Basic Recipes for Slush Funds

Circumventing Internal Controls Through Slush Concoctions

By By Arthur A. Hayes Jr., CFE

In the beginning, the agency managers meant to use the "unofficial" bank account for good and not for evil, as the comic book super-heroes would say. But in the end, the managers used an old family recipe to concoct a secret slush fund brew that illegally benefited a few at the expense of many.

The troubles began when a state healthcare agency's operating budget was cut and the group was denied additional funding by its governing body for the third year in a row.1 Agency managers were desperate so they devised a plan. The chief officers of the individual offices throughout the state would be asked to help defray some of the general costs of the agency by contributing their personal checks into a secret account. The managers rationalized that they then could use this private money to bypass budget cuts, and avoid time-consuming bid requirements and other red-tape headaches. The agency's trusted bookkeeper would handle the account.

Each year, the special fund accumulated about $30,000, which would be spent during the year. Few officers asked about the use of the money and the process became automatic and routine. They were glad that there was always some extra cash for emergencies.

However, the internal auditors discovered the fund one day by accident when they saw a personal check on the bookkeeper's desk written to an unfamiliar bank account. The skeptical auditors found that most of the officers who wrote their personal checks to the fund also submitted these expenses to the county for reimbursement. In effect, they were siphoning county funds into this unofficial account.

The auditors also found that the bookkeeper had used the funds for official purposes for two years, but then she had begun to use the money for personal bills. They found payments to her mortgage company, her utility company, and other businesses. Also, some of the executives who were in the inner circle of the central office would take travel advances out of the unofficial account for legitimate travel, but then they would submit claims to the state for reimbursement and "forget" to replace the money obtained from the unofficial account.

The bookkeeper is now up for parole and some of those forgetful officers have plenty of time to sit in their jail cells and remember their misdeeds. And, in reaction to bad publicity, the agency's governing body is still denying additional funding and cutting its operating budget.

Slush fund fraud, an atypical embezzlement, is more sophisticated than merely stealing money from a company. Slush funds are unofficial accounts containing money for use in ways that shouldn't be condoned by upper management – for example, purchasing of company party supplies, plush office furniture, excessive business travel and entertainment expenses, or even legitimate needs that can't be met through regular channels.

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