Focus on Fraud: A Case Study

Article, Claims MagazineMarch 2009

Insurance / Legal / Forensic Investigation

Walt Jakl provides a case study detailing how a trusted employee had discovered ways to siphon money from her employer and the steps a forensic accountant takes

The accounting investigation of insurance claims is a large portion of our business at RGL Forensics. For more than 40 years, we’ve assisted insurance companies to ensure the claims they pay are accurate and fair—be they business income, extra expense, property damage, stock loss, fraud or other claims. The case study that follows illustrates some of our work in the area of employee dishonesty claims.

The Case of the Purloined Payroll

Angelica was the office administrator at a small, prosperous, family owned business. Her responsibilities included office management and bookkeeping. The business owners, Jack and Jill Hill, loved Angelica. She was a loyal and valued employee who never made trouble, hardly ever took time off and ran the office with military precision. In fact, she was so good, that Jack and Jill hardly ever had to spend time in the office. Jill came in to approve checks and payroll and to review the monthly financial statements that Angelica prepared. After several years, during which the business grew and prospered, Angelica was like a member of the family.

Everything was wonderful until the day Jill made an unexpected visit to the office while Angelica was at lunch. Jill noticed a summary from the outside payroll company on Angelica’s desk. She was flabbergasted to see that the summary did not look the same as the copy that Angelica had given her earlier. It contained a comment that Angelica had requested payment for vacation time. The payment was direct-deposited to her bank account. Then, Angelica cancelled the vacation request. The direct-deposited amount would need to be reimbursed to the payroll clearing account. The payroll company corrected its accounting to reflect the reversal of the vacation pay. This meant that the payroll summary appeared as it should have. Jill realized that the comment had been whited-out on her copy of the payroll summary. In a panic, Jill reviewed the payroll summaries and payroll account in the accounting system. Except for some unexplained journal entries, everything seemed to be correct. Jill relaxed a little, but just to be safe, she notified her insurance carrier that she may have an employee dishonesty claim.

The insurance carrier hired me to investigate Jack and Jill’s accounting records. What I found left the Hills feeling betrayed and angry. Angelica had taken over half a million dollars.

Jill was mystified. She had supervised Angelica and all of the payroll accounts seemed to have correct balances. How did Angelica do it?

Here’s what happened: Angelica discovered that the outside payroll company would reverse payroll entries after payroll had been paid. So, it was possible to request payment for vacation time and have the payment direct-deposited to Angelica’s personal account. Once the funds were disbursed, she would then submit a revised payroll request removing the vacation time. The payroll service would make the corrections and issue a corrected payroll summary report with the “correct” payroll on it. However, because the funds had already been disbursed, the payroll company had to include a note on the corrected payroll summary that the overpaid funds would have to be reimbursed. Angelica simply whited-out the statement and gave a copy of the revised payroll summary to Jill. She got extra money with each payroll for over seven years before Jill’s accidental discovery. Angelica succeeded in hiding the “extra” payroll cost by recording a journal entry each month that removed the excess balance from the payroll account and placed it in the purchases account. No one ever looked at the purchases account.

We provided the insurance company with a detailed explanation of the nature and causes of the loss and, because several policy years were involved, a breakdown of the losses attributable to each year we analyzed. Because separate deductibles and policy limits applied to each year, our client’s exposure was significantly reduced.

In addition, with our detailed explanation of the causes of the loss, in exchange for not substantially increasing its premium the insurance company’s underwriting department requested that the insured make several changes to its internal controls—including the separation of employee duties, sending the bank statements and payroll statements directly to Jill for reconciliation and approval, and management approval of all journal entries—and to change outside payroll services before the next renewal.

And, what of Angelica? She was promptly terminated but suffered no other consequences. Who said crime doesn’t pay? 

 

As appeared in Claims Magazine, March 2009.

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