Dissecting a complex trade-skill education program case, part 2


By Joseph R. Dervaes, CFE, CIA, ACFE Fellow

joseph-dervaes-80x80.jpg   Fraud's Finer Points: Case history applications 

 MayJune-alan-wrench    
 

As we discussed in the March/April 2013 column, hundreds of taxpayer-supported public high schools and colleges offer trade-skill education programs that enable many to pursue lifelong technical careers. These programs are designed to break even over a period of time, but the most efficient and effective programs actually generate some income.

FRAUD OF CHOICE IS STILL SKIMMING 
  


Employee fraud and abuse in these programs is usually a case of simple asset misappropriation. In the ACFE’s Fraud Tree, cash schemes (part of asset misappropriations), which involves stealing of an entity’s funds, fall into three categories: larceny, fraudulent disbursements and skimming. Cash larceny schemes involve the theft of funds recorded in the entity’s accounting records, and skimming is the theft of off-book funds. In fraudulent disbursement schemes, an employee makes a distribution of company funds for a dishonest purpose.
 


In this concluding column of this two-part series, we’ll finish our case of Alan, a college instructor for more than 12 years in the Processing Machinery Maintenance and Repair Program in one of the largest technical colleges in the state of Washington. This skimming fraud case, the most complex I ever encountered, unfolded over four years. 

ANALYZING THE CAUSES OF THE PROGRAM'S FRAUD
 

 
The vocational program in which Alan taught was one of several at the college that offered retail operations open to the public to provide students with experience and hands-on training in maintaining and repairing manufacturing equipment used in the seafood canning industry. Students trained in welding, hydraulics, pneumatics, vacuum pumps, air compressors, electricity and power transmission. The machinery came primarily from private sector seafood harvesting and processing companies prevalent in the U.S. Pacific Northwest and Alaska. 
 


Let’s analyze what went wrong:
 


Duties in the vocational program were inadequately segregated. Alan’s supervisor, the program director, minimally reviewed him. The director also didn’t periodically evaluate the reasonableness of program revenues, expenses or the work-in-progress inventory. Meanwhile, the program ran into the red by US$372,067.93 during the four years Alan pulled off this scheme. Also, Alan frequently asked for and received his supervisor’s approval to exceed the program’s budget for supplies.
 


The work order system was dysfunctional. Alan didn’t properly account for and control purchase orders or cross reference them to prenumbered work orders. He didn’t maintain a work order logbook to track the work-in-progress inventory. Alan didn’t properly value jobs and seldom collected the required 50 percent deposits.
 


Cash receipts didn’t reconcile to completed work order sales. Alan didn’t list actual parts, materials and supplies on work orders. In fact, he often didn’t prepare work orders for repair jobs. Finally, actual job costs exceeded revenues on some projects.
 


Alan abused his position and authority
 by entering into equipment purchase contracts with private sector companies without the college’s authorization, and he shipped parts and machinery from the college to persons and companies without using work orders. He also allowed at least two out-of-state companies to use the college as their shipping point for sales to their own customers. 
 


Alan allowed customers to trade parts and machinery for students’ repair work, accepted donated and traded machinery without entering the transactions in college accounting records and allowed individuals who had no official capacity with the college to pick up parts from vendors.
 


Alan benefitted personally from the machinery repair program and misappropriated at least US$476,394 from it for more than four years. The college paid for all repair parts and shipping costs for machinery repaired by students; however, Alan received most of the revenue from the operation. He established a secret bank account and purported to be in business for himself. But the college wasn’t aware of the business, and he hadn’t registered it with the Internal Revenue Service, the Washington State Department of Licensing or the Secretary of State Office. Alan deposited US$145,723 from machinery repairs belonging to the college into his secret bank account, and he used some of the funds to enhance his personal lifestyle. 
 


The work-in-progress inventory significantly increased during the four years. Purchases valued at US$330,671 had no corresponding collection of revenues to account for losses in inventory. Alan listed work-in-progress inventory at market price rather than at purchase cost. The remaining value of inventory on hand was overstated by US$89,500 or 67 percent.
 

 

 

Students initially detected this scheme, and the college security chief confirmed it. However, the college didn’t take the matter seriously and only reprimanded Alan. Students then complained directly to the college’s external auditor. When Alan heard rumors of a pending audit, he destroyed program accounting records and immediately went on extended sick leave. He retired five months later and fled to American Samoa. He later pleaded guilty to one charge of theft from a federally funded program. The court sentenced him to 15 months in federal prison. 

 


For full access to story, members may sign in here.

Not a member? Click here to Join Now. Or Click here to sign up for a FREE TRIAL.