Fraud Cases Display Similarities

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Renae Maxwell allegedly used money stolen from her employer to buy cars, get a tattoo and throw an extravagant party to celebrate her daughter’s 16th birthday — and nearly put Oxford American magazine out of business.

Kelly Wooldridge is accused of opening a bank account for a dummy company and depositing into it checks intended for a similarly named subsidiary of his employer, Continental Express of Little Rock.

Ron Quillen skimmed more than $40,000 worth of checks from the Pulaski County government, where he was comptroller, and used the proceeds to conduct an extramarital affair that was documented in intimate detail on his county-owned computer.

In 2005 The Bank of Fayetteville uncovered a scheme by three employees who embezzled about $192,000 over five years and Dixie Development found its chief financial officer, Emily Israel, had skimmed about $87,000 from its coffers.

These Arkansas cases illustrate common types of occupational fraud, crimes that are hard to detect, even by auditors, and harder to measure, but which may soak up 5 percent or more of an organization’s annual revenue.

Most vulnerable, according to the national Association of Certified Fraud Examiners, are small businesses, which are least likely to have effective preventive measures in place and most likely to be crippled by a sizable theft.

Virtually all cases of occupational fraud have three things in common:

• Opportunity, whether from lack of internal controls, a manager’s ability to override existing controls or various corruption schemes;

• Rationalization, generally a feeling of being “overworked and underpaid”; and

• Incentive, such as mounting household bills or personal indulgences.

Those elements, according to Jerry Spratt, president of the Arkansas chapter of ACFE, define the “fraud triangle,” and sudden spending on previously unaffordable luxuries — like elaborate birthday parties — is a red flag.

“In over 99 percent of the frauds that Legislative Audit finds, all three of those elements are in place,” said Spratt, whose day job is assistant legislative auditor for the Arkansas Division of Legislative Audit. This summer, the ACFE will issue its fifth Report to the Nation on Occupational Fraud & Abuse. If it is like earlier ACFE reports, it will estimate that occupational fraud costs the typical organization 5 percent to 6 percent of annual revenue and that most cases will involve pure asset misappropriation while another sizable chunk mixes asset misappropriation with corruption and/or financial statement fraud.

The FBI doesn’t track embezzlement statistics, according to Little Rock office spokesman Steve Frazier, and the ACFE’s statistics are extrapolated from cases investigated by its members.

Asset Misappropriation

The ACFE categorizes occupational fraud as asset misappropriation, corruption and financial statement fraud. Asset misappropriation, defined as “any scheme that involves the theft or misuse of an organization’s assets,” is the most common. It was present in more than 90 percent of the 1,134 cases on which the ACFE’s most recent (2006) report was based.

Arkansas cases that fall into this category include those of Maxwell, a bookkeeper charged with embezzling at least $75,000 from Oxford American, the nonprofit magazine affiliated with the University of Central Arkansas. Another $28,000 worth of payroll taxes went unpaid on her watch, according to Warwick Sabin, the UCA vice president who has been named publisher as part of the school’s $140,000 bailout of the magazine.

Maxwell was arrested by UCA police in February and charged with theft and forgery; checks she issued to a co-worker who was on maternity leave were allegedly deposited in Maxwell’s account.

Maxwell had been hired in June and the first of the suspect checks was issued in September, but nothing was uncovered until January. In this way, Maxwell was atypical; employees with less than a year of tenure represented barely more than 10 percent of the perpetrators detailed by the ACFE in 2006.

Maxwell’s alleged crime falls into the category of asset misappropriation that the ACFE calls “check tampering.” The fact that Maxwell worked in accounting at Oxford American put her in the majority of check-tampering suspects. According to the ACFE, 57.4 percent of the check-tampering cases considered in the 2006 report were perpetrated in the accounting department, with another quarter coming from the ranks of upper management.

Lack of Controls

Skimming is another category of asset misappropriation. According to Spratt, this was the category of crime committed by former Pulaski County Comptroller Quillen. Skimming refers to stealing money — cash, checks or money orders — before it is recorded on an organizations books and records. It is, Pratt said, evidence of lack of internal controls.

Quillen, who was sentenced to 12 years in prison last year, was able to divert more than $40,000 to a personal account and use it to carry on an extramarital affair with a vendor because the county government didn’t have an appropriate system for dealing with unusual payments — refunds, rebates, etc. — that were occasionally received. Instead of booking such unusual payments and then transferring the amount to Quillen internally, county departments would often simply hand the checks to Quillen to handle. And he handled them, Pratt said, by depositing them into his own account.

While the cases seem quite different, some of the accusations that a federal grand jury lodged against Kelly Wooldridge earlier this month also fall into the category of skimming.

Wooldridge, who was president of Continental Express from November 2002 to May 2005, and CFO Todd Tiefel, who has pleaded guilty, are accused of incorporating in Arkansas a company called Great Western LLC, a name identical to that of an existing Nevada corporation that, like Continental Express, is owned by Edward M. Harvey.

The two then, according to the indictment, diverted more than $450,000 — mostly from insurance reimbursement checks — that was intended for the legitimate Great Western into a bank account set up for their shell company.

(Pratt said a state government employee was caught in a similar skimming scheme several years ago: He stole checks made out to DFA — the Department of Finance & Administration — and altered them so that the payee was D.F. Anderson.)

Payroll and Billing Fraud

The grand jury also accused Wooldridge of another type of asset misappropriation called payroll fraud. He had been president of Harvey-owned Gibraltar National Insurance Co. of Little Rock before he was promoted to president of Continental Express. For more than the two-and-a-half years, according to the indictment, he continued to collect his salary from Gibraltar National — a total of more than $286,000 — while also collecting more than $367,000 as president of Continental Express.

Wooldridge’s attorney, Tre Kitchens of North Little Rock, has denied that Wooldridge did anything wrong and has suggested that Tiefel has made allegations against Wooldridge “to save his own skin.”

Tiefel also received salary to which he was not entitled, according to Assistant U.S. Attorney Karen Whatley, who in January elicited his guilty plea to a charge of aiding and abetting wire fraud. According to Whatley, Tiefel was also guilty of a third category of asset misappropriation: fraudulent billing.

ACFE defines billing fraud as any scheme in which a person causes his employer to pay for anything that isn’t a legitimate business expense. In Tiefel’s case, the billing fraud came in the form of unauthorized credit card charges — the same category of embezzlement that ended the political career of former Arkansas Attorney General Steve Clark and brought down former Wal-Mart Vice Chairman Tom Coughlin.

John Atwood, former CFO of USA Drug in Pine Bluff, took advantage of lax controls over an employee benefit account to steal more than half a million dollars through billing fraud that went on from 2001 to 2004. (He and his lawyer would later blame the LaFrance family that owns the drug store chain for not realizing that Atwood couldn’t afford the gambling losses they saw him suffer.)

Accounting employees and upper-level managers — like Tiefel, Wooldridge, Atwood and Coughlin — are the suspects in more than half of billing schemes, according to the ACFE. Most perpetrators —more than 60 percent — have been employed by the victim organization at least five years.

Another costly case of billing fraud was that of Kevin M. Wheeler, who pleaded guilty in 1996 to embezzling $1.3 million from CDI Contractors Inc. of Little Rock by creating fake bills and paying them to himself.

Corruption

Financial statement fraud — think Enron and Worldcom — is the most publicized but least common of the three types of occupational fraud reported by the ACFE. No cases have come to light among Arkansas companies, although earnings have occasionally been restated.

But there have been cases of occupational fraud of the type that the ACFE calls corruption, in which a person uses his influence in a business transaction for personal benefit that is contrary to the duty he owes his employer. A perfect example is Dan F. Whitt of Maumelle.

In 2000 and 2001, when he was president of a Michigan video distribution company called Anchor Bay Entertainment, Whitt used his influence over the company’s choice of vendors to successfully extort kickbacks totaling $712,000. In 2001, Whitt’s Little Rock lawyer, Keith Moser, tried to help him extort kickbacks from two more Anchor Bay vendors; both ended up in federal prison.

Whitt and Moser’s extortion scheme was uncovered when one of the intended victims instead told another Anchor Bay executive about the kickback demand. A tip was the single most common method for detecting occupational fraud, according to the ACFE’s 2006 study, whether in private business or government. Tips outnumbered internal audits and external audits combined.

That’s not to say audits were useless. But internal audits were more helpful than external, finding more than a quarter of the embezzlements that were uncovered and reducing both the losses and length of time the fraud continued.

Although most victim companies in the ACFE study had external audits — the external audit was the most common anti-fraud measure — they only uncovered the embezzlement in 12 percent of cases. And, in a finding the ACFE called “counter-intuitive,” organizations that used external audits had higher median losses and took longer to discover the thefts than organizations without external audits.

In January, Continental Express filed a civil suit accusing auditors at BKD LLP of Little Rock of negligence and breach of contract for failing to uncover the embezzlement of which Tiefel and Wooldridge were accused.