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CE ARTICLE:

1 CE CREDIT

Travel
Expen$e
& Payroll Fraud
Case Study:
Inquiry, confrontation, admission,
restitution, and internal controls
By Eric A. Kreuter, PhD, CPA, CGMA,
CMA, CFM, MAFF, DABFE, FACFEI, CCA,
CCP, SPHR, Sareena M. Sawhney, MBA,
MAFF, and Glenn D. Sacks, CPA, CGMA

28 THE FORENSIC EXAMINER® Fall 2013


Abstract
Travel expense and payroll fraud
have become hot topics within both CE AT HOME STUDY COURSE:
for profit and non-profit organizations.
1 ce credit
Weaknesses in internal controls and greed
both contribute to the ongoing problem of In order to receive credit for the article, please go
assets and profits being slowly siphoned from to http://www.acfei.com/FEFA0113 and look
for course code FEFA0113 to take the exam and
unwary organizations. Fraud examiners work complete the evaluation.
closely with organizational management and
internal auditors to design fraud deterrence If you have special needs that prevent you from tak-
programs as well as conduct fraud investigations ing the exam online, please contact the registrar at
when problems are discovered. Collusion between 800.423.9737.
two or more employees makes fraud deterrence
American College of Forensic Examiners Institute®
more challenging. Because of this the proverbial
(ACFEI), provides this continuing education credit
“tone at the top” mantra becomes even more for Diplomates and certified members, who we
poignant. Further, it is very important that orga- recommend obtain 15 credits per year to maintain
nizations be ever-mindful of fraud risk, conduct their status.
periodic fraud-risk assessment, and review their
controls over information technology as part After studying this article, partici-
of a robust risk-prevention program. This pants should be better able to do the
following:
article offers a case study of a fraud involv-
ing travel expense and payroll fraud as 1. Explain the features of a complete
a way to illustrate what can hap- forensic investigation.
2. Discuss interview techniques.
pen, what can be done and what
3. Describe how to add value to an organization
value can be added during as part of a forensic investigation.
and following the foren- 4. Analyze the data-gathering stage
sic engagement. and the confrontation stage.
5. Discuss when it is appropriate to recommend
expansion of forensic procedures.

Keywords: Collusion, deterrence, fraud risk,


controls
Target Audience: Law enforcement profession-
als, forensic investigators, controllers and owners of
business entities
Disclosure: The authors have nothing to disclose
Program Level: Intermediate
FINANCIAL DISCLOSURE: None
PREREQUISITES: None

Fall 2013 THE FORENSIC EXAMINER® 29


n a warm summer day
in early July 2011, a key
member (“Ms. Smith”) of
the executive team of X
company sat in her office,
preparing a request form
for routine travel expense
reimbursement, attaching documen-
tation in support of the costs of the
air-ticket portion of her planned trip,
which she had purportedly booked re-
cently and paid for using her personal
credit card. The organization where Ms.
Smith worked did not have a corporate
travel account. Therefore, employees
would use their own charge accounts What happened? reports and receive reimbursement since her
and submit for reimbursement. The first scheme was detected position requires frequent international trav-
After signing the form, Ms. Smith The documentation in the case comprised el. Kreuter and Sawhney issued a proposal
walked to the office of the Chief an airline travel itinerary for an international
for forensic services and negotiated an agree-
Financial Officer (“CFO”) to ask for his destination but did not include invoices ment. They designed the investigation to
approval of the requested reimburse- for hotel accommodations and receipts for go forth discretely so Ms. Smith would not
ment. The CFO, who knew Ms. Smith transportation and other incidental expenses become aware of it. Planning for the covert
well and had worked with her at a because the trip had not yet taken place. The investigation began; the forensic team re-
previous company, probably engaged total requested reimbursement was $6,250. quested documents of Ms. Smith’s past travel
in social conversation. He must have Ms. Smith was pleased, but fraud has oc- expenses and analyzed them. The forensic
quickly glanced at the documents, not curred. How and where did the breakdowns team found more than a dozen anomalies
bothering to inspect them or review occur in preventive or detective controls? in just the first year of expense reports they
the total cost of the trip given his de- Those involved did not follow company reviewed. These anomalies included con-
veloped trust in Ms. Smith’s credibility. policy. As part of the findings of the inves- sistent violations of organizational policies
The CFO initialed the form and gave it tigation, the organization’s employee hand- requiring certain forms of documentation
back to Ms. Smith, who then went to book requires that all travel be arranged as well as duplication of reimbursement and
see Alex, the accounts payable clerk through the organization’s travel agent and missing proof of actual travel.
with whom she had also worked at the paid for by the organization directly. This Kreuter and Sawhney provided a pre-
prior company. She wanted Alex to im- requirement was outdated because the or- liminary verbal report to the Board member
mediately process her travel-expense ganization did not have a current contract who originally contacted them as well as to
reimbursement request and approve with a travel agency. the organization’s outside legal counsel. In
the wire transfer of $6,250 into her the report, Kreuter and Sawhney recom-
personal bank account. Alex was only The investigation continued mended that their forensic team conduct
too happy to assist her with what he In February 2012, forensic examiners Eric a formal interview with Ms. Smith for the
must have considered a routine task. Kreuter and Sareena Sawhney (“the forensic purpose of presenting her with the anoma-
He was busy with other tasks and did team”) were invited to a meeting with one of lous data and eliciting her responses to the
not take the opportunity to review the the members of the Board of Directors of a concerns raised in the preliminary phase of
details connected with the travel-ex- multinational philanthropic organization to the forensic examination. The organization
pense reimbursement request. Alex discuss a potential problem with Ms. Smith, and outside counsel agreed to the interview
immediately initiated the wire transfer, one of the members of their executive team. process, which the forensic team would
filed the documents into Ms. Smith’s During the meeting it was revealed that the lead. The team arranged a meeting with the
folder for her trip, and then moved on Board had recently been informed through Senior Vice President of Human Resources
to the rest of his busy day. an anonymous letter that Ms. Smith had (SVP HR) at the organization’s office. The
a previous criminal record for embezzle- SVP HR asked Ms. Smith to join him in the
ment—something she did not disclose on conference room, where she met Kreuter and
her employment application. The Board Sawhney. Ms. Smith looked a bit surprised
realized that it had an immediate and ur- to find Kreuter and Sawhney in the room
gent obligation to better understand the waiting for her. The interview was conduct-
background of Ms. Smith’s prior conviction. ed, and Ms. Smith was provided with copies
After discussion, they agreed to commission of some of the documents from her travel
a forensic review of her current functions as expense files, which formed the basis for the
they related to her ability to submit expense questions raised. Ms. Smith’s demeanor and

30 THE FORENSIC EXAMINER® Fall 2013


body language indicated signs of anxiety and
evasiveness. For example, she lowered her
head following some of the questions, and
her face turned red when asked about some
of the trips. She stated repeatedly that she
needed to “review her records.” What was
absent from her affect and attitude were
any statements defending her integrity or
outrage at being questioned over her rou-
tine travel-expense reports. Following the
questioning, it was mutually agreed that Ms.
Smith would bring additional documenta-
tion allegedly in support of her expenses to
the office of Kreuter and Sawhney the next
day for further review.
Kreuter and Sawhney continued to inspect
the documents contained in Ms. Smith’s
expense reports. There were questions con-
cerning the authenticity of certain airline-
generated documents as well as the cost of
one particular travel itinerary that seemed
unusually high. The forensic team contacted
the airline and received information estab-
lishing that the actual trip was booked three
months after the date of reimbursement and
cost much less than Ms. Smith indicated on
her travel-expense reimbursement form. Not
only was the cost of a coach class ticket far
less costly, but Ms. Smith actually upgraded
her coach ticket to first class using accumu-
lated air mileage. Kreuter also noticed that
the e-mail confirmation from the airline was
missing the year in the date reference. When “The potential that these documents
questioned, the airline representative said
that such confirmations of travel itineraries
were altered and/or matched together
always contain the full date reference and improperly was significantly increased
that this information was generated auto-
matically through their system; therefore, because of the incomplete records.”
Kreuter suspected that the document may
have been altered. It was further noted that
the page containing the purported amount meeting and had not gone to
of the flights was on a separate page with no the organization’s office that
reference to the itinerary and only a refer- morning. Kreuter contacted out-
ence to a charge on Ms. Smith’s American side counsel for the organization
Express card. The potential that these docu- and the SVP HR to advise them of
ments were altered and/or matched together the situation and to suggest prudent
improperly was significantly increased be- preventive steps to be considered to protect
cause of the incomplete records. Kreuter also the organization’s data security. A plan was
asked the airline representative about several devised. Ms. Smith did not show up for work.
other flight itineraries. The airline confirmed Later that day, Ms. Smith e-mailed additional
that two other expensive airline trips, for documentation to Kreuter with a copy sent
which Ms. Smith was reimbursed, were never to the organization’s outside counsel and the
booked and never took place. A pattern was SVP HR, concerning one of the trips in ques-
starting to take shape. The second meeting tion. This documentation was supposedly
would include confrontation with the newly meant to corroborate one of Ms. Smith’s trips
discovered information. as being taken for a few thousand dollars less
Hours following the agreed appointment, than what she was reimbursed and that she
Ms. Smith had not appeared for the second owed the excess funds to the organization.

Fall 2013 THE FORENSIC EXAMINER® 31


tem and with the organization’s policies and
procedures manual.
When Kreuter and Sawhney received
the travel-expense files for prior years, they
found no expense-reimbursement requests
for 2009 for Ms. Smith, though there was an
odd document—an accounts payable vendor
payment summary for Ms. Smith labeled
“consulting fees.” This was peculiar because
Ms. Smith was considered to be an em-
ployee and not an independent contractor;
therefore, why was she being paid through
accounts payable? The forensic team made
an additional inquiry, producing evidence
that Ms. Smith’s status was altered in the
organization’s records, showing her listed in
the organization’s books and records as an
independent contractor and no longer an
employee, despite no records of her being
terminated as an employee contained in her
personnel files maintained in the Human
Resources Department. The forensic team
also discovered that Ms. Smith was included
on the organization’s health and welfare
benefits, as well as on the organization’s
employee census for the retirement plan.
Kreuter spoke with the SVP HR, who was
startled at what they found. Kreuter con-
tacted Ms. Smith and requested another
meeting. Ms. Smith agreed, and this time
she kept her appointment.
Kreuter interviewed Ms. Smith in the pres-
ence of a witness, Glenn Sacks, a seasoned
What is particularly interesting about this Based on the information gathered to professional accountant. Kreuter first asked
evidence is that Ms. Smith indicated that date and Ms. Smith’s responses, the orga- Ms. Smith about the sudden switch in sta-
the original air ticket had been canceled by nization made the decision to immediately tus from employee to independent contrac-
the CFO the day it was booked and then terminate her employment. She was asked tor. She openly admitted to requesting this
rebooked at a reduced fare at the end of if she would continue to cooperate with change and had stated that she had the ex-
September. It would later be proven that the forensic team’s investigation. She read- press approval from the CFO. She explained
these statements were falsehoods. Ms. Smith ily agreed. Kreuter was asked to present the that she wanted to change to this status as
said that she did receive excess reimburse- findings reached by him and Sawhney at the she had established her own consulting com-
ment in an amount just over $2,000. Ms. organization’s annual Board meeting. pany and wanted to start consulting for other
Smith then called Kreuter and first explained Kreuter presented the findings of the companies while continuing in her capacity
that there must have been a misunderstand- forensic investigation and recommended with the current organization. She said this
ing about the information she provided expansion of the original parameters of the without flinching and without consideration
during the office visit, and then she brazenly investigation to include a careful review of for how absurd her story may have sounded.
asked if her new document “cleared up the Ms. Smith’s travel-expense files for several Reverting back to discussing the travel-
concerns raised” over her travel expenses. additional years and also to include a review expense concerns, Ms. Smith did admit to
Kreuter asked Ms. Smith if she repaid the of the expense files of the former CFO based receiving reimbursement for trips in excess of
excess reimbursement to which she respond- on several suspicious indications about his her cost, receiving reimbursement in advance
ed, “I have yet to work that out with them.” own travel expenses and possible complicity of booking trips, and receiving reimburse-
When asked why she did not respond to the with Ms. Smith. The former CFO resigned ment for trips that never took place; but
other questions raised in the first meeting, in the fall of 2011. The Board was shocked she had not admitted to fraud at this point.
Ms. Smith said she thought the forensic at the reported findings and unanimously When shown the airline travel confirma-
team was primarily interested in that one agreed to further forensic procedures. The tion and told that the airline recently pro-
trip. Her seemingly cool and collected de- expanded study commenced. Additional vided information to Kreuter, refuting Ms.
meanor at that point provided yet further discoveries were made with respect to Ms. Smith’s story, she then confessed to altering
evidence that Ms. Smith may have defrauded Smith and the CFO and also served to dis- the documents for the purpose of receiving
the organization. cover problems in the internal control sys- additional funds she needed as her personal

32 THE FORENSIC EXAMINER® Fall 2013


debts were mounting (persons in such finan- science of kinesics. Kinesiology—human
cial need may resort to embezzlement). kinetics—is the scientific study of human The Senior Vice President of
When questioned again about the change movement. Birdwhistell believed that words Human Resources received
of status from employee to independent take a back seat to nonverbal communica-
a handwritten letter from an
contractor, Ms. Smith also admitted to tion. He estimated that nonverbal commu-
doing so for the purpose of eliminating nication conveys 65 to 70 percent of the anonymous author indicating
any tax withholding, as she needed the information in a conversational interaction that three employees of
additional funds for her personal financial (Harold and Tobin, 2012, p.1). Just based the organization have been
obligations. She admitted she had contin- on Ms. Smith’s body language, she appeared working as a team to steal
ued to receive employee benefits as if she to be extremely agitated and uncomfortable from the organization. The
were still considered to be an employee and with the now-open facts and then seemed to
three employees were referred
agreed that her actions should result in her become overwhelmed by the likely impact
being required to make restitution for funds on her life. Interestingly, Ms. Smith did to by their respective titles
received in excess of entitlement. She agreed not ask if the organization planned to press and included the individuals
to repay the excess travel reimbursements charges with the District Attorney. referred to in this article
for 2011. Ms. Smith also understood that As described above, Ms. Smith’s nonver- plus the Director of Human
the other years’ expense files were being bal communication was entirely consistent Resources, who reports to
examined and that the amount of employee with that of a guilty person. Typically a
the Senior Vice President. This
benefits paid to her during the time she guilty person will not express outrage at
was listed as an independent contractor being accused of committing fraud but in- letter has created additional
would be determined at a later date and stead will try to manipulate facts and place concerns, but also serves to
communicated to her. When asked if she the blame on others. As described herein, highlight the importance of a
was aware of any other purposeful overpay- Ms. Smith expressed no outrage at being more detailed investigation into
ments based on falsified documents, she questioned about her expense reimburse- the areas of payroll, expense
said there weren’t any. ments and employee benefits. She did state
reimbursement, check writing,
that she was not alone in not adhering to
Importance of the organizational policy. and wire transfers.
demeanor of the suspect Kreuter reported the results of the second
Especially during the initial part of the in- meeting to several members of the Board as
terview (prior to her confession), Sacks and well as the outside attorney for the organi-
Kreuter noted that Ms. Smith appeared to be zation and the SVP HR. The investigation
quite nervous (her hands were shaking and continued, deepening into internal-control
she continued to drink from a near-empty weaknesses that were exploited, making it
water bottle after refusing more water). At possible for Ms. Smith to conceal her em-
the start of the interview, she indicated that bezzlement and alteration of records for a
she was sick but showed no outward signs multiple-year period.
of being sick at any time throughout the
proceeding. She reacted with silence and According to Skalek, Golden,
covered her mouth several times during Clayton & Pill, 2011:
responses to questions that directly related
to the incriminating evidence. She blushed “The allegations must be carefully sifted
several times during some tense moments of to establish those that are potentially
questioning and some silence between ques- genuine and to set priorities for investiga-
tions, answers, and follow-up questions. She tion—that is, where the greatest potential
cried quietly at one point toward the end of problems are in regard to financial loss,
the interview and expressed her sorrow over physical danger to persons or assets,
what she had done, stating that she did not legal implications, and so on” (p. 144).
manage her personal finances well and that
she needed to “get her life together.” The tenor of the anonymous letter received
As is evident from the above description by the organization suggests collusion:
of Ms. Smith’s nonverbal actions, an inter-
viewer must play close attention to the au- Collusion with third parties or other em-
tonomic body language of the person being ployees of the victim company, occurs
interviewed. Very often nonverbal commu- when such parties are aware of irregular
nication can be more important than ver- transactions, but do nothing to prevent
bal communication in a conversation. The them or nothing to bring them to the
study of nonverbal behavior related to the attention of either their auditors or the
interpretation of body language was founded counterparty’s auditors (p. 429).
by Mr. Ray Birdwhistell, who coined the

Fall 2013 THE FORENSIC EXAMINER® 33


one in an organization has some responsibil-
ity for internal control. A strong system of
internal controls begins with a sound control
environment. The control environment sets
the tone of the organization often referred
to as “tone at the top” and provides an at-
mosphere in which people carry out their
duties (COSO Report, 1992). An exhibit
attached to Statement of Auditing Standard
99 (AU 316), Consideration of Fraud in a
Financial Statement Audit, provides examples
of programs and controls that management
can implement to prevent, deter, and detect
fraud. It describes how it is the organization’s
responsibility to create a culture of honesty
“Ultimately, the organization is in much and high ethics and to clearly communicate
acceptable behavior and expectations of each
better shape now that the problems employee. Part of creating an appropriate
have been uncovered and efforts culture is to hire and promote appropriate
employees and to have a consistent method
undertaken to eliminate as many of responding to incidents of alleged or
suspected fraud. Employees are very aware
shortfalls in the system as possible.” of how situations are handled in the com-
panies they work for. Fraudsters will notice
formal report and presented to the Board and take advantage of any and all perceived
of Directors. A newly hired CFO has been weaknesses in the internal control system.
tasked with implementing new internal con- Management can play a key role in design-
trol procedures throughout the organization. ing control activities to prevent or detect
The organization informed Kreuter and Sawhney made a number of rec- fraud. Finally, an entity should also have
the forensic team that the CFO ommendations to the organization for increas- an appropriate oversight and monitoring
committed improprieties with re- ing detective controls and to implement some function in place. It is important for all or-
spect to submission of excess travel preventive controls. While the information ganizations, even those with the most robust
expenses in a prior year for which the uncovered in the forensic investigation has control systems, to continue to monitor the
organization was reimbursed. Despite be- been unnerving for the Board and the execu- effectiveness of controls in place. Monitoring
ing caught doing so, the CFO was allowed tive management, identification of shortcom- activities can typically be carried out by in-
to remain in his job. The investigation was ings in the system of controls will undoubt- ternal auditors, members of management,
extended to a review of travel-expense re- edly lead to improvements in the system to and personnel responsible for governance,
imbursement of the former CFO where prevent further defalcations. Ultimately, the such as the board of directors. There can be
anomalies were uncovered, leading to the organization is in much better shape now that no letup in this effort.
need to commence a process of inquiry with the problems have been uncovered and efforts Internal controls systems are not static;
the CFO in order to fully understand if ad- undertaken to eliminate as many shortfalls in they are constantly changing and adapting
ditional improprieties have occurred. Kreuter the system as possible. to changing conditions about perceived new
and Sacks interviewed the CFO, who ap- fraud risks. When a problem arises, such as
peared somewhat aloof and dismissive of any Importance of an internal that depicted in this case study, there is an
notion that anything he did was either pur- control system opportunity to evaluate and fine-tune the
poseful or harmful to the organization. This A strong internal control system is critical in internal control system and institute top-
part of the investigation determined that the the fight to prevent fraud in an organization. down changes. A willingness to examine
CFO did, in fact, receive excess reimburse- A strong internal control system helps man- policies and procedures with a view toward
ment for his own travel expenses. He agreed agement achieve its objectives related to the tightening controls will reduce risk.
to make restitution to the organization but effectiveness and efficiency of its operations, Despite management’s best efforts to es-
vocalized his desire for the investigation to the reliability of its financial reporting, and tablish and maintain an effective system of
be over so he could move on with his life. compliance with applicable laws and regu- internal controls, the possibility remains that
The potential existed for a wider scheme, lations. It is management’s responsibility to fraud can and will occur. It is very difficult
especially in an environment of collusive ac- develop and implement a strong system of to overcome collusion between people or
tivity, and warranted the increased investiga- internal controls and to monitor activity management override of established controls.
tion. The inherent weaknesses found during throughout the year as the only surefire way Employees also can make honest mistakes
the forensic investigation in the organization’s to be satisfied that fraud, if not deterred, can in judgment that can cause well-designed
internal control system were addressed in a at least be readily detected. However, every- internal systems to fail.

34 THE FORENSIC EXAMINER® Fall 2013


Recently in the news we read
about Jeff Neely, a federal
official with the General
Services Administration who is
being investigated for excess
spending related to travel. “In
the last year alone, Neely, a GSA
regional commissioner, took
five GSA-funded trips to Hawaii,
Guam and Saipan—and that was
after his bosses were warned
by the GSA inspector general to
curb his travel” (Shields, 2012).

Engaging an independent forensic examiner Ms. Smith was terminated for cause and About the authors:
to investigate concerns of the type men- made full restitution for monies stolen from
tioned in this article will ensure a thorough the organization, and was appreciative for Dr. Kreuter is a partner and Ms.
handling of the concerns raised. Following being treated humanely during the investi- Sawhney and Mr.
the investigation, there is usually renewed gation. The former CFO has agreed to repay Sacks are directors
energy on the part of management to tighten the funds he received that were found to be in the Litigation and
internal controls. either unauthorized or paid in duplication Corporate Financial
with other expense reimbursement. He Advisory Services
Conclusions never admitted to purposefully defraud- Division of Marks
There are many reasons why employees will ing the organization. The organization has Paneth & Shron
commit fraud against their organizations. taken a number of steps toward improve- LLP, working pre-
Such behavior is easier in poor internal-con- ment of its internal systems and has begun dominantly in the
trol environments. Employees can carry out to recognize the events that have occurred New York City of-
expense-reimbursement schemes through as a learning experience. n fice. Dr. Kreuter and
various means. Examples include submit- Ms. Sawhney have
ting fictitious expenses, double billing, and/ References: extensive back-
or inflating actual business expenses. In this Committee of Sponsoring Organizations of the Tread- grounds in foren-
way Commission (COSO) Report, Internal Control
particular case, Ms. Smith created fictitious sic investigations
– Integrated Framework (1992).
expenses by submitting itineraries for trips Golden, T.W., Skalek, S.L., Clayton, M.M., & Pill, J. and also providing
that she canceled. Other examples of ficti- S. (2011). A guide to forensic accounting investi- litigation support
tious expenses can include charging for items gation. Hoboken, NJ: John Wiley & Sons, Inc. services to attor-
for personal reasons, i.e., a hotel expense for Harold, E. & Tobin, S.(2012). Ray Birdwhistell. Re-
trieved March 28, 2012. www.culturalequity.org/
neys. Mr. Sacks has
non-business purposes. Double billing can alanlomax/ce_alanlomax_profile_birdwhistell.php an extensive back-
occur by submitting the same receipts more Shields, G. (2012). Feds’ trouble in paradi$e: GSA pig ground in financial
than once for a period of time. The best took kin on exotic trips. New York Post, April 18, p. 6. statement fraud
way to detect this is by analyzing individual and in forensic pro-
expense reimbursements to the employee to cedures. They have
see whether duplicate amounts appear. Lastly, all been published in the fields of foren-
examples of inflating business expenses can sics and litigation services. Dr. Kreuter
occur when an employee gets reimbursed for CERTIFIED FORENSIC is a member of the American Board of
extra tips when the original tip may already ACCOUNTANT, Cr.FA® Forensic Accounting and a Diplomate and
Learn more about CERTIFIED FORENSIC
be included by the restaurant or claiming Fellow of the American College of Forensic
ACCOUNTANT, Cr.FA®. Call 800.423.9737
expense reimbursement for meals shared or enroll online at www.acfei.com. Examiners Institute.
with a spouse rather than a business partner.

Fall 2013 THE FORENSIC EXAMINER® 35

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