tips from such knowledgeable sources is to establish telephone “hot
lines” that are convenient and guarantee callers’ anonymity.
To encourage their use, hot lines must let callers furnish information without fear of
reprisal. Since many employees who want to report misdeeds may be afraid—for fear of
discovery—to call a hot line at work, such services must be available 24 hours a day.
Although callers report a wide variety of petty grievances, one simple fact remains:
Some crimes are not discovered any other way.
There are three types of hot lines.
Full-time, in-house. The most expensive and effective hot lines are staffed—around the
clock—by live personnel who can answer the caller’s questions and concerns. Usually
only the largest companies maintain full-time hot lines.
Third-party providers. Many third parties provide hot line services that are available at
all times. When an individual calls to make a report, the provider takes down the
information and relays it to the client company. Although this type of service is less
expensive than an in-house version, the employer—not the service provider—is
responsible for informing employees of its availability and contact information.
Part-time, in-house. Many companies have a tip line answered by company
employees—usually in the internal audit or security departments—during working
hours. At other times, callers are able to leave a voice-mail message. Although
inexpensive, this method is not as effective as the other two types of hot line because—
as explained above—it isn’t sufficiently confidential and doesn’t give callers a chance to
ask questions before they give information.
JOSEPH T. WELLS, CPA, CFE, is founder and chairman of the Association of Certified
Fraud Examiners in Austin, Texas, and professor of fraud examination at the University of
Texas. Mr. Wells’ article, “So That’s Why It's Called a Pyramid Scheme” (JofA, Oct.00,
page 91), won the Lawler Award for the best article in the JofA in 2000. His e-mail address
is joe@cfenet.com.
Journal of Accountancy
Maintain your standards on routine business tasks or
suffer the consequences.
Billing Schemes, Part 4:
Personal Purchases
BY JOSEPH T. WELLS
This is the final installment in a four-part series on identifying false invoices and their
issuers. The July and August columns focused on billing schemes involving shell
companies criminals set up to facilitate fraud. Articles in this issue and September explain
how to detect and prevent two scams that employ other, completely different phony-bill
strategies.
This month’s case study shows CPAs the far-reaching consequences of not setting up
controls in a business to detect and prevent seemingly immaterial frauds.
ost business owners enjoy their leadership role. But wearing the boss’s hat means
shouldering diverse responsibilities, and many entrepreneurs don’t have time to manage
human resources and other important administrative functions. So they often hire someone
to do these jobs for them. If at first all goes well, the boss may no longer check to see if his
or her managers follow proper supervisory procedures. That’s when trouble brews.
The following case study isn’t just for auditors,
but rather for the thousands of CPAs heading
their own businesses, occupying other
management positions or advising businessowner clients. It demonstrates how “immaterial”
fraud—especially in small organizations—can
have companywide consequences.
How Crooks Help Themselves to
Company Funds
Some employees can’t resist temptation
and use their employers’ money to buy
things for themselves. They do it in one
or more of four ways.
THE PERFECT APPLICANT?
A Midwestern CPA firm with about 50 full-time
employees needed someone to run office
errands. Deidre, a member of its bookkeeping
staff, thought she knew the ideal candidate: a
Fraudulently authorizing invoices by
an appropriate party. In many
occupational fraud cases, the culprit’s
duties include authorizing purchases,
and his or her conscience is the only
young man named Mark, who lived in her
apartment complex. So she recommended him control in place.
for an employment interview during which he
Falsifying documents to obtain
appeared bright, energetic and sincere—
everything the firm wanted. Gladys, the partner authorization. If the fraudster is not the
authorizer of invoices, he or she often will
in charge, hired him on the spot.
forge a supervisor’s approval signature
on purchase requisitions and other
documents.
Altering legitimate purchase orders.
In some cases, a crooked employee
alters a legitimate purchase order,
increasing the quantity of merchandise
requested. When the goods arrive, the
employee takes the excess items or
returns them for a refund.
Misusing company credit cards. If a
company has weak controls over the use
of credit cards, some employees take
advantage and buy everything from fuel
for their automobiles to furniture for their
homes.
The following Monday Mark began work enthusiastically: He hand-delivered urgent
documents, used the company car to pick up visitors arriving from out of town and shopped
for miscellaneous office supplies and groceries. The weeks passed swiftly as Mark got
better at his job. Management even trusted him with making bank deposits, and after six
months of exemplary performance, he received a positive evaluation and a modest raise.
CLAY FEET REVEALED
One day, as Mark’s first anniversary
neared, his good start came to a bad end.
On the way back from picking up supplies
at the supermarket, he stowed some of
them in his car before bringing the rest to
the office. But unfortunately for Mark, the
firm’s receptionist saw what he had done
and promptly informed the office
manager, Harriett.
Given the firm’s lax purchase approval
procedures, Mark had had no trouble
using company funds to buy things for
himself. Each time he made a list of
necessary supplies and prepared to go
shopping, Harriet issued Mark a blank,
signed check. When he returned, Mark
submitted the receipt for his purchases.
Because the office supplies and groceries
weren’t particularly expensive, Harriett
rarely examined the cash-register tapes—
a fact that hadn’t escaped Mark’s
Source: Occupational Fraud and Abuse, by
attention. After the receptionist’s visit,
Joseph T. Wells, Obsidian Publishing Co. Inc.,
though, Harriett scanned several of
1997.
Mark’s receipts. She was shocked to
discover that in addition to items for the
office, Mark had been buying beer,
cigarettes and other personal items
without reimbursing the firm for them.
Taking a deep breath, Harriet reported
the embarrassing facts to Gladys, who
didn’t take the news well. Individually,
Mark’s thefts weren’t material, but they
would force Gladys to make a difficult
decision. Although she couldn’t just
reprimand Mark, she hesitated to fire him.
And yet it was important to set an
example that would deter other
employees from committing fraud.
THE TRUTH HURTS
The choice turned out to be clearer than Gladys expected, but it still was painful. After
glancing at Mark’s personnel file, she summoned him to her office and closed the door.
When he was seated she said she needed his help on a problem. Gladys paused and
looked Mark right in the eye. “What would you do if you were the boss and you learned a
valuable employee was stealing from the firm?” she asked.
Mark’s gaze wandered around the room. He frowned and said in a low voice, “I guess I’d
call him in and ask him about it.” After five minutes of patient questioning, Gladys got Mark
to confess. When she asked for a motive, he said the stolen items “weren’t expensive” and
the company could “easily afford them.”
Hearing this casual admission, Gladys resisted an urge to shout at Mark in frustration. “We
all liked and trusted this young man,” Gladys thought. “He’s been a good employee in every
other way—he has a near-perfect attendance record, gets along well with everyone and
makes a good impression on clients.”
But Gladys knew retaining Mark would set a dangerous legal precedent. If she let one
thieving employee stay and in the future fired another for similar misdeeds, the firm would
be vulnerable to a wrongful discharge suit. It was clear Mark had to go.
Gladys’s eyes moved again to Mark’s personnel file,
open on her desk, with his employment application
on top. She noticed Mark previously had worked for
a nearby computer manufacturer. On a hunch, she
asked, “What would your former employer say if I
called and asked why you left?” She was struck by
Mark’s curious reply: “I didn’t do it.”
As she said “I’m terminating you immediately for
stealing from the company, Mark,” she realized it
mattered more to her than it did to him.
How to Prevent and Detect
Personal Purchases
Ensure company policy clearly
prohibits all personal purchases
with company funds.
Do not permit the same employee
to originate purchases and approve
them.
Separate the invoice approval
function from the payment and
receiving function.
Before leaving the boss’s office, Mark admitted the
computer maker also had fired him for stealing.
Gladys silently cursed herself for not instructing the
Establish maximum purchasing
staff to put Mark through a normal preemployment
limits
for each employee.
background check. Instead, she had trusted
Deidre’s judgment and recommendation. At the time
Install controls to detect multiple
it seemed reasonable; Deidre had been with the
purchases just below employees’
company for more than four years and was an
approval limits.
outstanding employee.
Establish procedures to routinely
check for deliveries of companyordered goods to external
addresses. And look for matches
between invoice delivery addresses
and employees’ home addresses.
Examine shipment receiving
reports for merchandise ordered
and paid for but not delivered.
Check invoices for vendors that
are not usually associated with the
company’s business. For example,
it would be suspicious for a
manufacturer to order goods from a
department store.
Routinely examine individual
employees’ buying habits, looking
for increases in the amount or
frequency of purchases.
Carefully control access to, and
purchases that are made from,
company credit cards. Be especially
alert to purchases in round
amounts, which might indicate false
or inappropriate charges.
Gladys knew that in today’s litigious environment, Mark’s previous employer probably would
not have revealed the true reason for his departure, even if her firm had asked. But the
computer manufacturer’s HR manager probably would have admitted he would not rehire
Mark, and that would have been a red flag.
ONE MISTAKE, MANY CONSEQUENCES
Minutes after finishing with Mark, the boss called in Deidre, who, having heard the rumor
quickly spreading through the office, was in tears and revealed—to Gladys’s growing
anxiety—she and Mark had been dating for months. When questioned, Deidre admitted she
knew Mark was pilfering groceries and said she had encouraged him to stop. But Mark
continued stealing, and Deidre said she couldn’t bring herself to turn him in. Dazed, Gladys
wondered if she’d checked her own brains at the door the day the firm hired Mark without
knowing more about him. But she gritted her teeth and fired Deidre, too, for her ethical
lapse.
But what of Gladys’s managerial error? The price for the firm’s slack cost controls and
failure to follow appropriate hiring procedures was significant: Although Mark’s thefts were
petty, two workers lost their jobs. Deidre had been next in line to head the bookkeeping
department.
Furthermore, although Deidre’s coworkers knew why she was leaving, her popularity did not
diminish and a blue mood pervaded her team for weeks. Gladys learned the hard way how a
good employee’s departure under bad circumstances can foster low morale that, along with
the cost of training replacements, burdens a firm with avoidable difficulties.
The moral? When it comes to fraud, do sweat the small stuff.
Checking References
Approximately 7% of employees who commit fraud did so at previous jobs, according to
the Association of Certified Fraud Examiners’ 2002 Report to the Nation on Occupational
Fraud and Abuse. To avoid hiring these high-risk workers, consider the following
recommendations.
On the company’s employment application form, request information on all jobs held in
the last seven years or longer.
Look for chronological gaps on an employee’s application, which may indicate he or she
wants to avoid disclosing information about a particular position held or a criminal
conviction.
Confirm all employment-history information. If possible, interview the applicant’s
immediate supervisor. Fearful of employee litigation, most organizations will provide only
basic information. But often they will reveal whether they would rehire the employee—a
valuable indication of the circumstances under which he or she left the company.
JOSEPH T. WELLS, CPA, CFE, is founder and chairman of the Association of Certified
Fraud Examiners in Austin, Texas, and professor of fraud examination at the University of
Texas. Mr. Wells’ article, “ So That’s Why It's Called a Pyramid Scheme ” ( JofA , Oct.00,
page 91), won the Lawler Award for the best article in the JofA in 2000. His e-mail address
is joe@cfenet.com .