Peter Singer, the head

of a marketing

department at an

event company, was

retiring but agreed to stay

on for six months to transition

the new department

head. On day two of the

transition, the incoming

department head called the

CAE and left a voicemail

message saying something

odd was going on and urged

him to take a look.

During the investigation,

the CAE found that

Singer purchased marketing

services from a vendor to

support revenue targets for

a specific product. Although

that seemed reasonable,

the audit also revealed

that Singer was holding

US$500,000 in late invoices

from the vendor, a significant

amount to the company.

Some invoices were

overdue by 18 months, well

past the typical 45-day average

pay cycle. The vendor

representative sent numerous

emails to Singer complaining

about the invoices.

The invoices were

being paid increasingly

late beginning several years

earlier, when the budget for

this marketing service was

reduced by US$400,000.

This was due to the belief

that the vendor's services

were less useful as the

product became more established

in the marketplace.

If the invoices had been

paid timely, Singer would

have been over budget. The

invoices were never sent to

accounts payable, as Singer

asked the vendor to send the

invoices directly to him. In

addition, Singer never disclosed

these commitments

during the monthly financial

close process.

Singer sent emails

requesting that the vendor

reduce the amounts of the

invoices so that he could

avoid additional approvals.

The vendor complied by

splitting invoices. Singer also

developed a close personal

friendship with the vendor

representative they would

often go on trips together

with their spouses. They

were so close that, when

Singer's wife lost her job

two years earlier, the vendor

representative offered her a

position at his firm.

As seemingly fraudulent

events like this are investigated,

internal auditors are

often quick to look for the

motivations and benefits to

the perpetrators. Although

the situation unraveled with

a lot of juicy, and often irrelevant,

tidbits of information

along the way, management

wanted internal audit to

focus on one question: Why

did Singer do it?

After hundreds of

hours of research and several

hours of interviews,

internal audit was left with

a troubling assessment of

Singer's behavior. He had

committed fraud. He lied to

the company about spending

money with the vendor

by making it appear that he

was on budget, evidenced

by the outstanding invoices.

He was aware of these outstanding

invoices, as they were piled up on his desk. He worked hard to circumvent

internal controls for authorizing and recording the invoices,

and the vendor representative conspired with him to circumvent

company authorization limits. Because of this

activity, the company had a US$500,000 debt for services it

did not authorize, value, or want.

In the end, there was no direct and convincing way

to prove that Singer received any benefit from the vendor.

In the eyes of management, this made the behavior much

less grievous and "not quite fraud." Internal audit was able

to convince management that Singer intentionally circumvented

internal controls to conceal the budget overrun, so

he was asked to leave a few months earlier than planned.

Consequently, management changed the policy to have all

invoices sent directly to accounts payable to avoid future

errors. However, management paid the outstanding invoices

without confronting the vendor about its part in knowingly

evading internal controls.

The absence of a clear-cut villain stealing from the

company left management wondering what the concern

was about. As a result, management

sent a muddled message about what is

acceptable and missed an opportunity

to strengthen the company's defenses

against future fraud.

Fraud investigations are often the

most intriguing part of an internal

auditor's job. You have villains, who break rules and selfishly

benefit to the detriment of the organization. Until someone

catches on, that is.

However, the reality is not always so clear cut. In

fact, it could be argued that the villain situation is rare. In

many cases, a confused individual takes a few small steps

across the line of good judgment and winds up entangled

in rationalizations and good intentions. As things progress,

this person hears the chirping of his or her conscience

that something isn't right, but the warning is distant and

the words are muffled. In the end, the employee is baffled

as to how his or her actions were perceived so negatively.

The individual knows he or she could have done things

better, but can't believe the situation is being taken so seriously.

Termination? Fraud? The employee is shocked by

the possibility, and many times will utter the words, "But

I didn't steal."

It is always difficult to see ordinary people fumble into

bad situations. And organizations are not always prepared

to handle these situations, which leads them down a messy

road of uncomfortable conversations, half measures, and

lackluster support.

Lessons Learned

Organizations need to establish a clear perspective

on how they want to approach fraud and its many

faces. A strong fraud policy describes what the company

perceives as fraud and lays out the expectations

for investigation and resolution. Without a policy,

fraudulent activity is often addressed by management

based on the biases and perspectives associated with

each unique instance.

Internal audit should use these situations to improve

the organization's fraud perspective. Fraud is often

interpreted and managed differently across organizations

based on corporate culture and understanding

of internal control. Although frustrating for those

involved, management's lukewarm support may be

the most valuable observation from this scenario. It is

an indication that there is significant work to be done

to improve internal control awareness at the top of

the organization.

Internal audit has the expertise, perspective, skills, and

independence to lead in these situations. Expecting others

to share a clear vision of murky fraud cases is not

always realistic

Questions

• What do you think of Peter Singer's actions?
• Would you have classified his actions as a fraud?
• If not fraud, what do you think motivated him?
• Do you think the company should have paid the vendors since they also circumvented normal procedures?
• Why?
• How could the companies have protected themselves against this type of behavior?