Two to Tango: A Fraud Story

I had a great Business Law professor in college. He was an attorney and one of his clients was a country music singer with a drinking problem. Whenever he showed up at a gig too drunk to play, the concert promoter would often threaten litigation for the lost concert revenue. The attorney spent a lot of time dealing with angry concert promoters, police departments, etc. As you might expect, he had a good sense of humor about the whole thing- a requirement for that kind of work!
My professor defined fraud as “willful intent to deceive”. He also defined collusion as two or more people working together to commit fraud. Recently in St. Louis, two women “admitted setting up two nonprofit corporations that they used to send fraudulent bills to the state independent living program.” One woman drafted the invoices and the second- her supervisor- approved them. This illustrates a key point: all the controls in the world can fail if more than one person is involved in committing a fraud. In this case, the control to prevent the employee from paying fictitious invoices was that they required approval from a supervisor. Since the supervisor was “in on the scam”, the control failed. At least $70,000 of the bills submitted was false.
How could this have been prevented? Unfortunately, certain key functions cannot be delegated to others in a small business. The business owner should consider personally reviewing each invoice to be paid, and each bill sent to a client.
The Lesson: To prevent collusion, some accounting tasks must be retained by the owner in a small business.
Your Homework: Have you recently delegated a large amount of responsibility to an employee, due to growth in your business? Does that responsibility involve billing or paying invoices? If so, you should consider reviewing each process to prevent fraud.
(Source: “Woman Sentenced in billing scheme”, St. Louis Post Dispatch, 5/12/07)