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The Spinster and the Dubious Investment

Financial Statement Fraud in Small Organizations



November/December 2011

Small organizations: Beware of those longtime employees who have their hands in every department. They could be like alpha executive Francine Gordon, whose fraud gave her company headaches and grief. Learn lessons from this tale of misplaced trust, faulty internal controls and lack of segregation of duties.

This article is excerpted and adapted from the “Financial Statement Fraud Casebook: Baking the Ledgers and Cooking the Books,” edited by Dr. Joseph T. Wells, CFE, CPA, published by John Wiley & Sons Inc. ©2011 Used with permission. Names in this case are fictitious.  

 

NovDec-spinster-at-work.jpgAll financial statement frauds are not in the billions of dollars. They only need to be big enough to be material to the financial statements.
Francine Gordon was a highly intelligent, model employee of Small Town Federal Credit Union (STFCU). She had been STFCU’s controller for more than 15 years, but she also managed the data-processing systems. When the data-processing clerk was sick or on vacation, Gordon would step into the position to make sure that the processes ran efficiently. Many employees at the credit union — including Gordon — believed she knew more about the IT systems than the data-processing clerk.


She was not the typical “that’s not my job” employee. For years, she helped out in many other departments and led several projects. Susan Wren, STFCU’s CEO, and many employees tolerated her somewhat dictatorial manner and moody temper because she was so valuable to the credit union. Few employees ever challenged Gordon about credit union issues.


As with many small financial institutions, the credit union had not separated duties because of finite resources and extremely tight budgets. Gordon had some unthinkable duties and responsibilities. Her primary responsibilities as controller were creating financial statements, preparing budgets and forecasts and reconciling STFCU’s lengthy and often complicated bank statement.


In addition to supervising the data-processing department, she was responsible for the accounting — and the management — of STFCU’s investment portfolio. This allowed her to make purchase and sales decisions about investments, although intelligent investment analysis was not one of her strengths. So, Gordon relied on the advice of the credit union’s three approved brokers. Her control of so many of STFCU’s areas created a “witch’s brew” for bad decisions and lax internal controls.


Her compensation was good but not comparable for those working in the upper tier in credit unions of similar size. Regardless, Wren granted Gordon more authority and autonomy throughout the years.
Gordon frequently worked long hours and weekends. She was not married, did not have a significant other or children, seldom visited her faraway family and was not close to other employees and had few friends. Gordon did gravitate toward Steven Edwards, one of the credit union’s investment brokers. Edwards, an older distinguished gentleman with a silver tongue, always was impeccably dressed and manicured. He would send flowers to Francine on her birthday and visit her regularly.


Though the credit union had three approved brokers, it consistently awarded Edwards about 90 percent of its investment business. Because it was a small financial institution, STFCU relied on its brokers to analyze investments and to detail how individual investments and the total portfolio fit into the credit union’s balance sheet and future goals. However, Edwards did not provide these analytics and did not appear to have a solid understanding of how to manage an investment portfolio. In fact, he did not seem to understand financial institutions very well. Apparently, his skills were more social than financial.

 


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