The New Hope/Solebury School District serves students in part of Bucks County, Pennsylvania. The county, just north of Philadelphia, has been peaceful refuge since its colonial beginnings as a stopover on the road between New York and Philadelphia. But modern telemarketing reaches even the quietest parts of the county and can expose the most straightforward budget-execution tasks to million-dollar fraud.

Consider These Questions

1. What standards of internal control were violated here?

2. How would you revise financial practices in the District to prevent similar fraud in the future?

3. Compare the roles of internal control and post-audit in the war against waste, fraud, and abuse.

The scam involved the business manager of the District, Kathryn Hock, and American Corporate Supplies distributor operated as a telemarketer by Marc and Teresa Suckman. The district serves 825 students, with an annual budget of $6.6 million. Hock, business manager since 1978, had worked her way up from school secretary. Some school board members had questioned her ability to deal with more sophisticated accounting systems and methods and had expressed doubt about her qualifications. She had managed to keep her job, although uneasily.

American Corporate Supplies, located in California, made phone calls to prospective purchasers (public, private, non-profit---it mattered not) around the country, offering products at a discount, Often the discounts were from artificially inflated prices. Their business was to induce customers to purchase felt-tip pens from them; the scam was that the pens often had not been ordered at all or, if ordered, were never delivered. Their business was good: along with the school district, victims included an Idaho priest ($66,000), a St. Luis businessman ($40,000), and a Pennsylvania man ($155,000). But the $2 million from the school district apparently was their best.

Hock received a long-distance call from the American Corporate Supplies in 1983, offering green felt-tipped pens. Because district teachers had requested the color, she placed an order. The shipment arrived as promised, and she paid the bill.

Through the year, the business manager made more pen orders. Eventually, her contact, William Chester of American Corporate (possibly Suckman) informed her that her good-customer status entitled her to receive a pocket tape recorder, a gift that she accepted, That put Hock in jeopardy, although she did not realize it.

After a few weeks, Chester called in regard to filling her back order. There actually was none, but he convinced her that such an order did exist and that she had a legal obligation to complete the order. Mr. Chester the proceeded to call one or two more times each month to obtain a new order from her.

By April 1984, the district definitely needed no more markers. They had arrived in regular batches, and there was room for little else in the storage closet. Hock tried to stop the flow, but Chester told her that the district had an outstanding balance of $3,547.14 and that she should send the check to close the account. The claim was excessive, Hock objected, but Chester threatened to tell the school board about the gift she accepted for placing the orders. That would cause her to be fired, so she settled the account and stopped the orders

Or so she thought. A month later Chester called again this time with an outstanding balance of $4,229.53. She again objected, but Chester threatened to inform both the school board and the police about the unauthorized payment for the goods not received. The stakes for her were higher.

Hock felt in even greater jeopardy and, because of this vulnerability, was going to be called on to provide even greater sums of money. U.S. News & World Report describes her response: Hock knew then she was in deep water "I was panic-stricken," she says. "I had never come up against anything like this and didn't know how to handle it." She paid that bill, and then another the following month, and dozens more, sometimes three a month. "Each time he said it would be the final order, but it never was," she says. When the amounts Chester demanded escalated as high as $30,000, she started breaking the payments with several different checks so they would be easier to hide in the books. She had authority to sign checks and stamp them with the signatures of two board officials. When the cancelled checks came back from the bank, she would white out American Corporate Supplies and type in the name of a local fuel oil company and other regular suppliers, inflating their costs. Then she would alter the computerized accounts accordingly.

This process continued until 1988, when the accumulated overspending had grown so large that Hock could no longer conceal it. She quite in June, just as the district superintendent who had supported her against the skeptical board retired. The new superintendent and business manager soon found discrepancies and performed a special audit. The FBI and the U.S. Attorney received the results, and Hock confessed.

In July of 1989, Hock pled guilty to embezzling $2,043,903 from the district: evidence indicated that she kept none of the money, but she sent it all to Suckman. She was sentenced to sixteen months in prison and ordered to pay back the money she had stolen. She cooperated in further investigations to help find the Suckmans. The district had to borrow $1 million to replace the missing funds.

In Aprils of 1990, a federal grand jury indicted the Suckmans on thirty-eight counts of transporting stolen securities obtained by fraud, twenty counts in engaging in monetary transactions in criminally derived property, and a single count of conspiracy to commit interstate transportation of stolen money and securities. Marc Suckman was also indicted on three counts of blackmail. The Suckmans were arrested in Costa Rica and transported to Philadelphia for trial. They pled guilty shortly before jury selection; Marc Suckman faced six years in prison and Teresa Suckman up to four years and three months. They agreed to help in further investigations of telemarketing scams. U.S. District Judge James McGirr Kelly ordered restitution (the Suckmans claimed all proceeds had been "dissipated" by high living) and forbade them from working in telemarketing again.