During the years I have worked as an auditor and forensic accountant, I have encountered several instances where fraud occurred. Some involved thefts of a few thousand dollars and others involved thefts of several millions of dollars.

Something about Betty

A case of fraud

don-bays 45

Donald R. Bays, CPA, CFE, CVA, CFF

Donald R. Cressey, a well-known criminologist, developed what is known as the Fraud Triangle. Interested in the circumstances that led embezzlers to temptation, he published Other People’s Money: A Study in the Social Psychology of Embezzlement. His hypothesis was “Trusted persons become trust violators when they conceive of themselves as having a financial problem which is non-sharable, are aware this problem can be secretly resolved by violation of the position of financial trust, and are able to apply to their own conduct in that situation verbalizations which enable them to adjust their conceptions of themselves as trusted persons with their conceptions of themselves as users of the entrusted funds or property.”[1]

The Fraud Triangle originated from Donald Cressey’s hypothesis and is a model for explaining the factors that cause someone to commit occupational fraud. It consists of three components which, together, lead to fraudulent behavior:

  • Perceived opportunity
  • Rationalization
  • Pressure/motivation

Opportunity might arise because of:

  • Internal controls
    • None in place
    • Not enforced
    • Not monitored
    • Not effective
  • No segregation of duties
  • Too much trust
  • Poor “tone at the top”

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Rationalization might occur because of:

  • “I don’t get paid what I’m worth!”
  • “Everyone else is doing it!”
  • “If they don’t know I’m doing it, they deserve to lose the money”
  • “I intended to pay it back”
  • “Nobody will miss the money”

Pressure/Motivation comes from:

  • External pressure/motivation:
    • Debt, greed
    • Lifestyle needs
    • Life pressures
    • Illicit activities: vices, gambling, drugs
  • Internal pressure/motivation
    • Pressure to perform
    • Too much work[2]

During the years I have worked as an auditor and forensic accountant, I have encountered several instances where fraud occurred. Some involved thefts of a few thousand dollars and others involved thefts of several millions of dollars. I would like to tell you about one of the more memorable cases of fraud I encountered. It was one of the smaller fraud cases that I investigated but was one that easily covered the fraud triangle. I call this story: The Water Company Caper, or the Drain on Liquid Assets

The Two Businesses

This case involved a man, Harold, who was a residential home developer in a Colorado city outside of Denver. He was the president of the company. Harold also established a water company to serve the needs of the new residents in his multi-home development site. Harold had an office building on the grounds of his home development acres. The building had a wall right down the middle of its interior. On one side of the wall Harold ran his home development business. On the other side of the wall, he carried on his water company business’ activities.

The New Hire

Harold had a controller by the name of Ralph who was responsible for over-seeing the accounting and financial activities of both the home development business and his water company. But with the home development business booming, Ralph decided to spend most of his time overseeing the home development business. He decided to hire an experienced bookkeeper to handle the accounting functions of the water company including collecting cash payments from the water company customers made at the counter and depositing those monies collected along with the checks which arrived in the daily mail.

When Betty applied for the bookkeeping position for the water company, Ralph knew he had the right person for the job. She had a wonderful resume and answered all his interview questions very professionally. What Ralph did not know is that Betty’s resume was a complete fabrication. Ralph would have found out differently if he had checked on her previous employment’s references. Ralph thought that there was no need to do any background checks on Betty. After all, she handled herself extremely well during the interview, was dressed very professionally and talked about all the bookkeeping experience she had.

Ralph was desperate to have someone take over the accounting for the water company, so he was anxious to get Betty working right away. He hired her on the spot. Ralph went about his business of taking care of the accounting and financial affairs of the home development business. He rarely went on the other side of the wall to see how Betty was doing, and he never checked her work.

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The Departure

After eight months on the job, Betty announced to Ralph that she would be moving to Denver as her boyfriend got a new job there. She told Ralph that she would help him find a replacement for her position. After a few days, Betty told Ralph that she could not stay at the water company any longer and would be moving to Denver the next day. Ralph was very disappointed that he was losing someone as qualified as Betty. But now, he would have to step in and do the accounting functions of the water company until he could find a replacement for Betty.

The Revelation

One of the first jobs Ralph took on at the water company was to do the monthly bank reconciliations. This is when he started to notice that something was amiss. The bank reconciliations that Betty had prepared did not even properly add and subtract amounts. The amount of deposits in transit stayed the same month after month. The checks outstanding amount stayed the same month after month. Had Ralph been reviewing Betty’s work from the start he would have noticed the anomalies.

Ralph started getting complaints from customers saying they had not been given credit for water payments they had made. Ralph then found out why. Betty was keeping cash that was paid to her at the front counter of the water company’s side of Harold’s office building. Betty was also endorsing customer checks over to herself and depositing them in her bank account. Since Betty controlled the accounting for the customer payments, it was easy for her to manipulate the payments. Besides, she knew Ralph would never check the accounting entries that she made.

I was asked by Harold to perform forensic accounting procedures on the accounting records of the water company to get an idea of how much money Betty made off with. I eventually found that Betty had stolen almost $50,000 from the water company in the eight months she had worked there. Harold had insurance for this sort of thing, but he also had a deductible of $30,000 that would be subtracted from the $50,000 that Betty took.

What Happened to Betty?

Harold filed a criminal complaint with the deputies who investigated the theft. I was contacted by the District Attorney who asked me to help draft up the language for the warrant that would be issued for Betty’s arrest. Betty was located in Denver and arrested. She told the judge that she was very sorry for what she had done, but that she needed the money for her boyfriend who had a drug addiction. He had pressured her to do what she did. She told the judge that it was always her intent to pay the money back. The judge felt sorry for Betty and released her on her own recognizance with a promise to appear for a hearing a few weeks later.

Betty was never heard from again.

[1] Donald R. Cressey, Other People’s Money (Montclair: Patterson Smith, 1973) p. 30.

[2] Association of Government Accountants, https://agacgfm.org

Donald R. Bays, CPA, ABV, CVA, CFF, Director, is known for his expertise in valuing businesses as part of divorce settlements. He has also testified as an expert witness on numerous civil cases. You can reach Donald at (480)-483-1170 or DonB@hhcpa.com.

 

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