Fraud Friday: All The Queen’s Horses

It’s not too often that us auditor/fraud investigator/forensic accountant-types find ourselves in the bright light of mainstream celebrity. In a way, our entire collective professional identity is primarily as anonymous bean-counting corporate drones. We even revel in it, and use it to our advantage when trying keep an ultra-low profile during an investigation.

Really, accountants and auditors tend to only make the news when it’s BAD (here’s looking at you, Arthur Anderson). To be fair, the ACFE and their wonderfully named trade magazine, FRAUD, is full of stories of intrepid, tenacious defenders of truth, justice, and the American Way, but let’s face it: Nobody but us reads those stories.

The closest I’ve seen any frauditor-types come to mainstream celebrity is Harry Markopolous, the kick-ass CFE who unearthed the Bernie Madoff Ponzi scheme, which remains the largest confirmed Ponzi/Pyramid-type fraud scheme in world history, with estimates of up to $100-billion dollars stolen (although Mr. Markopolous insists that at least $35 billion of that figure consists of fictional profits that Madoff reported, but that never really existed). Regardless, I highly recommend Mr. Markopolous’ fantastic book about the Madoff scandal, No One Would Listen.

But now we’ve got a new contender for fraud-world celebrity, such as it is: Kelly Richmond Pope, PhD., CPA:

KRPope
Source: https://www.allthequeenshorsesfilm.com/filmmakers/

Dr. Pope, in addition to being a professor of forensic accounting, ethics and leadership, and managerial accounting at DePaul University, is a self-described “Left-handed CPA who uses filmmaking to teach people about decision-making.” I recently had a chance to attend a private showing, of her latest documentary film, All The Queen’s Horsesand it is remarkable. It may be the single best documentation of the complex psycho-social web that surrounds every fraud scheme.

You may remember the surreal headlines coming out of the sleepy small-town of Dixon, Illinois in 2012:
Crundwell Indictment Press Release
Source: FBI press release, 5/1/12

“Financial controls in Dixon were the ‘perfect storm of embezzlement,’ an expert says”
Chicago Tribune

“Woman accused of bilking $53 million from Reagan’s boyhood hometown”
Reuters

The story seems utterly banal: Small-town has poor-to-non-existent internal controls in its municipal government operations, and a long-time employee sees an opportunity for malfeasance and takes it. But this case is really something else – Rita A. Crundwell, the long-time town controller, stole AT LEAST $53 million over a period of twenty years. This from a small farming community of less than 16,000 people.

Dr. Pope began working on the film shortly after Ms. Crundwell’s arrest in 2012. Recognizing that there was a compelling story beyond just the dollar amount in this case, Pope and her production team took six years to ensure that the entire tale was told – from Rita Crundwell’s humble and quasi-idyllic childhood, all the way through arrest, indictment, and sentencing and the subsequent human, political, and economic aftermath.

I think what I found so compelling about All The Queen’s Horses was how well the film captures the emotional roller-coaster that whistleblowers find themselves on, and the ripples of fallout that affect people far beyond the primary participants in the saga.

Narrated by Dr. Pope in a crisp, entertaining style, the film intersperses dozens of interviews with experts and laypeople, politicians and taxpayers, academics and activists, while also taking an educational approach, with numerous animated info-graphics and concurrent storylines.

A key theme that emerges is that Rita Crundwell could never have pulled off the largest municipal fraud in U.S history without a number of unwitting assistants. It’s a textbook case of failure of multiple lines of defense against fraud: A bank that fails to adhere to anti-money-laundering procedures. A good-ol-boy city council that was asleep at the wheel. Dozens of colleagues, friends, and family members that never seriously questioned Rita’s expertly delivered but suspicious cover stories. And a global audit firm that failed their fiduciary duty to their client (the City of Dixon), that their shame (and liability) should be infinite. It’s all quite a tale, told in a fast-moving and entertaining 1 hour, 10-minute film that is very well-produced.

Most of all, All The Queen’s Horses serves as a vivid reminder that every entity involving humans is susceptible to fraud in all its forms. The thing I keep going back to when thinking about the film is the fundamental decency of virtually everyone in Dixon. Hard-working, honest, charitable, polite folks. The proverbial salt-of-the-earth-midwesterners that I’ve come to know and love after living in Kansas for nearly a decade. These folks trusted Rita Crundwell with their tax dollars. She stole nearly all of it, and roads, sidewalks, buildings, and other public infrastructure in Dixon steadily decayed. Kelly Richmond Pope captures the pain and betrayal that these folks feel, and their confusion and angst at realizing that it was “one of their own” that did it.

All The Queen’s Horses is available on all major streaming platforms, and has been one of the most-watched documentary films of the past two years on Netflix, iTunes, Amazon Prime Video, and Google Play.  I highly recommend taking the time to watch it and research the story and the film!


Music Recommendation: Nathaniel Rateliff & The Night Sweats, Live at Red Rocks A tasty stew of blue-eyed soul, greasy garage-band rock-n-roll, and classic R&B, along with an assist from the amazing Preservation Hall Jazz Band of New Orleans. A new favorite – highly recommended!

Food Recommendation: The short-rib griller sandwich at Q39, Kansas City Pitmaster Rob Magee’s incredible restaurants in Kansas City and Overland Park, Kansas. This thing is worth getting on an airplane for – trust me. Truly sublime. Magee’s Q39 has rapidly ascended the ultra-competitive KC BBQ ladder.

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How to Waste $341,000 (Hint: Certainly Not by Flying Coach with the Proletariat)

I love the Federal Inspectors General. They are truly doing valuable, important oversight work. Sometimes the dollar amounts they oversee are absolutely mind-boggling. When I was a baby auditor at the venerable office of the California State Auditor, working under the guidance of the truly competent Elaine Howle, CPA, I once caught a $527 million dollar journal entry in a state agency’s general journal that had been mistakenly entered as a debit instead of a credit. When we contacted the agency, their budget was so large that they didn’t even realize the error because it wasn’t material!

Anyway, at the federal level, the numbers run into the TRILLIONS overall. Hard to grasp that large of a number. The 73 IG offices in the civilian government, along with the numerous military IG offices, perform some of the most demanding, complex, politically incendiary audits and investigations on the planet. However, sometimes it’s not the size of the numbers that the IG reports, it’s the overall meaning and reputational effect of a specific report. Take, for example, the freshly-released HHS IG report on the travel habits of (former) department secretary Tom Price.

Mr. Price did not like to fly with the rest of us, it would appear. Thus, he thought it appropriate to charter aircraft or order military aircraft to transport him and his lackeys  staff around our great nation. Turns out – SURPRISE – that was improper, and the IG says Mr. Price should pay $341K to the U.S. Treasury. We’ll see how that turns out, but the main point remains: Organizations are profoundly affected by management culture, the much-studied “tone at the top.” A culture of lawlessness and disregard for policies & procedures is inevitably toxic for an organization. In addition, such a high-profile example of blatant graft greatly erodes public trust in government – at all levels. Most citizens don’t really understand that the federal government isn’t responsible for remodeling their local school building, but in their mind, they lump it all together, and overall trust plummets. That’s why, while there is a certain schadenfreude at seeing such an epically arrogant “public servant” be taken to task by the Inspector General, in the end, we all suffer for the behavior.

From the L.A. Times:

“Former Health and Human Services secretary Tom Price should repay the federal government more than $341,000 for improperly using charter and military aircraft for travel for himself and his wife, a new report from the agency’s independent Office of the Inspector General has concluded.

“The Office of the Secretary improperly used federal funds related to former Secretary Price’s government travel,” said the report, released Friday. Auditors found that 20 of the 21 trips that Price took during his brief tenure as secretary in 2017 did not meet federal requirements.

Price, a conservative Georgia congressman and friend of House Speaker Paul D. Ryan (R-Wis.) whom President Trump tapped to lead the health agency, was forced to resign last September after reports by Politico outlined his extensive use of charter and military aircraft for routine travel domestically and around the world.

Many of the flights were between major U.S. cities served by much cheaper commercial airlines.

 

After the scandal broke, Price said he would repay a portion of the costs.

But the Office of Inspector General recommended that the health agency recoup an additional $341,616 from Price, who is now serving on the advisory board of Atlanta-based Jackson Healthcare.

The inspector general estimated that the government spent nearly $1.2 million on Price’s travel during his seven months in office. That included more than $700,000 in military flights on two foreign and two domestic trips, as well as more than $480,000 for various domestic trips by private chartered aircraft.

In a formal response, HHS agreed with most of the inspector general’s recommendations for tightening up official travel and requested details on the $341,000 that investigators said the government should recoup.

An HHS spokesperson said the agency would ask the Department of Justice’s Office of Legal Counsel to review whether there is a legal basis to recoup the money.

Nicholas Peters, a spokesman for Price, suggested in a statement that the costly travel was the result of “good faith mistakes” by HHS staff.

Peters would not say if the former secretary will repay the taxpayer money that the inspector general says should be recouped.

Senior Democrats on Capitol Hill, meanwhile, redoubled their criticism of the former health secretary.

 

“This report confirms Tom Price’s role as the poster child for the rampant waste of taxpayer dollars that has occurred on Trump’s watch — all while he was pursuing dangerous policies that increase families’ premiums and weaken their healthcare,” said Oregon Sen. Ron Wyden, the senior Democrat on the Senate Finance Committee.

Wyden was among many Democrats who opposed Price’s nomination, citing among other things revelations that while a congressman, Price had traded extensively in the stocks of healthcare companies that could have been affected by his votes and actions.

Extravagant spending on travel and office remodeling by top officials became a running story as the Trump administration took power in Washington on a presidential promise to “drain the swamp.”

 

Price was forced out in the fall of 2017 after his travel drew the ire of President Trump, who was also upset over the GOP failure to repeal Obamacare.

A successful orthopedic surgeon before winning a congressional seat from the Atlanta suburbs, Price rose to become one of the top GOP experts on budget and healthcare issues. But as secretary of HHS, he never produced a healthcare plan to “repeal and replace” the Affordable Care Act.

 

Among other findings from the report:

— Investigators questioned Price’s assertion that his official schedule prevented him from flying commercial. In one case a White House event cited as justification was cancelled, and Price’s office chose to continue with a charter flight at a cost of nearly $18,000.

— Even among charter flight options, Price’s office did not always book the lowest-cost trip. In one case the difference between quoted options amounted to nearly $46,000.

— For six trips, Price either started or ended his travel in his home state of Georgia, his most frequent charter travel destination outside of his official duty station in Washington, D.C.

— HHS paid more than $11,500 on commercial flights for a Price trip to China, Vietnam and Japan. But Price ultimately flew on military transport at a cost of more than $430,000 and HHS lost track of what it spent for the commercial airline ticket until the inspector general’s investigators identified the expense.”

 


Music RecommendationSend Me An Omen from The Magpie Salute. An excellent deep-fried southern rocker in the vein of the Allman Brothers Band/Govt. Mule. Chris Robinson of the Black Crowes is the band leader, and he’s got quite a capable cast of players behind him on this. Can’t wait to hear the full new album.

Food Recommendation: Speaking of Southern goodness, I must admit that one of my guilty pleasures is southern food in all its butter-soaked-and-rolled-in-bread-crumbs glory, and Trisha’s Southern Kitchen, a Food Network show hosted by the always-lovely Trisha Yearwood has plenty of Southern goodness, along with some nicely-updated modern recipes.

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Fraud Friday: Catch Me If You Can, or How I Learned the Value of Hard Work From The Best Confidence Man Of All Time

CatchMe

Greetings, fellow fraud-nerds! Today, as it is midsummer, and ’tis the season for travel, family vacations, and stolen tourists credit cards, I thought that rather than highlight current news in the fraud investigation and audit universe, we could take a fun look back at one of the true characters in the long and storied dance between the perpetrators and the investigators who doggedly pursue them.

Most of you are at least passingly familiar with the remarkable story of Frank Abagnale, Jr., aka “The Catch Me If You Can Guy,” aka the highly successful business fraud consultant, aka the greatest check washer of all time. For those of you who are unfamiliar, or if you want to do a deeper dive and read a great book, we highly recommend Frank’s autobiography (with co-author Stan Redding). It’s an entertaining and revealing read, if a bit dated in terms of fraud scheme logistics, but the social engineering principles remain as relevant as ever. They don’t call them “Confidence Men” for nothing!

Of course, Abagnale’s big break into pop culture came when Steven Speilberg and Tom Hanks adapted the autobiography into the hit film of the same name. It’s a highly stylized, gauzy retrospective look back at the idealized jet set of the 1960’s. Leonardo DiCaprio plays our antihero with relish, and Tom Hanks is perfectly cast as the stereotypical tireless gumshoe investigator, playing a human game of cat-and-mouse across the globe. It’s worth owning the blu-ray for the extras – including additional background and some cool FBI investigative documentary footage. But the book and movie are not what I want to focus on today. Rather, I want to highlight the value of persistence, determination, and plain old hard work.

I’ve attended a couple of lectures with Abagnale. These talks are Abagnale’s bread-and-butter, and you can video of many of them online. His “Talks at Google” episode is particuarly good. What’s interesting about Abagnale, and what makes him so different from a lot of the “reformed fraudster” lecture set is that he openly admits that he’s not “reformed” or “cured” in any way. He’ll straight-up tell you that he’s not necessarily a changed person, he just chooses not to use his talents for illegal activities. It’s remarkable when you see him tell a room full of fraud investigators, attorneys, and law enforcement that he’s still the same con man he always was.

But what is also remarkable, and sets Frank Abagnale, Jr. apart is his sheer work ethic. When he was washing checks, it was all he did. Nothing else. He set out to become the best check-washer in the world, and by most accounts he was. He was obsessive about learning and mastering the details of his craft, illegal though it might have been. This is one of the things that the movie gets correct, in my opinion. DiCaprio’s Abagnale is obsessive to the point of madness, which, though it may not be mentally healthy, did create a form of excellence in him.

That’s one of the key takeaways of Abagnale’s talks – if you work incredibly hard at something, you WILL get good at it. You may not be the best, but you’ll eventually become competent. He said that the only reason the FBI caught him was that he was finally pitted against an agent who was as obssessed with catching his man as Abagnale was in staying on the lam and living large. (Note: Carl Shea – Hanks’ version of Shea in the film is Carl Hanratty – is the real life FBI agent, and him and Abagnale are now friends and sometimes do seminars/speeches together).

There’s no shortcut: If you want to master anything, you have to be a bit obsessive about it. That may not go over well in the era of “work/life balance” and the foreign (to me) concept of “self-care.” If you put in the hard work and the long-term effort, nobody will be able to catch YOU.

Have a great weekend!

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Fraud Friday: Fyre Festival Fraud, Bumblebee Tuna Price-Fixing, Barclays Bank’s $2-Billion Fine

maxresdefault

Lots to get to on the first Fraud Friday of the summer, so let’s get to it…

Fyre Festival Founder Billy McFarland Has Been Arrested Again on Additional Fraud Charges

The promoter of a failed music festival in the Bahamas who is awaiting sentencing on fraud charges was arrested on new fraud charges Tuesday, leading a judge to order his detention.

Billy McFarland, 26, will remain behind bars until a judge, who is scheduled to sentence him next week in the festival case, decides whether he can be freed on bail.

McFarland pleaded guilty to wire fraud charges in March in a deal that called for him to serve between eight and 10 years in prison, although he has requested leniency with no incarceration. The plea pertained to the bungledspring 2017 Fyre Festival on the Bahamian island of Exuma that cost over 80 investors a total of $26 million.

The festival was anything but the ultra-luxurious event promoted as “the cultural experience of the decade” and touted on social media by Kendall Jenner, Bella Hadid, Emily Ratajkowski and other models and celebrities.

Assistant U.S. Attorney Kristy Greenberg called McFarland a financial threat to the community, saying he’d used the client list of the Fyre Festival to pitch a new ticket fraud that promised tickets to music, fashion and sporting events that he didn’t possess and had no way of getting…

Prosecutors said over 15 victims had been bilked since late last year of more than $100,000 as McFarland and his workers sold non-existent tickets to the 2018 Met Gala, Burning Man 2018, Coachella 2018, the 2018 Grammy Awards, Super Bowl LII and a Cleveland Cavaliers game that would include a team dinner with Lebron James.

Greenberg said McFarland was living lavishly with monthlong stays in luxury hotels and excursions to expensive restaurants. And he’d told his workers that he would flee if he is sentenced to over three years in prison next week, she said.

“The weight of the evidence here is quite strong,” Greenberg said. “He targeted the same victims who tried to attend his Fyre Festival.”

She said prosecutors were considering additional charges including bank fraud and an identity theft charge that would carry a mandatory two-year prison sentence upon conviction.

“Mr. McFarland is a serial fraudster, plain and simple,” Greenberg told Gorenstein. “Mr. McFarland is looking at a significant term of imprisonment.”…

Gorenstein, noting that McFarland would likely face an additional two years or so in prison if he is convicted in the new case, said that if he is freed on bail in the Fyre Festival case, he’ll face a $1 million bail on the new charges. – Associated Press via Time Magazine

“Nobody ever lost a dollar by underestimating the taste of the American public” – P.T. Barnum


Bumble Bee tuna price-fixing case, like Starkey fraud prosecution, could change white-collar prosecutions

When the roll call is sounded of business deals that looked like a good idea at the time but went massively wrong, special notice should go to the merger of the tuna packagers Bumble Bee and Chicken of the Sea, announced in late 2014.

The $1.5 billion deal would have created a canned tuna powerhouse¹ commanding nearly half of the U.S. market, swamping StarKist, which at the time was the No. 1 brand with 34.6 percent.

The deal never happened.

In conducting a routine antitrust review of the proposed deal, the Department of Justice unearthed what looked like a massive conspiracy among the three companies to fix canned tuna prices.

The parent of Chicken of the Sea, a Thai company named Thai Union Group, promptly bailed out of the merger and fessed up to the Justice Department in return for amnesty from prosecution. Its deal requires it to cooperate with the government’s investigation of the other two companies.

Two top executives of San Diego-based Bumble Bee and an executive of StarKist pleaded guilty to federal price-fixing charges in 2016 and 2017 and turned state’s evidence; their sentencings have been deferred at least to Sept. 26, when their cooperation can be assessed. Bumble Bee pleaded guilty to price fixing last year and agreed to pay a fine of at least $25 million and as much as $81.5 million (the higher amount if the company is eventually sold).

So far, 78 civil lawsuits have been filed against the three tuna companies and consolidated into a single proceeding before federal Judge Janis Sammartino in San Diego. They fall into four categories: three class actions for groceries and wholesalers, consumers, and food preparers such as delicatessens; and a fourth group of big tuna buyers such as Walmart and Sysco.

The Justice Department says the alleged collusion lasted from 2011 at least through 2013; some civil plaintiffs say it continues to this day. The lawsuits don’t specify how much the companies allegedly squeezed from consumers by colluding. U.S. canned tuna sales, however, come to between $1.7 billion and $2 billion a year.

Then, on May 16, came the federal indictment of Bumble Bee’s longtime chief executive, Christopher Lischewski.

The Lischewski indictment is what elevates the Bumble Bee investigation into a special category of white-collar crime cases, for he’s one of the rare CEOs to be brought to book in recent years for corporate wrongdoing.

Lawyers were monitoring the local prosecution of Starkey Technologies former executives for the same reason — a change in policy during the Obama administration making it easier to prosecute individual company officials.

Before, the Justice Department had moved away from prosecuting individual executives in favor of extracting criminal pleas, fines and civil settlements from their corporations. That policy reached its climax in the aftermath of the 2008 financial crisis, when top executives of big banks seen to have defrauded investors and customers averted prosecution.

Presumably responding to criticism about executives going free, the Obama-era Justice Department issued a new policy in 2015 over the signature of then-Deputy Attorney General Sally Yates. The “Yates memo” stated that it would henceforth be a priority in corporate misconduct cases to seek “accountability from the individuals who perpetrated the wrongdoing.”

Investigations should focus on individuals from the start, the memo said, and corporations wouldn’t get credit for cooperating with the government unless they fingered individual wrongdoers.

That was proper, because “almost invariably, white-collar crime comes from the top,” said William K. Black, a former bank regulator who brought cases in the 1980s against numerous individual executives in the wake of the savings and loan crisis.

But it did complicate prosecutions. That’s because “individual responsibility in huge corporations can be very diffuse,” says Henry Pontell, a white-collar crime expert at John Jay College of Criminal Justice and UC Irvine. “It’s possible in a large organization that a CEO may not know who’s doing what.”

Moreover, “going after individuals is harder — they will put up a defense because they face real consequences,” Anello said in an interview. By contrast, “companies look for ways to resolve cases.”

It took two years to build the cases against former Starkey President Jerry Ruzicka, who along with a business associate, was found guilty of fraud.

The number of white-collar cases as a whole has been decreasing since 2011, and the Trump administration has signaled a shift from corporate prosecutions to immigration cases in the federal system, making it likely that fewer of these types of cases will see the courtroom, according to an article in the New York Law Journal last February by white-collar defense attorneys Robert J. Anello and Richard F. Albert. Immigration charges have accounted for 53 percent of all federal prosecutions so far this year, according to TRAC, and drug charges an additional 32 percent.

The individual guilty pleas in the tuna cases, experts said, suggest that the government must really have the goods. Certainly, the circumstantial evidence is strong. According to the indictments and civil lawsuits, the three big processors had emerged from an era of ferocious competition for market share from 1985 to 1999, when more than half the canned tuna sold in the U.S. was subject to promotions that discounted prices by as much as 31 percent. – Minneapolis Star-Tribune

¹ “Canned Tuna Powerhouse” is an excellent name for a cover band. Just sayin.’


Barclays agrees to pay $2bn to settle US fraud case

Barclays has agreed a $2bn (£1.4bn) settlement with the US justice department over the sale of mortgage-backed securities in the lead-up to the 2008 financial crisis.

The settlement follows a three-year investigation into allegations that the bank caused billions of dollars of losses to investors by “engaging in a fraudulent scheme” to sell Residential Mortgage-Backed Securities (RMBS) between 2005 and 2007.

The British bank was said to have misled investors about the quality of the mortgage loans backing those deals.

The justice department alleged violations of the Financial Institutions Reform, Recovery and Enforcement Act of 1989, based on postal, wire and bank fraud as well as other misconduct.

Two former Barclays executives have also reached a settlement. Paul Menefee, who served as the lead banker of its subprime RMBS securitisation unit, and John Carroll, who worked as the head trader for subprime loan acquisitions, will pay a total of $2m.

Richard Donoghue, US attorney for the eastern district of New York, said: “This settlement reflects the ongoing commitment of the Department of Justice, and this office, to hold banks and other entities and individuals accountable for their fraudulent conduct.

“The substantial penalty Barclays and its executives have agreed to pay is an important step in recognising the harm that was caused to the national economy and to investors in RMBS.” (Translation

The fine is less than City analysts had expected and less than the penalties paid by other foreign banks facing similar claims. In December 2016 Credit Suisse paid $5.3bn as a settlement and to consumers. Deutsche Bank settled at $7.2bn a month later. At the time Barclays said it would not settle and the justice department launched legal proceedings.

The department’s complaint involved 36 residential mortgage-backed security deals, which made $31bn of subprime and Alt-A loans tradable on the market.

The department alleged that the borrowers whose loans backed those deals were “significantly less trustworthy” than Barclays made them out to be. In addition, the mortgaged properties were “systemically worth less” than what had been presented to investors. 

Ultimately more than half of those loans defaulted.

Barclays said the settlement resolved “all actual and potential civil claims” by the justice department relating to securitisation, underwriting and sale of mortgage-backed securities in the period 2005-2007.

Jes Staley, its chief executive – who was not at the bank at the time of the RMBS sales – said: “I am pleased that we have been able to reach a fair and proportionate settlement with the Department of Justice.” (Translation: Really glad you suckers allowed me to pay you off with shareholder money and avoid any personal responsibility!)

The settlement comes nearly a month after Barclays confirmed a loss of nearly £2bn last year, after a string of hefty charges, including a £900m hit from Donald Trump’s corporate tax changes and £127m from the collapse of the outsourcing and construction firm Carillion. It also racked up £2.5bn of losses from the sale of Barclays Africa.

Pre-tax profits rose 10% to £5.3bn for 2017, but the bank reported an after-tax loss of £1.9bn. It made a profit of £1.6bn in 2016. 

Staley said: “The completion of our restructuring in 2017, and putting significant legacy matters like this one behind us, mean Barclays is well positioned to produce stronger earnings going forward, and to start returning a greater proportion of those earnings to our shareholders over time.”

As a result, Barclays still intended to pay a dividend of 6.5p for 2018, he added. Barclays shares edged down after the announcement.

What’s the line from the Talking Heads song? “Same as it ever was”

No food or music recommendations this week, because it just doesn’t feel right when there are kids locked in cages in the name of securing the Republic…

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Fraud Friday: Schrödinger’s Fraud, or How They Rationalize Cleaning Out Your Bank Account

Schrodinger's Cat Graphic

The psychology of morality – that’s a deep trench to dive into. Everyone from Tolstoy to Jay-Z has asked, in one form or another, “What does it mean to be ‘moral’?

Is morality a human behavioral trait selected by nature over thousands of generations that allows us to live in high-density social settings? Are we the only living beings that are able to identify such an abstract concept? Interestingly, it would appear not:

Do Animals Know Right From Wrong? New Clues Point to ‘yes’

I knew there was a reason I generally trust animals more than humans!

But I digress…More relevant to our discussion is the psychological landscape of white-collar criminals. By now, many, if not most people in the accounting/audit/fraud investigation are well aware of Donald Cressey’s famous and venerable Fraud Triangle:

Fraud_Triangle

Credit: Wikimedia Commons

Pressure – Opportunity – Rationalization: The three ingredients for baking a big ol’ fraud cake. This framework is now standard in most academic courses that are even tangentially fraud-related – everything from accounting and finance, to human resources and financial institution employee training. It’s common sense: give certain individuals a reason to steal, a chance to steal, and something to convince themselves that it’s okay, and you are going to be missing some assets of some sort.

Recently, however, the Cressey model is being supplanted by the Fraud Diamond concept, which adds capability as a fourth fraud dimension:

Fraud Diamond

Makes sense: In order to commit fraud, you have to be able to, you know, commit fraud.

The problem is that these models bring us no closer to answering the existential question: WHY?

In my approximately fifteen years conducting investigations, I’ve yet to come across the hypothetical Parent-Stealing-Money-To-Pay-For-Their-Child’s-Chemotherapy fraudster that we read about in the ACFE’s Fraud Examiner’s manual. But I’ve certainly come across plenty of Trusted-Employee-Cleans-Out-The-Company-Cash-Account-To-Go-To-The-Casino fraudsters. This one happened right in here in my local area:

Laura Dejong admitted that she embezzled $2,679,227 from her employer, Kansas City Screw Products Inc., from January 2003 to November 2011. Kansas City Screw Products is a family-owned and -operated metal fabrication business in Kansas City. Laura Dejong, who was employed as a secretary and bookkeeper for approximately 23 years, forged checks drawn on two company bank accounts.

According to court documents, significant gambling activity was identified for the Dejongs, totaling approximately $4.5 million from January 2002 to December 2011. The majority of the Dejongs’ gambling was at slot machines.

Records indicate that the Dejongs took at least eight cruises and spent more than $100,000 on payments for cruises, vacations, and airfare between 2005 and 2011. During the time of the embezzlement scheme, according to court documents, the Dejongs used the stolen money to purchase a 2007 Chevrolet Tahoe, a 2009 Honda Accord, a 1997 Crownline boat (20-foot fiberglass runabout), a 1997 Prestige boat trailer, a 1985 Chevrolet RV/motor-home (now a KC Chiefs party bus), a 2008 Jayco travel trailer, four Ameriprise Brokerage accounts, four Kansas Speedway season tickets (for passholder seats, parking passes, and track passes), four Kansas City Chiefs Club Level season tickets and parking passes, membership to the Chiefs Wolfpack Club (an exclusive members-only facility), and their residence.” fbi.gov

Wouldn’t we all like to have our own KC Chiefs party bus, metaphorically if not actually?

Anyhow, nobody needs all that crap. Why do we do it? And frankly, I don’t generally subscribe to the “there’s two kinds of people” worldview that so many fraud professionals have. It’s just not that simple. I’ve met enough convicted felons to realize that they’re not all evil people who only care about bringing chaos and darkness to the world through criminal activity, etc. That’s certainly NOT to say that there aren’t a small percentage of people who comprise an extremely malevolent group of sociopaths that will steal anything that’s not nailed down.

The unsatisfying answer is that just about any of us could be a victim or a perpetrator. Some people start small and find themselves getting in deeper and deeper to a fraud scheme that began as a very small “F You” to their employer, or to borrow money to pay the rent. You would be surprised how many white-collar criminals commit embezzlement in order to please their spouse/partner/boyfriend/girlfriend. It’s among the saddest things I’ve ever seen to listen to a woman in her mid-30’s talk about how her husband served her with divorce papers and took custody of her children the day before she went to federal prison after embezzling hundreds of thousands of dollars that she spent mostly on trying to keep him happy.

NPR has an excellent piece on the psychology of fraud, I recommend listening:

https://www.npr.org/2012/05/01/151764534/psychology-of-fraud-why-good-people-do-bad-things
“In general, when we think about bad behavior, we think about it being tied to character: Bad people do bad things. But that model, researchers say, is profoundly inadequate…

…Here is, she says, a common misperception that at moments like this, when people face an ethical decision, they clearly understand the choice that they are making.

“We assume that they can see the ethics and are consciously choosing not to behave ethically,” Tenbrunsel says.

This, generally speaking, is the basis of our disapproval: They knew. They chose to do wrong.

But Tenbrunsel says that we are frequently blind to the ethics of a situation.

Over the past couple of decades, psychologists have documented many different ways that our minds fail to see what is directly in front of us. They’ve come up with a concept called “bounded ethicality”: That’s the notion that cognitively, our ability to behave ethically is seriously limited, because we don’t always see the ethical big picture.

One small example: the way a decision is framed. “The way that a decision is presented to me,” says Tenbrunsel, “very much changes the way in which I view that decision, and then eventually, the decision it is that I reach.”

Essentially, Tenbrunsel argues, certain cognitive frames make us blind to the fact that we are confronting an ethical problem at all.

Tenbrunsel told us about a recent experiment that illustrates the problem. She got together two groups of people and told one to think about a business decision. The other group was instructed to think about an ethical decision. Those asked to consider a business decision generated one mental checklist; those asked to think of an ethical decision generated a different mental checklist.

Tenbrunsel next had her subjects do an unrelated task to distract them. Then she presented them with an opportunity to cheat.

Those cognitively primed to think about business behaved radically different from those who were not — no matter who they were, or what their moral upbringing had been.

“If you’re thinking about a business decision, you are significantly more likely to lie than if you were thinking from an ethical frame,” Tenbrunsel says.

According to Tenbrunsel, the business frame cognitively activates one set of goals — to be competent, to be successful; the ethics frame triggers other goals. And once you’re in, say, a business frame, you become really focused on meeting those goals, and other goals can completely fade from view.”

I too disagree with many of the outdated beliefs of the ACFE’s founders in relation to the red flags of fraud – it’s just overly simplistic to assume that every accounts payable clerk who buys a new car is embezzling. I find there to be a lot of implied sociological bias in those assumptions, some of which border on racism and misogyny.

Good people do indeed do bad things. Kind of like how Schrödinger’s mythical quantum cat can be both alive and dead at the same time.

So what can we do as preventive and detective controls to minimize the risk of fraud? We’ll address that in our next installment…


Music Recommendation: Keith Urban’s new album, Graffiti U. One of the best in the business, KU releases another well-crafted, soulful album of country-flavored music that continues to push the boundaries of the genre.


Food Recommendation: Hummus. So many ways to use chickpeas to make tasty stuff. If you haven’t tried it, you’ll like it. Recipe: https://www.bonappetit.com/test-kitchen/cooking-tips/article/best-hummus-ever

 

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Fraud Friday: Crime Pays, or Talking Animals Discuss the Finer Points of Escrow

On a tight deadline this week for a project, so no lengthy analytical post today. Rumors of impending treasonweasel activity are rampant, so I suspect the news cycle is about to heat up and bury this blog anyway. In that spirit, I’ll leave you with a classic:
Dilbert

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Fraud Friday: When Auditors Attack, or Fear & Loathing in Clay County, MO

State auditors tend to embody the excellent advice of President Teddy Roosevelt: They speak softly and carry a big stick. Most state audit shops work under a broad legislative mandate – this includes the ability to examine any and all records of state and local agencies, and this includes subpoena power, when necessary.

In practice, state audit shops rarely threaten to flex their legal muscles, and this is mostly because their legislative mandate and mission are widely understood by public policy makers and managers. When the State Auditor calls, you pick up the phone and give them what they need, so to speak. Now, there are definitely instances where an agency will dig in and try to refuse a specific records request, etc., but that almost invariably ends poorly for that agency. It’s even rarer for an agency to not only refuse to cooperate, but to also engage legal counsel to threaten legal action against the state auditor for even insinuating their intention to audit an agency. And yet, here we are…

For those unfamiliar with the greater Kansas City metropolitan area, Clay County occupies roughly the northeast quadrant of the KC metro. The county’s population is about 250,000 and growing, and it’s a fairly large county geographically, so while Clay County residents are part of a relatively bustling urban midwestern city, the county retains a rural, provincial character. This is attractive for many residents who move there seeking reasonably-priced land, good schools, an increasing number of amenities and retail options, and a sane commuting distance to almost any part of the Kansas City area.

Unfortunately, small-town living also tends to include small-town politics, and things have been getting a bit…testy…up in Clay County recently.

KC television station WDAF “Fox 4 KC” has been conducting an extensive, in-depth journalistic investigation of Clay county commissioners and numerous reports of government waste, fraud, and abuse associated with the county government. In my experience, it is unusual for a local TV news department to devote such a significant amount of resources to a local public policy matter, and I’d like to recognize the excellent reporting of Megan Dillard and the entire Problem Solvers team at Fox 4.

Last year, reports of wasteful spending and poor oversight began surfacing in Clay County. $600 coffee makers. Unexplained $5,000 cash transfers to Paypal.  The hiring of ELEVEN legal firms to conduct legal work on behalf of the county and the commissioners. Procurement card abuse by county management. Failure to follow the approval process for significant expenditures. Managers signing their own expense reimbursements. In other words, the familiar tale that we public-sector auditors too often end up investigating as fraud and turning over to law enforcement for prosecution. WDAF aired their first story about this mess on Feb. 28, 2018, and it’s a doozy:

Missouri Auditor Weighs in on Clay County’s Alleged Misuse of Taxpayer’s Money

This Northland county is facing growing public outrage after slashed budgets, salary increases for elected officials and possible misuse of taxpayer money.

Stop wasteful spending. It`s a message, a mantra, that Clay County citizens have made their battle cry. They’re frustrated by what they see as a misuse of taxpayer money, overspending, lack of internal controls and budget cuts to much-needed county departments.

‘I was just embarrassed by how our county was being run. Enough was enough,’ said Clay County resident Jason Withington. He started the petition drive along with former Clay County employee Sherry Duffett.

We’ve got everything in this story: Arrogant public employees, both elected and appointed, who resent open records requests and do everything they can to avoid accountability? Check!

Ridiculous-seeming expenses, that even if justified, still look terrible on an investigative report on television? Check!

A whistleblower putting their livelihood on the line for coming forward to resist and/or expose the avarice and greed of the villainous county employees? Check!

Clay County residents have noticed all of this alleged malfeasance and are understandably pissed off. Part of their collective response has been to start a petition drive to implore Missouri State Auditor Nicole Galloway’s office to conduct a thorough, comprehensive, non-partisan/non-political audit and investigation of the alleged waste, fraud, and abuse.

There’s a lot more to this story, and I encourage any of you who are interested in good governance and fraud investigation to view and follow the story. However, recent developments in this story have kind of blown my mind. Essentially, Clay County hired an attorney to send threatening letters to both the County Clerk AND THE STATE AUDITOR. That’s right – these local government “public servants” are insinuating that the State Auditor not only has no jurisdiction to conduct an audit or investigation of the county’s books but that even attempting to do so will result in legal action against the State Auditor herself! In addition to the letter to Galloway, the law firm also served whistleblowing Clay County Clerk Megan Thompson with a similarly-worded threatening letter in late March. Needless to say, Galloway ain’t having any of that nonsense.

Days after voicing concerns about the red flags FOX4’s investigation uncovered, Missouri State Auditor Nicole Galloway also received a threatening letter from Pearson…”It is clear there are questionable activities,” Galloway previously said of Clay County spending.

The eight-page letter she received said Galloway’s comments to FOX4 “reflect an inappropriate prejudging of issues based on far less than all the facts,” and her comments “violate the state law that defines the duties of the auditor. Frankly, the comments make clear that you and your office are now incapable of objectively performing an audit or any other activities regarding clay county,” Pearson said in his letter…

…Pearson says Galloway and her office should recuse themselves from such action, not participate in any activities in Clay County, and refer all Clay County matters to an external accounting firm. ‘”t is unfortunate that such measures are necessary to ensure an independent process that complies with state law,” Pearson wrote, “but given the comments on camera, I see no other alternative.”

Pearson gave Galloway 10 days to heed his request. “If you do not do so, Clay County, on behalf of its taxpayers, reserves all rights to take legal action to enjoin any unlawful actions,” he said.

Galloway’s office sent its own letter in which she repeated, “there are legitimate concerns” in Clay County and “citizens concerns appear to be numerous and widespread.” Galloway’s general counsel also said Pearson “mischaracterized” and took the auditor’s comments “out of context.”

“While we could speculate as to your motivations for doing so, this office takes any concern related to these matters seriously,” general counsel Paul Harper wrote.

He added that Galloway’s comments in FOX4’s story “clearly demonstrate that the auditor remains objective and has neither made any predetermined assessment of the facts nor predetermined any recommendations for a future report.”

The letter concludes, “We stand ready to assist any citizens with their concerns about how public funds are handled.” – Fox4KC

That takes some pretty big brass ones to tell a state auditor’s office that they have 10 days to stand down. Elected officials in Clay County are now backpedaling, stating that the law firm in question did not bring the letter before the County Commission for review and approval before it was sent, blah blah blah.

Plausible deniability – The provenance of weasels worldwide! I suspect there will be much more to this story going forward, and we’ll update as things develop.


Music Recommendation: All Them Witches from Nashville, TN. These guys aren’t breaking any particularly new ground, but they definitely ARE producing some groovy, stoned-out, blues-space-rock jams. I particularly dig https://open.spotify.com/embed/track/2EvUjCWg5zeaeKxGeOaHPh“>When God Comes Back, Heavy/Like A Witch, and Elk.Blood.HeartGo ahead, eat an edible or three, and trip out on these spacey sounds. Tip of the hat to my cousin-in-law (I think), Jack Vogel for turning me on to these dudes!

Food Recommendation: Look, it was just recently Easter, and holidays require, nay, they DEMAND high-quality, high-calorie sugary treats. For my (considerable) money, it’s impossible to beat See’s Candies

If they were good enough for Warren Buffet to buy the entire company after trying them, they’re good enough for your broke ass. My personal favorites in the See’s lineup: Milk/Dark Bordeaux, Toffee-ettes, and Butterscotch Squares. As Amy, my lovely & talented spouse says, “They’re just little drops of Heaven.”

Until next time, keep fighting the good fight!


 

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