Guest Blog: The Fraud Case that Defined My Career

By Justin Burns, CPA, CFE

Justin Burns, CPA CFE is an auditor with Berman Hopkins Wright & LaHam in Melbourne, FL. In his role as an auditor he performs annual financial statement audits. As one of the firm’s experts in fraud and forensics he also performs fraud and forensic work for clients including investigations, litigation support, fraud risk assessments,  fraud prevention consulting, and internal control implementation.

Background

I had the misfortune (but oddly also the luck) of being involved in a large fraud case while working at my very first accounting job after college. I had begun working at this non-profit organization while obtaining my master’s degree and was hired full-time after graduation. We were a small NFP that focused on business development in Mississippi, with our funding of around $6 million a year coming from a mixture of state and federal funding. Our overall operating budget was actually pretty small.

Our entire office consisted of fifteen people, with only two of us in the accounting/finance department, and the two of us handled everything accounting and finance related. My position had traditionally been filled by someone fresh out of college who stayed on staff long enough to earn the CPA license and then find a better paying job somewhere else. The staff accountant was in charge of things like budget tracking, grant reporting, entering timesheets for payroll, entering some AP and AR items into the accounting system, and doing some of the internal financial reporting to help the CFO prepare for quarterly board meetings. The CFO, Erin, would handle bank reconciliations, cutting the accounts payable checks, reconciling credit card receipts to the statements, and other things that she said “wouldn’t really provide good experience for the staff accountant.”

Our annual audit began the first week of September. I had assisted with two previous audits which went easily, but this year the NFP switched to a new CPA firm. I remember that Erin was irritated about the change, but everyone assumed she was upset about ending a longtime working relationship. The new audit began and it was way more intense than the prior audits. The new auditors were asking all sorts of questions and doing walkthroughs, and you know, AUDITING. The previous audit firm would send one person who would sit in an empty office for a week and every now and then would ask me to pull an invoice, but mostly just talked to Erin. The new firm sent multiple staff members, and they were really trying to understand what we did and our processes.

Fraud Case

On Tuesday September 17, 2013, I left to run an errand and grab a quick lunch to eat at my desk. I will never forget that I went to Burger King before coming back to the office. I sat down to eat at my desk when Erin walked in looking very anxious. She said, “They want to talk to you in the conference room.” Assuming she was referring to the auditors, I said, “I just picked up lunch. Can I eat this really quick and then talk to them?” (In my defense Burger King isn’t good warm and it’s especially bad when it gets cold). After she went to see if they could wait on me, she returned to my office and said,  “Yeah, go ahead and eat. I just want you to know that I did it, but it’s not as bad as what they say it is.” I stopped eating and said, “Did what? What did you do?” She then began sobbing.

A guy I didn’t know came to my office, said something that I don’t remember, and Erin left with him. Having finished my lunch, I went into the conference room and saw that the room was filled with people I didn’t know wearing suits. The guy in charge said, “Well, did you have a good lunch?” I muttered something along the lines of “not exactly.” The suits at the table included three lawyers, the audit partner from the new firm, and a couple of FBI agents. They explained that Erin had been stealing money. They weren’t sure how much, what the time frame was, or what methods she used, but they had enough evidence to know that she had been stealing.

Jim, the audit partner  said, “Justin, Erin is gone. She will be out of the building by the time you leave this room. You will not have any contact with her from now on. We need to know what you know how to do and what you don’t know how to do. You are going to take over the day to day operations to keep things running as smoothly as possible around here. You also are not allowed to tell anyone in the company or outside of the company that this investigation is going on. Tomorrow you will go to the FBI offices and talk to these two men who have some questions for you. I’m sure you are going to do just fine and you have nothing to be nervous about. Tom, the CEO, and Anna, the receptionist, are going to go with you and talk to them as well.”

And that was how I learned that my boss had been committing fraud. This woman had been a mentor and a friend. I was in shock and didn’t really believe it, except that she told me she was guilty.

On that Wednesday, we went to the FBI offices, and I talked to the agents for about two hours. My company’s attorney went with us and sat in on the meetings. Before the questions began, our lawyer (who had been an FBI agent and federal prosecutor before) asked the FBI agent, “So we all know Justin wasn’t involved and didn’t have any knowledge of what was going on, right? We are just having a friendly chat.” The FBI Agent looked at me and said, “Right now, Justin is on the fence. He can either fall off on the side where he’ll be safe, or he can fall off on the side with the dog in the yard.” They asked me all sorts of questions about my job at the firm, what Erin was like, and whether or not I had ever noticed anything suspicious – which I had not

At the end of the interview, they asked me to look around Erin’s former office for any evidence that might help them in the investigation. Erin had kept paper records of everything. She had drawers and file cabinets full of receipts, expense reports, and credit card statements. I was being invited to assist in the evidence gathering for a federal case. I guess I didn’t fall off the fence into the side with the dog in the yard.

Methods Used to Commit Fraud

Erin’s methods of stealing money included:

Cutting checks directly to herself. She would print out an expense report and attach a screenshot of a shopping cart from a CPE (continuing professional education) website listing the cost of the course. The supporting documents never contained a receipt confirming the purchase was made. We had the CEO’s signature loaded into the system, so when the checks were printed, the CEO’s signature was on the checks.  If Erin had actually participated in all of the CPE she claimed on the expense reports, she would have had around 200 hours of CPE per year! She would also purchase office supplies on the credit card, related to the next scheme, and then submit an expense report for the items.

Creating an unauthorized company credit card for personal use. She obtained a company credit card for personal use, but she had the bills sent directly to her home address. She would then pay the credit cards off with the NFP funds through one big payment covering all of the NFP cards. Fun story: She took her family on a Disney cruise using this card.

Using an authorized company credit card for personal use. She also had access to a legitimate company credit card that was supposed to be used for things like ordering office supplies. We found that she was charging personal purchases on that card as well.

Red Flags and Pressure

Erin’s husband was a pretty high ranking person at one of the big state development authorities, so we assumed he made a decent living based on the family’s home and lifestyle. Ultimately, we discovered that he made about half of what we assumed. Erin’s salary was around $110,000 at the time the fraud was discovered. Once we found out the truth, it was evident they were living beyond their means. They were always going on trips, drove very nice vehicles, and the kids always had top of the line sports gear and wore the latest fashions.

I think part of the pressure behind her need to steal was a “keeping up with the Joneses” appearance. She and her husband lived in a very affluent area where this social pressure was very heavy. Everybody knew everyone else’s business, and they were always gossiping about each other. Erin grew up in a small poor town in North Mississippi and didn’t grow up in that kind of environment. I think she really wanted to feel like she belonged in that group of people.

Fallout

After all was said and done the NFP ended up with a loss of approximately $850,000 from Erin’s embezzlement stretching back over seven years. Oddly enough, the timeframe of the embezzlement corresponded with the engagement of the former auditors . The auditing firm was sued and they agreed to pay off a $400,000 line of credit Erin maxed out before leaving, but they did not admit to any wrong doing.

Erin ended up pleading guilty to $630,000 after being offered a plea deal. The remaining amount could have been argued at trial, and she could have received a longer sentence, but plea amount included the personal benefit that could be proven without a doubt. She was sentenced to one year in prison and forced to pay restitution. She served three months in prison, three months in a halfway house, and the remaining six months under home arrest.

The NFP struggled to survive and had to focus on just making it to the next pay period. Tom gave up his paycheck that following December so that we could make sure everyone else was paid. Both of his children were under the age of 5 at the time, and I remember thinking it was incredibly selfless of him to do that during the holidays.

I was promoted to controller after spending about nine months working extra long days to complete the day to day accounting work, assisting with the evidence gathering, and tearing rebuilding the internal controls. Despite the stress, this was the most excited I had ever been to go into work every day.

Career Defining Moment

The memory that stands out to me about this case is when I found the credit card statements. I called the CEO into Erin’s office and showed him what I found. I was excited and talking about one hundred miles per hour, when I looked over at Tom. He was just sitting in a chair with glassy eyes. I remember saying, “She definitely did it! It’s right here.” He just stared at one of her family photos on the wall while he told me about Erin’s daughters being flower girls at his wedding and how Erin had babysat for people in the company. He was crushed. He trusted her completely, and he had been betrayed.

At this moment, I realized I was the only person in the building who thought this was experience was interesting. For everyone else, this was the worst possible scenario. We knew our funding would get cut over this. We knew times were going to be tough, and we weren’t sure if we would survive as a company. Although I was in the middle of it all, this was the most excited I had ever been about accounting. I knew exactly what I wanted to do in the accounting industry. I wanted to help people who felt like Tom felt when he looked at family photos of the person who betrayed his trust.

Today

Erin called me about 2 years ago to let me know that I may be getting contacted by someone from the County. She said the County was trying to charge her in relation to the embezzlement because they thought the punishment that the Federal Court handed down was too lenient. On that phone call I told her that what she did changed my career and made me want to be a fraud investigator. She said “Well, I guess some good came out of all this mess.” Nobody ever contacted me about the County case, and I don’t think it ended up going anywhere.

I spoke with Tom to let him know that I was going to share this case with podcast listeners and to ask him if he had any of the documents from the case. He agreed to send me what he had, and we spent some time talking about how things were going. The NFP is doing well. They got back to business as usual and have put the embezzlement behind them. They are providing an important service for the citizens of Mississippi. All of their accounting is now performed by a local accounting firm. They receive a monthly restitution check from Erin’s wages that are being garnished. At the current rate, she is scheduled to make her final restitution payment sometime around 2040. Erin lost her CPA license due to her embezzlement. A family that she knows from church gave her a job as a bookkeeper at their family owned business.