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The fraudsier, Bobbie jean Donnelly, had taken advantage of a lack of adequate controls over her division’s budget and a lax system for reviewing expenses. The company’s iniernal audit team delected her crime by analyzing patterns in a year’s woith of reports from employees with the highest travel and expense bills. Donnelly was hired as an administrative assistant to the manager of a Los Angeles-based design division for a multibillion-dollar retail corporation. Based on her strong performance, she was quickly promoted to office manager for the tiivision. In addition lo managing her boss’s needs, she supervised support personnel :uid prepared and oversaw the design deI’artments budget. Her manager gave her ihe responsibitiiy to provide the first level of expense repori review. He relied on her to ensure that the expenses were valid before he signed them, On a few occasions, he even asked her to sign the expense reports on his behalf. As the business grew, management decided il was lime to build a traditional in[crnal audit department. That’s where 1 i ame in. My internal audit team was conductinga routine travel and expense audit. V’e developed an audit program designed L O ensure that employees were following the corporate travel and expense poliey and that adequate internal controls for the processing and payment of expense reports were in place and operating efleclivety. The team assembled a sample of indtviduals and transactions lo test. The indiiduals were selected from the population of employees who submiited the highe.sl Editor’s Note: This article is an excerplfrom Fraud Casebook: Lessons From the Bad Side of Business, a collection of case studies editedfayJofA contributing editor Joseph T. Welhand published in July by John Wiky &Sons Inc. Identifying characteristioi, including the names of individuals and organizations involved in this case, have been changed or omitted.
Analysis of expense patterns exposes crime.
by Bethmara Kessler
his is ihe siory of how a travel and expense report audit exposed a fraudsier who siphoned money from the fashion company where she worked lo fund her own lavish spending.
60 Journal of Accountancy October 2007
F R A U D / A U D I T I NG
dollar amounts over ihe course of ihe year lor reimbursemcni. The transactions were selected randomly across ihe Lotal popnlaiion of submiued expenses. 1 he approach and criteria used lo audii the individuals differed significantly from ihe approach used lo audil the transactions. The transaclions were reviewed for compliance wiih the poiicy, pmper authorization and approval, and overall reasonableness of the expense. That work ‘ieidcd some audit exceptions—mosily small and isolated—htit no major surprises. The more interesting resuits of the work came from the review of individuLils. We looked at the reasonableness of the expenses based on the employee’s role in ihe company and searched for any paticms of activity that seemed unusual. We quickly identified a group of individuals who routinely submitted their ,’meriain Express bills for reimbursement mstead of submitting detailed receipts of individual expenses, A closer look revealed i hat many employees were submitting exjienses twice. The bills began to show a jiattern—one month of charges, the nexi monLh a late fee with old charges and new charges combined, tt didn’t lake long for us to determine that the activity was coming from one area of tlie business—the design department. Several individuals had devised very inventive ways of submitting expenses for reimbursement. In some cases, employees submitted ihe same receipt multiple times but altered the sii:e of the tip and total amount on each of the documents to make the duplication less obvious.
I asked my lead auditor to gather all the expense reports foretnployees in that division. Several of the Los Angeles-based employees routinely traveled to New York on business and submiued New York City taxi receipts for reimbursement, a legitimate expense. Upon examinalion of the actual taxi receipts, we noticed mullipie receipts that ap|)eared to come from the same taxi on the same day: New York City taxis are regulated and have electronic me-
start time of the receipt next in sequence. The employee who had run up the highest expenses was ihc office manager. Bobbie Jean Donnelly She had charged about $115,000 over the previous year, while her manager had submilted about $40,000 m expenses. It seemed strange that Donnelly’s expenses would be so much higher ihan her manager’s, I met with our general counsel atid informed him of what we had identified in the audit. He agreed ihat v^’e needed lo conduct a thorough investigation of the design team’s expenses, especially Donnelly’s aclivities. To search for red flags in the expense reports, my lead auditor and 1 itsed data analysis software to silt through the data. The software alkiwed us lo identify duplicate amounts and isolate the expense reports that w^’ needed to review in tandem. The expense rej^ons were on paper and were voluminous, but we i^elieved it would be worthwhile lo invest the time of some niemliers ol our team to help build a datahase of the expense detail to facilitate the i cview. That investment paid off. Without the software we would never have identified thai many of the expenses submitted multiple times for reimbursement were filed over the course of many months. Tools that could be used to examine and parse such data include IDEA Dauj Analysis Software, Audil Command Language (ACL), Excel, Access, SQL, SAS— generally any database or query software. We separated the duplicates and. in some cases, expenses that were submitted numerous times. We found thai Donnelly
ters that print receipts. The receipis al! show the taxi medallion number and the trip number. We found multiple receipts had sequential trip numbers from the same day This seemed suspicious. The time ,stamps had small gaps between the end time of the receipt firet In sequence, and the
• Businesses must clearly define the roles and responsibilities of employees who sign expense reports and those who process the reports. That slu.iuld eliminate confuston about whether a manager’s signature means that the mdrvrdual is authorizing the expenses as reasonable business expenses or signifies (hat the manager reviewed the report and supporting detail and attests to the validity of the expenses. • Travel and expense transactions should be reviewed randomly for evidence of compliance with corporate policy, proper authorization and approval and the overall reason-
ableness of expenses. Intemal auditors shouid also conduct periodic reviews of the activities of employees with the highest expense reimbursement totals. • Duties such as signing expense reports and monitoring /managing the budget should be segregated. A fraudster given both ol those responsibilities can attempt to bury questionable expenses in underbudget categories.
Bethmara Kessler, CFE, CISA. leads enterprise business risk management for Limited Brands Inc. Her e-mail address is email@example.com.
October 2007 Journal of Accountancy 61
FRAU D / A U D I T I N G
and four other design division employees were routinely submitting expenses multiple times for reimbursement. Our review linked Donnelly to about $12,000 in false expenses. But I had a nagging feeling about lhe sheer amount of expenses she was submitting, so I ran additionai analyses on her expenses to aggregate them by category. I was surprised lo see that the majority of her purchases were samples, items that design team memben;, who traveled extensively searcliing for inspiration for new product lines, purchased as part of their research and development. Using the audit software, I extracted all travel-related expetises Donnelly submitted to see if the sample purchases correlated to trips that other design team members took. I found that ihey did. II also appeared that her manager had sent her to Italy to recruit interns for the company. Donnelly had submitted more than $6,000 in expenses for this one-week
tnp. It seemed that she had wined and dined the students at the finest restaurants in Ualy In reality, there was no recmiiini; trip. Those expenses coincided with a vacation that Donnelly and her husband took to Italy.
» Practical Tips
• Never a.sk anyone in d business setting to reproduce your signature t on any kind oi document, even something as seemingly benign as a birthday card. Such 3 recjuest can trigger claims thaf the individual was authorized to sign documents for you and can undercut your legal standing if the individual forges your signalurein I he course of a fraud. planning process. By signing the expense reports on her manager’s behalf and monitoring budgetto-actual variances each month, she could submit her fraudulent expenses coded to a budget line that was mnning below budget so that her manager would never deteci the activity The final tally of Donnelly’s fraud was approximately $275,000 over two and a half
FLAWS IN THE SYSTEM
The company^ expense reporting process required indixaduals to describe the business purpose of an expense and have their manager sign off on the actual expense report, Donnelly’s boss was amazed by how accurately Donnelly forged his name on hei Iraudulent expense reports, Given the nature of its work, the design department’s budget was made up of broad estimates of the types of expenses it would incur throughout the year. Some projecLs were specifically identified in the budgeting process, but there were general categories described only as “other” or “miscellaneous.” Donnelly used these general categories to pad the budget in the
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• Auditing for Internal Fraud, a CPE selfstudy course (#730278). • Fraud and the Financial Statement Audit: Auditor Responsibilities, a CPE self-study courae(#731814JA). For more information or to make a purchase, go to www.cpa2biz.com, or call the Institute at 888-777-7077. Web site The Antilraud Resource Center. http://antif ra ud.a icpa.org.
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Donnelly and other design department employees who had abused the expense repon system were temiinaied. Our investigation was unahle to detemiine if a link existed between Donnelly’s actions and ihe travel and expense fraud of other employees in the department. The company’s general counsel and 1 look our findings to the district attorneys office, which agreed to prosecute Donnelly At first, she was adamant about her innocence and refused to consider a plea agreement. Donnelly’s manager and 1 testified before a grand jur>- ihat indicted her. Ultimately, she accepted a plea to a charge of grand larceny, a felony that came with a sentence of one to three years in prison- Donnelly .served approximately three months of that lime in jail. CORRECTIVE ACTION When the case was over, 1 worked wiih the managetnent team to recap the breakdowns in our systems and examine the lessons learned. Some changes the company made in ihc wake ol ihe findings included; • Modifying travel and expense policies to be more detailed wiih respect to sup-
years. Almost 95% of her submitted expenses were false. The bluest categor)* of her li-aiiduknt exc)en.ses was samples, wliicfi she was not authorized lo buy, DonneUys iiianager recognized many of her expensed jHuvhases as items that she wore regularly 10 work. Her purchases included a pair of $750 Jimmy Choo shoes, $875 for a Hermes scarf and $f,250 fora Prada wallet.
porting documentation lor expenses. The company now requires original documentation and prohibits credit card statements and photocopies. Such requircmenls prevent employees from submitting duplicate expenses for reimbursement. The company also now requires all employees to use a corporate credit card for business ex|Tenses. This significanily reduces the amount of expenses for which people claim to have paid cash and reduces their abtliiy to splii ihe credit card receipt from the detailed receipt and submit boLh for reimbursement. Both the iniemal audit team and the travel and expense team within accounts payable have expanded the use of attdit software to proactively look for warning signs of fraud in T&E data. The T&H team also developed auditing protocols to increase efTiciency in auditing T&rE dala. Qttarterly, leatn members separate big spenders fmm the resl of the population to look for patterns that appear odd. Weekly, they randomly select expense reports to review against a set of audii criteria. •
Assessing Fraud Risk
by Joseph T. Wells and John D.Gill
Every organization faces some risk of Iraud from within. Fraud exposure can be classified inio three broad categories: asset misappropriation, corruption atid fraudtilent financial statements. Answering the following 15 questions IS a good starling point for sizing up a company’s vulnerability to fraud and crediting an action plan for lessening the risks. The questions are based on information fVom the 2007 edilion of the fraud Bxiimincis Manual published by the Association of Certified Fraud Examiners.
I. Do one or two hey employees appear lo ikmmatc ihc company?
U control is centered in the hands of a few key employees, those individuals should be under heightened scrutiny for compliance with internal controls and other policies and procedures,
1. Do any key anploycfi appear lo have a clou: association with vendors?
Employees with a close relationship to a vendor should be prohibited from approving transactions with ihal vendor. Alternatively, transactions between these parties should be reviewed on a regular basis for compliance with internal controls.
3. Do any key employees have outside husiOctober 2007 Journal of Accountancy 63