Behind ‘Tears and Hugs,’ a Staggering Fraud

Mandy was a superstar. For my client, a nearly century-old private school, she was much more than the bookkeeper.

March 2013

By Tiffany Couch, CFE, CPA

 

Editor's note: The following case study is a true account. Names have been changed. 

 

Mandy was a superstar. For my client, a nearly century-old private school, she was much more than the bookkeeper. She was the beloved “school mom” who wore many hats when she was needed in a pinch - including secretary, nurse and janitor. She was adored by school staff and parents alike.

 

The school principal was shocked when she received a call from the Internal Revenue Service (IRS) informing her that the school was nearly two years behind in paying payroll taxes. An emergency board meeting was held and superstar Mandy was called to explain. As she told the board that the school’s decreasing enrollment and late-paying families had combined to create a cash flow crunch, she cried with conviction as she told them of her desperation to “keep the lights on and the teachers paid” instead of paying the payroll taxes.

 

The meeting ended in tears and hugs and an even larger admiration for superstar Mandy, who had convinced them that she had singlehandedly saved their beloved school.

 

Committees were formed, funds were raised, and the more than $200,000 in taxes and penalties were paid by a combination of the fundraising drive and a complete withdrawal of the school’s entire savings account.

 

New internal controls were implemented. The school principal signed all checks instead of allowing Mandy to sign them.  The kids went back to school. The parents went back to work.  All was well again.

 

Or so Mandy thought it would be.

 

 

Questions Arise 

Mandy’s convincing performance persuaded Mark, a parent, board member and practicing attorney, to work pro bono in an attempt to obtain a refund of the penalties and interest paid by the school (more than $100,000). This work resulted in a suit filed against the IRS.

 

Once again, superstar Mandy was called for another performance. This time, to provide deposition testimony to the IRS. It was during this deposition that Mark caught Mandy in a lie.  He wondered why, during her deposition, she would lie about something as silly as where she was on a particular day.

 

Mandy’s lie reminded Mark of a few other things that didn’t seem right. Why was it that Mandy was always too busy to provide the board with financial reports? Mark had a single year-end copy of a financial statement and realized that revenue seemed “off.” With more than 250 kids in attendance, shouldn’t the revenue on the financial statement reflect a number close to 250 times the amount of annual tuition? Why didn’t it? Then, he was informed that Mandy had been accused of stealing funds from her previous employer.

 

These nagging questions prompted Mark’s call to our office. He explained his dilemma and asked whether he was crazy. He tried to convince me that she was just “too nice” and “too well loved” to do anything like perpetrate a fraud.

 

He asked whether there was enough predication to start an internal investigation.

 

I asked several key questions about Mandy and learned that she had total control over the financials up until the IRS had called the principal. She invoiced parents, accepted payments, and took funds to the bank. She wrote and signed checks and had full control over the accounting system (a popular software product) used by the school. But that was two years ago, I was told. Since the IRS phone call, Mandy could no longer sign checks and the school felt that they were safe.

 

Given her previous history with allegations of theft, the non-payment of the payroll taxes, and her total control over the school’s cash and accounting records, I recommended that we obtain bank statements for the year prior to the IRS phone call to determine whether fraud was the reason the payroll taxes had gone unpaid.

 

 

The Investigation Deepens 

A box of new documents arriving in the office of a forensic accountant is almost as thrilling as Christmas Day. You never know the surprises you may find in the box. The school’s bank statements and cancelled checks were no exception. Before the UPS driver was able to climb back into his big brown truck, I had the box open. I determined that the school had several bank accounts (approximately five) and set out to organize them by account number and by month.

 

Within an hour of organizing the statements, I was on the phone with Mark. “Does the school have an ATM card?” I asked. “Did the school authorize Mandy to write checks to herself in excess of her payroll checks each month?” Concerned, Mark immediately made the appropriate inquiries at the school and learned the answer was a resounding “no” to each of my questions.

 

With a solid $40,000 fraudulent disbursement scheme case mapped out and the client’s budget depleted, I prematurely congratulated myself on a job well done.

 

Getting the job done, however, was not as easy a task as I had hoped. Mandy had been placed on administrative leave as a result of our initial findings. This fractured relationships on the board, among staff, and between parents. I received numerous calls from individuals begging me to stop “the witch hunt” and insisting we were lying about our findings. When key board members were presented with evidence of forged checks, they remained incredulous and attempted to provide valid reasons Mandy would write checks to herself and her personal vendors.

 

During a visit to the school to return documents and retrieve more, I noticed the school secretary sitting in front of her computer, obviously perplexed. She asked whether I could help apply a tuition payment to a student’s account. “No problem!” I said as I took control of the mouse and maneuvered around the accounting software to find the customer.  But the customer was nowhere to be found – neither under the student’s or parents’ names. With me now perplexed, I told her, “They must be a new student. We just need to set up an account for them. Let me show you how to do this.”

 

To which she responded, “No, he’s an eighth grader, and he’s been enrolled at the school since kindergarten. His parents pay cash each and every month, always on the 10^th.” 

 

I immediately asked for the bank deposit book. I quickly flipped through the carbon copies leftover from previous deposits… all listing checks, and no cash. I asked the school secretary about lunch money, field trip money, and how many parents paid cash for tuition. She pulled out a receipt book where she had meticulously recorded hundreds of thousands of dollars of cash payments over the years. None of which I was able to trace to the bank accounts.

 

A subsequent review of the accounting software file revealed an extensive pattern of deleted customers, deleted invoices, and deleted payments. I reconciled many of the cash receipts from the secretary’s book to the deleted items in the file.

 

My $40,000 fraudulent disbursement case suddenly paled in comparison to the $200,000 cash skimming scheme.

 

 

The Fallout 

In the end, the school’s losses from theft exceed $240,000. Superstar Mandy was given a superstar sentence of 43 months in the Washington State Women’s Correction Facility and was ordered to pay $110,000 restitution.

 

The school was not successful in receiving a refund from the IRS for the penalties and interest.

 

And this forensic accountant learned several key lessons:

 

Conduct informational interviews early and often 

Don’t get lost down a single rabbit trail 

Learn how to maintain composure in the face of immense pressure and personal attacks  

The accounting software’s audit trail report is a key fraud detection tool 

  

Tiffany Couch, CPA/CFF, CFE is the founder and principal of Acuity Group PLLC – a forensic accounting firm based in Vancouver, WA. For more information about Ms. Couch or Acuity Group their website is www.acuityforensics.com. Ms. Couch can be reached at tcouch@acuityforensics.com.