Purell Magazine Construction Fraud

You are a newly hired fraud examiner. You have been asked to write a preliminary

report on the scenario below, using the information presented in Units $1$ to $4$ and

findings from your additional research.

Purell magazine and publishing house decided to outsource much of its direct$-$mail

operations to specialized mail vendors. The company began converting its plant in

Oakville, Ontario, from a direct$-$mail$-$order factory to an office complex. Part of the

construction of the office complex involved building an auditorium that was

identical to another auditorium in its European offices.

As a recently hired Auditor and fraud examiner, this is your third day on the job.

In an effort to get to know your new company, you had scheduled a series of

interviews with all the vice presidents. The first interview was with the vice

president of administrative services, Richard Green, who oversaw many

construction projects and maintenance services. Because of the massive

renovation project, it was not unusual for hundreds of invoices to be forwarded to

Green.

Coincidence one: You stopped by the accounts payable department and

retrieved a series of recently submitted invoices for various trade expenses related

to the auditorium construction project. $$One of the things you wanted to

accomplish was to understand how the accounting codes worked$$what was

capitalized, what was expensed, how it was recorded, etc.$$ So$,$ you grabbed a stack

of processed invoices with accounting codes and went to the construction site to

meet with the vice president for an hour$-$long interview.

As the two of you walked around the grounds, you asked the vice president if he

could explain the accounting codes to you: $$He stared at the $[$top$]$ invoice for

approximately $30$ seconds and said: $$That is not my signature on the invoice!$$ As

he looked through the stack, he found what appeared to be about three or four

other forgeries. He was completely baffled.$$

The initial investigation revealed that all the forgeries were in the painting

division, budgeted at approximately $$800,000$ a year. The company employed only

one person to oversee the painting operations in its facilities department: James

Small. Small, a $35-$year$-$old from New Fairfield, Ontario, earned about $$30,000$ a

year.

It was his job to coordinate time$-$and$-$materials contracts with the scores of

painters, carpenters, electricians, and plumbers who toiled daily on the

renovation, repair, and construction of the building complex. As facilities

supervisor, Small regularly forwarded invoices to the vice president of

administration services for approval. Small launched his scheme by crafting false

invoices for the jobs done by the painters. He took a copy of a trade invoice from

an existing painting contractor and, using his home computer, created a replica

into which he would record slightly different hours for the trade contractors$$ work.

A probable scenario of how Small executed his scheme. $$Let$$s say he knew that

during the month of February, as an example, there were twenty$-$seven painters

on the grounds during the course of one week.$$ Small also knew the total number

of hours and the volume of materials used in that time. $$He would create invoices

that were similar in nature but record only eleven painters on the grounds. Small

would not reinvoice exactly the same work done during a week, but he would make

it look so similar that no one$$s suspicions were ever aroused. Effectively, there

were no work orders on the $$phantom work$$ he created on these invoices. Small

always listed fewer painters on the false invoice than the actual number who had

worked that week, and he registered less time for their services than they had

actually worked.

As part of his job, he regularly brought the trade invoices into the administrative

VP$$s office for signature approval. After delivering a stack of these invoices, he

would return to collect them within the next day or two and deliver the approved

invoices to the accounts payable department. It was this opportunity that allowed

this individual to go and collect the approved invoices and insert his own replicated

fraudulent invoices as approved. This was the first piece of an $$electronic circuit$$

that allowed him to commit the fraud.

The second piece of the circuit for the fraud to ignite, was allowing this same

employee to transport the invoices to the accounts payable department, and

ultimately to collect the cheque. After seeing how easy it was to slip in his own

false invoices in the stack of approved ones, Small became bolder in his scheme.

He began calling accounts payable, claiming that a carpenter or painter had

arrived on the grounds and needed his cheque $$immediately$.$ To keep the project

flowing, the employees in the accounts payable department accommodated him.

Many employees knew and liked Small, who had worked for the company for

nearly $15$ years.

Eventually, t