Fraud in 2011

By Chrissie A. Powers, CPA/CFF, CFE, CVA

As 2011 draws to an end, we still find many businesses struggling in the current state of the economy. Some organizations have and continue to function under conditions which are ripe for employee fraud to blossom. During a down economy, when jobs are being lost, one of the most fundamental functions for a fraud to occur is created: a lack of segregation of duties. In 2011, we have seen firsthand the devastating affects this has on a company. Here is an example of one of many fraud schemes that can occur without proper segregation of duties.

Jennifer, an employee at ABC Home, was to collect monthly rent from the tenants of the facility. The conditions were ripe for fraud as the tenants were elderly and not fluent in English. Each month many of the tenants would present their rent payment in the form of a cashier’s check and request Jennifer to assist them with completing the payee line because their handwriting was illegible due to age and English was not their first language. Jennifer soon gained the tenants trust and the tenants would leave the blank cashier’s checks with her for their monthly rent, which is when the skimming began.

Skimming

Skimming is any scheme in which cash is stolen from an organization before it is recorded on the organization’s books. Jennifer would take the cashier’s check and write her name in the payee line and deposit the funds into her personal account. Sometimes copies of the appropriate tenant’s cashier’s checks were even filed in their tenant folder, but she was not recording the receipt in the accounting system. Without recording the payments presented in the accounting system, the tenant’s accounts started to incur delinquent charges and their past due balances were growing. What was Jennifer to do? If the account balances got too large someone would be suspicious. How about misapplying the other tenant’s payments? So she began what fraud examiners call a lapping scheme.

Lapping

Lapping tenant payments is particularly useful to employees who skim receivables. If the tenant’s account becomes delinquent, the scheme may be discovered. Lapping covers the fraud by crediting the tenant’s account with money from some other account. It is the fraudster’s version of “robbing Peter to pay Paul.” Jennifer continued her “shell game” for a while until it got too difficult to know which tenant’s funds need to be applied where. Once she even used the check scanning machine to deposit some of the same checks twice on different days. When she recorded the deposits in the accounting system for the first deposit, the proper tenant’s accounts were reflected. Weeks later when she resubmitted various checks for deposit again, she recorded the funds to other tenants. The resubmission of the checks was eventually caught by her employer’s bank; however, it bought her some more time to continue her scheme. When discovered, Jennifer explained the mishap to management as a clerical error, which again bought her more time.

The house of cards was bound to come tumbling down. Management was now cognizant of Jennifer’s requests for tenant accounts to be cleaned up. She was requesting outstanding balances and delinquent charges be written off, but it was too late. They had her on their radar. A second employee was reassigned to the location to help with rent collections. All rent was to be collected and recorded in the accounting system by Bill and all deposits to be made by Jennifer. Bill began speaking to the tenants when they presented their monthly rent payment and asking the tenant about their outstanding balance. The tenants, who never received a receipt when payment was made in the past, were confused as they had paid all of the rents and were current.

Lessons Learned

The Company has since terminated Jennifer and put segregation of duties in place to create checks and balances. One employee will collect the rent and a second will make the deposit. All tenants are to receive a receipt with every payment and a monthly account statement is generated and provided as well. The Company has purchased a stamp with the Company’s name on it for the tenant’s to stamp the Payee line on their checks. No check is to be given to an ABC Home employee that is not complete. Documentation and a sample of the proper way to fill out a rent check to ABC Home have been distributed to all tenants. This documentation has now become part of the new tenant package. Lastly, ABC Home’s employee handbook now has a fraud policy in place with a zero tolerance policy.

If you have additional questions or concerns regarding fraud, don’t hesitate to contact us.

Chrissie A. Powers, CPA/CFF, CFE, CVA

Chrissie A. Powers,
CPA/CFF, CFE, CVA

Managing Member
P.D. Eye Forensics, LLC