When Employees Go Rogue: Tales of Fraud and Fraud Prevention – Part 2

David Anderson is principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation, forensic accounting, and marital dissolution services in Philadelphia and the Delaware Valley.

Last week, in the first segment of a three-part series, forensic accounting expert David Anderson of David Anderson & Associates, Certified Fraud Examiner in Philadelphia, discussed payroll frauds committed by trusted accounting employees, and how the frauds could have been prevented.  This week, in Part 2, he looks at non-payroll frauds by committed by trusted accounting employees.

Fraud #1: The Controller of a regional retail chain began using the company’s petty cash fund (over which she had total control) to perpetrate her fraud.  Initially, she “borrowed” money from the $1,000 fund and left a personal check in the petty cash box for the amount borrowed.  After receiving her next paycheck, she repaid the “loan” and retrieved her check.  This went on for several months with the “borrowed” amount regularly increasing until she was taking almost the entire $1,000 amount each pay period.  To further her scheme, she persuaded the owner to increase the petty cash fund to $5,000.

As the scheme continued, her “borrowings” increased to the point that the amount borrowed exceeded her entire paycheck, and she was unable to repay the petty cash fund.  No problem, she then launched her next scheme.  She made copies of other employee’s previously reimbursed expense documents, and submitted these as her own (reimbursing herself through petty cash).  This scheme was discovered only when the Controller was away on vacation and the owner went into the petty cash box to pay the person who watered the plants in the office.  He discovered that less than $100 cash was left in petty cash along with over $4,900 in copies of receipts (one of which he recognized was from his most recent expense reimbursement request).

The owner should have initially been suspicious of the request to increase the petty cash fund to $5,000.  He should have demanded written documentation of why it was necessary for such a large increase.  Additionally, he should have conducted regular random surprise audits of petty cash, particularly on the day before a payday and on the day before a long holiday weekend (these are the most likely times to find petty cash fraud).  Had he done so, he could either have prevented the petty cash fraud or stopped it in its early stages.

Fraud #2: The same Controller as in the above fraud also engaged in an additional fraud scheme involving accounts receivable.  The retail chain had its own branded credit card for customer use in making purchases from the chain.  The Controller had previously been issued such a credit card, and the card balance reached a point where she was unable to pay the amount due.  To solve this problem, she simply issued a credit memo which wiped out the credit card balance (obviously the company had no internal controls over credit memos).

The Controller then expanded this scheme by identifying friends, family, and neighbors who also had the chain’s branded credit cards.  She approached these people with an offer to eliminate their credit card balances in return for cash payments (to her) of a percentage of the amount eliminated.  This scheme was discovered as part of the forensic examination Anderson conducted after the owner found the above petty cash fraud.

Because of the possibility of improper use, credit memos should be tightly controlled.  In this case, either the owner’s approval should have been required for issuance of a credit memo or at least approval by two different managers for such issuance.  Additionally, the owner should have required that a monthly analysis of accounts receivable be produced which included identification of all credit memos applied against accounts receivable.  Had such controls/procedures been in place, the fraud could have either been prevented or stopped in its early stages.

Fraud #3: The long-time bookkeeper for a personal liability law firm was responsible for all accounting activities, including writing checks from the firm’s escrow account and recording all transactions on a manual One-Write accounting system.  She began her fraud by writing checks to herself, but recording them on the One-Write system as having been written to various vendors.  Because of the large number of cases, she was able to spread out the improper payments so no one case would have too many vendor payments.

This fraud continued for years until one week when the bookkeeper was on vacation.  The owner received a call from a vendor complaining an invoice had not been paid (such a call would normally have been transferred to the bookkeeper).  Because the escrow account bank statements had arrived the day before, the owner started going through the paid checks to see if any of them were for this vendor’s invoice.  Instead he found multiple checks paid to the bookkeeper.  Our investigation found that this fraud cost the law firm over $500,000.

As with some of the previous frauds, the easiest way to have prevented this fraud or to have caught it in the early stages would have been for the owner to have had the escrow account bank statements sent by the bank directly to him so that he could spend a few minutes each month reviewing the statement and the cancelled checks.

Many business owners believe installing controls to prevent frauds are time-consuming and expensive.  In each of the above cases, installing relatively easy-to-implement and low-cost, or no-cost, controls could have prevented each of the above non-payroll frauds.

Next week, in the final segment of this three-part series, Anderson will discuss fraud executed by trusted members of management.

If you want to learn how a Certified Fraud Examiner from an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley can help safeguard your company against such fraud schemes, please contact the Philadelphia forensic accounting firm of David Anderson & Associates by calling David Anderson at 267-207-3597 or emailing him at

About David Anderson & Associates

David Anderson & Associates is a Philadelphia forensic accounting firm that provides a full range of forensic accounting services in Philadelphia and the Delaware Valley.  The experienced professionals at David Anderson & Associates provide forensic accounting, business valuation, fraud investigation, fraud deterrence, litigation support, economic damage analysis, business consulting and outsourced CFO services.  Company principal David Anderson is a forensic accounting expert who has more than 30 years of experience in financial and operational leadership positions and is a Certified Public Accountant, a Certified Fraud Examiner and a Certified Valuation Analyst.