Exploring a Fictional Case of Employee Fraud

By Published On: July 25, 2024Categories: Services - FAVS

In the world of business, the threat of employee fraud looms large, with the potential to cause significant financial and reputational damage. In the past, we have written articles about different types of fraud to look out for and what businesses can do to protect against fraud. In this article, we will look at a fictitious company, XYZ Corporation, and show how any company can find themselves falling victim to employee fraud. By examining the methods employed in the fraud and the subsequent detection and repercussions, this fictitious case underscores the critical importance of robust internal controls and vigilant oversight in safeguarding a company’s assets.

Background

XYZ Corporation is a mid-sized manufacturing company known for its innovative products and strong market presence. The company employs around 500 people and has annual revenues of approximately $50 million. Despite its success, XYZ Corporation became a victim of a sophisticated employee fraud scheme that went undetected for nearly two years.

The Perpetrator

Jane Smith, a trusted and long-term employee, worked as the Accounts Payable Manager at XYZ Corporation. She had been with the company for over ten years and was well-regarded by her colleagues and supervisors. Jane had extensive knowledge of the company’s financial systems and procedures, which she leveraged to commit fraud.

The Scheme

Jane exploited weaknesses in the company’s internal controls to perpetrate a fraudulent scheme involving fake vendor invoices. Here’s how she did it:

  1. Creation of Fake Vendors: Jane created several fictitious vendor accounts in the company’s accounting system. She used real but unrelated business names and addresses to avoid immediate detection.
  2. Submission of Fake Invoices: She generated fake invoices from these fictitious vendors for goods and services that were never delivered. The invoices were relatively small in value to avoid raising suspicion but frequent enough to accumulate significant amounts over time.
  3. Approval Process Manipulation: Jane had access to the accounts payable system and was responsible for approving invoices for payment. She ensured that the fake invoices were approved and processed without additional scrutiny by manipulating the approval process. Since she had the authority to approve payments below a certain threshold, she kept the fraudulent invoices within this limit.
  4. Payment Diversion: Payments for the fake invoices were directed to bank accounts that Jane had set up in the names of the fictitious vendors. These accounts were controlled by Jane, allowing her to siphon off company funds.

Detection

The fraud was eventually discovered during a routine internal audit. The auditors noticed unusual patterns in the vendor payment records, including multiple payments to vendors with no corresponding purchase orders or receiving reports. A deeper investigation revealed the fictitious vendor accounts and the fraudulent invoices.

Outcome

Once the fraud was uncovered, XYZ Corporation took immediate action:

  1. Termination and Legal Action: Jane was terminated from her position, and the company initiated legal proceedings against her. She was charged with multiple counts of fraud and embezzlement.
  2. Recovery Efforts: The company worked with law enforcement and forensic accountants to trace and recover as much of the stolen funds as possible. While some funds were recovered, a significant portion had been spent or hidden, resulting in substantial financial loss. Companies may have a specific type of insurance to protect them in situations of employee fraud, read our article here for more information.
  3. Strengthening Internal Controls: XYZ Corporation reviewed and strengthened its internal controls to prevent future fraud. Measures included:
    1. Segregation of Duties: Reassigning responsibilities to ensure no single employee had control over the entire payment process.
    2. Vendor Verification: Implementing a more rigorous vendor verification process, including background checks and regular audits of vendor accounts.
    3. Enhanced Monitoring: Introducing data analytics tools to detect unusual patterns in financial transactions and improve oversight.

Lessons Learned

This case highlights the importance of robust internal controls and regular audits in preventing and detecting fraud. It also underscores the need for organizations to be vigilant and proactive in monitoring financial activities. By implementing strong anti-fraud measures and fostering a culture of ethical behavior, businesses can protect themselves from similar threats. If you unfortunately find yourself dealing with fraud in your business, contact Ryan Stretmater, CPA/CFF, CFE, MBA at rstretmater@sdkcpa.com or 612.332.9351 to see how the team at SDK can help.