Essay question:

This scenario has been adapted from the Certified Fraud Examination.

The following case study features the story of Daniel Jones, a Certified Public Accountant.

Daniel Jones doesn't look like a criminal. His clear eyes and boyish demeanour lend Daniel an air of youth that belies his age. He combs his curly hair to the side and favours pullover sports shirts. Certainly nothing in his appearance suggests that he's an accomplished thief. Maybe that's why Daniel's story is so disturbing. He is an ordinary guy, working diligently at his chosen profession; he has a wife and four kids; he's not after fast cars or a Hollywood mansion; he just wants a good life. Daniel is as surprised as anyone to realize he's a crook.

Daniel was born in Wharton, Texas. Though his father's work with the Air Force moved the family around, they eventually circled back to Texas in time for Daniel to graduate from Wharton High School. He attended the University of Texas at Austin, graduating with a degree in accounting in 1985. Two years later, he earned his Master of Professional Accountancy (MPA) and began a promising career.

As an auditor for the state of Texas, Daniel tracked operations at several state-run hospitals in the Houston area, including the University of Texas-Health Science Center and the Medical Branch in Galveston. He enjoyed the work and the people he worked with. When a staff position at the Health- Science Center came open, Daniel applied. He was hired as the Health-Science Center's Assistant Director for Reporting.

Daniell's career was gaining momentum. He left the UT Health Science Center to become Director of Accounting for the University of Houston. Then, in 1984, he joined a private consulting firm called MFC & Associates. The firm did management and financial work for various state clients. The owner of MFC, Lee Palunko, assured Daniel that the move presented an excellent opportunity.

Palunko couldn't pay that much at firstabout $36,000 a yearbut the potentials looked solid and bright. While Palunko handled the business end of MFC, Daniel and a small staff kept the clients happy. Daniel dealt in appropriations and transfers for the governmental departments who received grants, conducting reallocations between transfer and non-transfer accounts.

Lots of money flowed through the State of Texas system, and lots of it ran across Daniel's desk, but nobody ever suggested anything untoward in his work. Daniel distinguished himself as a member of Palunko's firm.

Unfortunately, things turned grim for Daniel. Despite his best efforts at home and on the job, he found himself in a bind. His salary at MFC wasn't enough to support his growing family, and he had been living beyond his means. With mounting credit problems, Daniel filed for bankruptcy in 1996.

While Daniel and his wife were trying to hoist themselves out of bankruptcy, things at MFC turned sour. Palunko was charged with commercial bribery by the Texas Attorney General's office for an arrangement he had with an official at one of MFC's clients. Palunko reached a plea agreement and paid a hefty fine. As a part of the deal he cut, Palunko was forbidden to do business with government agencies. Since virtually all of MFC's work came from government agencies, the company had a problemit had no clients. Everyone but Daniel and one other employee left the firm.

In addition to the welter of troubles afflicting him personally and professionally, Daniel had a tax problem. He was working for MFC as a contractor, meaning no money for taxes or Social Security was withheld from his income. Daniel hadn't been making his quarterly payments and he owed back taxes for several years. He worked out a repayment plan with the IRS, but the $500 a month was more than he could afford.

By 2000, Daniel wore the face of a desperate man. He wasn't sleeping well and he was experiencing health problems. It was all tied to the anxiety he felt over his financial situation. He knew he had the solution to his money woes. Literally, it lay at his fingertips. But could he do it? He shouldn't. He knew that much.

One of Daniel's clients was St. Michael's Academy, a Catholic high school in the rolling hills just outside Austin. St. Michael's did more business than any of Daniel's other accounts, about $1 million a year income. The school's officers asked little or no questions concerning Daniel's work. They were the perfect target.

Daniel saw his situation in stark terms: "I was making $3,000 a month at MFC, and basically we were spending $3,000 a month, and then some. I decided, I have to settle with the IRS so they won't go ballistic and take what little money I do have. I decided, I can just do these couple of cheques and then I can find some new clients. I'll just kind of get in and get out."

Sitting quietly at his desk one afternoon, Daniel wrote himself a cheque on St. Michael's account. He felt a thrill, he felt a bit nervous, and he felt like he had just stepped into a new reality. Daniel was now a criminal. Pulling off the fraud took little effort. Daniel had set up a couple of business accounts several months before. He says he was hoping to do some work on the side with a company he called Media DLC, and another called Lion Custom Programming. Whatever the intent, neither of these ventures did any real business until Daniel used them in his operation.

He began writing cheques to his shell companies for small amounts in the range of $350. Eventually he was writing cheques for $3,000 or $4,000 at a time. On some occasions, almost daring his client to catch him, Daniel wrote St. Michael's cheques directly to himself. The school assumed the money was for services rendered, if they bothered to wonder at all.

When asked how he thought he was going to explain unauthorized cheques in his name, he replied, "I wasn't thinking of explaining it. I just wasn't thinking."

But he was thinking enough to know that he needed some kind of subterfuge. To cover his tracks, he underestimated payroll taxes for the school's employees and then wrote cheques from the general operating account to his shell companies.

Eventually, Daniel's scheme enabled him to pay off all his creditors. The Jones family was free and clear, but the fraud didn't stop. The money was too good and too easy. "I thought I'd do this for a couple months and get the IRS taken care of and then I'd start making other money," says Daniel, "But I got hooked on doing this with the cheques. It just got worse year after year."

Daniel's habit eventually had him cutting three or four cheques a month to himself, creating a monthly shadow income of $8,000 to $10,000. During the first years of his scheme, he took relatively small amountsfrom $10 to $30,000. By the end, he was averaging $100,000 in stolen funds a year. St. Michael's brought in about $1 million annually, meaning Daniel was taking 10% of the school's income for himself. Over five years, Bob stole between $300,000 and $400,000 from St. Michael's.

Daniel played the high-roller's game with his loot. He drove a fancy car and lived in an opulent house. He took extravagant vacations and bought luxury goods. He also stole enough to pay off his enormous debts. Usually a white-collar thief will steal as much as he can until he's caught or finds new territory to plunder, but Daniel never got caught by St. Michael's Academy. It was the guilt that was his undoing.

"It was a period of a couple of weeks that I was thrashing this around in my mind," he remembers. "I kept thinking, what can I do? How can I stop this? It wasn't a one-day decision. Finally, I knew that the only way to stop it was just to confess what I had done. I had to stop it myself."

Daniel made his decision and began the excruciating process of confession. He started by telling his wife one Tuesday morning before the children were out of bed. He spoke bluntly. "I've taken the money from the school. I'm going to have to confess." She reacted like she'd been slapped. For a long time, she said nothing. Then she began to cry, repeating, "I can't believe this. Maybe I'm still sleeping. What are you telling me?"

Daniel told his story many times over the next few weeks. First to his pastor, then to his attorney, and then to his clients at St. Michael's. At a meeting with several ranking members of the academy, Daniel again laid out the tale of his corruption, leaving his audience as stupefied as his wife had been the morning before. Telling the police afterwards was nothing in light of what he'd been through.

But Daniel felt his heart breaking as he stood in front of his parents and admitted, "I've done a terribly wrong thing. I've destroyed myself." The final blow came later that same evening when he gathered the family in the living room. All four children burst into tears, their only thought being that their daddy was going to prison. Daniel can't recall the incident without succumbing to tears himself.

"In the beginning," says Daniel, "I had rationalized the situation. It was supposed to be temporary. I thought, nobody's getting hurt here. At the time I was doing the cheques I didn't feel bad about it." Only gradually did Daniel's conscience get the best of him. How did he go wrong? There's no definitive answer, but Daniel thinks it was cumulative. "It was day by day, making the wrong decisions. Not acting on what I knew was right. It was a daily erosion."

St. Michael's also learned a lesson. Controls are the key to good financial health. Bob admits that the only reason he got away with his thievery was that no one bothered to check his work. "No one but me was looking at bank statements. I would just do the financials and they would say, 'Okay, there's the financials.' Nobody ever asked ..." Bob had full access to all areas of the school's accounting, a big mistake from the outset. St. Michael's had committed the cardinal sin of fraud prevention theory.

In writing your report the following points must be addressed fully:

a) Determine the type of fraud committed, and describe the symptoms of fraud that might be evident to an investigator

b) As discussed in one of the units, all frauds involve key elements. Identify and describe the elements of the Daniel Jones fraud.