Case #6: Embezzlement Now—Bankruptcy Later?
After pleading guilty to four counts of mail fraud and four counts of filing false federal income tax returns, the defendant appeared in federal court in March 2010 for sentencing. This previously trusted executive assistant of an apparel distributor received a sentence of 57 months in prison followed by three years probation for the embezzlement of more than $1.6 million from her employer. She was ordered to pay back $1,542,638.25 to the apparel group and its insurer, as well as $710,291.33 to the Internal Revenue Service in back taxes, penalties and fees.
Criminal records also revealed this was the defendant’s third conviction for embezzlement from an employer.
The Alleged Scheme:
The defendant held various positions at the apparel company including Administrative Assistant to the President and Director of Human Resources. Her duties and responsibilities included sales and marketing, accounting, human resources, merchandising; and she had authority to approve and sign purchase orders, invoices, and checks in amounts of less than $75,000, if these matters were in the normal course of business.
According to court records, in August 1999, the defendant created a fictitious business entity to facilitate a fraudulent scheme. For approximately nine years, between 1999 and June 2008, the defendant defrauded her employer by generating fictitious invoices and submitting those invoices to her employer for payment. Since her duties gave the defendant authority to approve and sign purchase orders and checks for amounts up to $75,000, she would approve those phony services invoices and ultimately transfer those funds into her personal bank accounts. The money was used to pay for her son’s college tuition and to finance trips to Walt Disney World, Bahamas, Jamaica, Europe, Australia and Greece. She also installed a $20,000 home theater system and remodeled her home, prosecutors said.
When her employer filed for bankruptcy, it listed declines in consumer spending and shifting trends in clothing among the reasons for its financial demise. Little did it know that shortly afterwards, embezzlement would also become a factor on that list.
The Scheme’s Downfall:
While no creditable information was received regarding the discovery of this fraud, one source indicated that the IRS may have played an instrumental role; the defendant allegedly neglected to report some of her “earnings” in her 2004—2007 tax returns, causing her to be charged with four counts of filing false federal tax returns.
- This conviction was the defendant’s third guilty verdict for embezzlement from an employer. Case after case continues to show that “past behavior is an excellent predictor of future behavior”. At the time the defendant was hired and had a criminal records check taken place, it would have revealed that this applicant was found guilty on two prior occasions for embezzlement from former employers.
- The defendant’s duties gave her the authority to approve and sign purchase orders and checks for amounts up to $75,000. Numerous internal fraud case examples clearly reveal that no employee should have the ability to perform any high-risk financial task without supervisory oversight and verification.
- The defendant had authority to approve and add vendors to Accounts Payable authorized vendor payment lists. No individual should have authority to compile an “approved vendor list” without impartial verification that those vendors are legitimate businesses.
Practically every business manager knows that internal controls, segregation of duties and supervisory oversight are three important components of any organization’s anti-fraud program.
Yet, few understand the reality of how to keep these critical safeguards in-place and effectively operational in a busy work environment.
Be informed – learn from the experiences of others. Get involved – and YOU will be prepared.
Read more in Business Fraud: From Trust To Betrayal