Fraud at the Top

Cover and Rossiter, P.A. Fraud at the top

By Pete Kennedy, CPA of Cover & Rossiter, P.A.

On June 2, the U.S. Attorney for the Eastern District of Pennsylvania issued a 10-page report indicating that the person who was the executive vice president and general counsel for the The Children’s Hospital of Philadelphia stole $1.7 million from 1999 until his firing in February 2011. As the saying goes, a person with a suit, tie and briefcase can steal more money than a person with a gun. There was nothing too fancy about the scheme itself.

Acting alone, the defendant allegedly made up a series of phony vendors, submitted phony invoices, and authorized payment of the phony invoices using the authority of his positions. There were bank accounts and address/PO boxes set up in the name of the phony vendor into which the checks were deposited giving the defendant access to the cash. From 1999 to 2003, the defendant was in charge of coordinating CHOP’s defense for medical malpractice claims.

He dummied up invoices for nonexistent expert witnesses for $225,000 in total. In 2003, CHOP evidently changed its procedures and required a second approval on these expenses, temporarily squashing the scheme, but the existence of the fraud remained undiscovered. In 2007, the defendant was promoted to senior vice president for community and government relations and was off to the races again. Using the same tactics, he submitted over 100 bogus invoices and was paid $1.5 million until he was caught in February of this year. Questions arose when the defendant began making errors on the bogus invoices, which generated inquiries and, eventually, suspicions. The report made it sound more sophisticated than it was. It was a garden variety fraud scheme and all organizations should have controls in place to prevent it. The distinguishing factor of this fraud was the senior-level position of the alleged perpetrator.

Was the defendant a poorly paid underling just trying to get by? Hardly! A quick check of CHOP’s Form 990 for the years ended June 30, 2007, 2008 and 2009 indicates that the defendant earned $420,000, $450,000 and $700,000 respectively. But even this compensation was not enough to support a lifestyle that included a yacht and a full-time captain. I guess those yachts are expensive, but I wouldn’t know. In its June 30, 2009 Form 990, CHOP reported that, as general counsel for CHOP, the defendant would have been responsible for reviewing conflict of interest statements given by the board and all senior management. Essentially, this person was so highly regarded and so deeply trusted that he was tasked with critical control procedures such as passing judgment on the acceptability of vendor/board member relationships, etc. In the meantime, he was running a crude fraud scheme taking advantage of his position of trust and a chink in the internal control armor of CHOP. This situation painfully illustrates two issues: 1. No one in any position from bottom to top of a nonprofit can be considered immune from fraud risk.

There is a percentage of people in the population that will steal if given the opportunity. They may work in the janitorial staff or they may work in the corner office. If your organization employs more than 10 or 20 people, you probably have one or more of them working in your organization right now. The system of controls should not treat anyone as being above suspicion. 2. Many fraud studies stress the importance of the “Tone at the Top.” The attitudes of senior personnel can have a profound impact on the overall fertility of the environment to sprout fraud schemes. If the senior people are fudging their expense reports, ignoring or circumventing controls, or otherwise taking advantage of their positions of authority, even in a small way, it can make justification of fraud in lower ranks that much easier. As auditors, we conduct interviews of personnel semi-randomly selected throughout an organization to help us assess where the risks of fraud may be.

We directly ask questions about where fraud may be occurring and try to gauge the overall moral tone. A response I all too frequently receive is “Oh my goodness! Fraud could never happen here! Everyone is so honest and we all share the same commitment to the mission. It is unthinkable!” I cringe when I hear this reply because it tells me no one is really critically thinking about where and how fraud could be occurring and then taking active steps to address weaknesses. Alternatively, the best responses are “We know there are controls in operation, they are strictly and consistently enforced from the top down, they apply equally to everyone and the penalty for theft of any amount is immediate termination.”

What responses would we hear in your organization? For advice about fraud control policies and procedures, or any other aspect of nonprofit management, please contact Pete Kennedy or any other member of the Nonprofit Practice team at Cover & Rossiter at (302) 656-6632. Cover & Rossiter, P.A. is one of the area's oldest and most respected certified public accounting and advisory firms serving the accounting, tax and audit needs of the nonprofit community in Delaware.


This article was originally published in Delaware Online.