The Spinster and the Dubious Investment
Financial Statement Fraud in Small Organizations
Eric Sumners, CFE, CPA
November/December 2011
Small organizations: Beware of those longtime employees who have their
hands in every department. They could be like alpha executive Francine
Gordon, whose fraud gave her company headaches and grief. Learn
lessons from this tale of misplaced trust, faulty internal controls
and lack of segregation of duties.
This article is excerpted and adapted from the “Financial Statement
Fraud Casebook: Baking the Ledgers and Cooking the Books,” edited by
Dr. Joseph T. Wells, CFE, CPA, published by John Wiley & Sons Inc.
©2011 Used with permission. Names in this case are fictitious.
All financial statement frauds are not in the billions of dollars.
They only need to be big enough to be material to the financial
statements.
Francine Gordon was a highly intelligent, model employee of Small Town
Federal Credit Union (STFCU). She had been STFCU’s controller for more
than 15 years, but she also managed the data-processing systems. When
the data-processing clerk was sick or on vacation, Gordon would step
into the position to make sure that the processes ran efficiently.
Many employees at the credit union — including Gordon — believed she
knew more about the IT systems than the data-processing clerk.
She was not the typical “that’s not my job” employee. For years, she
helped out in many other departments and led several projects. Susan
Wren, STFCU’s CEO, and many employees tolerated her somewhat
dictatorial manner and moody temper because she was so valuable to the
credit union. Few employees ever challenged Gordon about credit union
issues.
As with many small financial institutions, the credit union had not
separated duties because of finite resources and extremely tight
budgets. Gordon had some unthinkable duties and responsibilities. Her
primary responsibilities as controller were creating financial
statements, preparing budgets and forecasts and reconciling STFCU’s
lengthy and often complicated bank statement.
In addition to supervising the data-processing department, she was
responsible for the accounting — and the management — of STFCU’s
investment portfolio. This allowed her to make purchase and sales
decisions about investments, although intelligent investment analysis
was not one of her strengths. So, Gordon relied on the advice of the
credit union’s three approved brokers. Her control of so many of
STFCU’s areas created a “witch’s brew” for bad decisions and lax
internal controls.
Her compensation was good but not comparable for those working in the
upper tier in credit unions of similar size. Regardless, Wren granted
Gordon more authority and autonomy throughout the years.
Gordon frequently worked long hours and weekends. She was not married,
did not have a significant other or children, seldom visited her
faraway family and was not close to other employees and had few
friends. Gordon did gravitate toward Steven Edwards, one of the credit
union’s investment brokers. Edwards, an older distinguished gentleman
with a silver tongue, always was impeccably dressed and manicured. He
would send flowers to Francine on her birthday and visit her
regularly.
Though the credit union had three approved brokers, it consistently
awarded Edwards about 90 percent of its investment business. Because
it was a small financial institution, STFCU relied on its brokers to
analyze investments and to detail how individual investments and the
total portfolio fit into the credit union’s balance sheet and future
goals. However, Edwards did not provide these analytics and did not
appear to have a solid understanding of how to manage an investment
portfolio. In fact, he did not seem to understand financial
institutions very well. Apparently, his skills were more social than
financial.
--
CA Ramachandran Mahadevan,M.Com.,F.C.A.,
Financial Statement Fraud in Small Organizations
Eric Sumners, CFE, CPA
November/December 2011
Small organizations: Beware of those longtime employees who have their
hands in every department. They could be like alpha executive Francine
Gordon, whose fraud gave her company headaches and grief. Learn
lessons from this tale of misplaced trust, faulty internal controls
and lack of segregation of duties.
This article is excerpted and adapted from the “Financial Statement
Fraud Casebook: Baking the Ledgers and Cooking the Books,” edited by
Dr. Joseph T. Wells, CFE, CPA, published by John Wiley & Sons Inc.
©2011 Used with permission. Names in this case are fictitious.
All financial statement frauds are not in the billions of dollars.
They only need to be big enough to be material to the financial
statements.
Francine Gordon was a highly intelligent, model employee of Small Town
Federal Credit Union (STFCU). She had been STFCU’s controller for more
than 15 years, but she also managed the data-processing systems. When
the data-processing clerk was sick or on vacation, Gordon would step
into the position to make sure that the processes ran efficiently.
Many employees at the credit union — including Gordon — believed she
knew more about the IT systems than the data-processing clerk.
She was not the typical “that’s not my job” employee. For years, she
helped out in many other departments and led several projects. Susan
Wren, STFCU’s CEO, and many employees tolerated her somewhat
dictatorial manner and moody temper because she was so valuable to the
credit union. Few employees ever challenged Gordon about credit union
issues.
As with many small financial institutions, the credit union had not
separated duties because of finite resources and extremely tight
budgets. Gordon had some unthinkable duties and responsibilities. Her
primary responsibilities as controller were creating financial
statements, preparing budgets and forecasts and reconciling STFCU’s
lengthy and often complicated bank statement.
In addition to supervising the data-processing department, she was
responsible for the accounting — and the management — of STFCU’s
investment portfolio. This allowed her to make purchase and sales
decisions about investments, although intelligent investment analysis
was not one of her strengths. So, Gordon relied on the advice of the
credit union’s three approved brokers. Her control of so many of
STFCU’s areas created a “witch’s brew” for bad decisions and lax
internal controls.
Her compensation was good but not comparable for those working in the
upper tier in credit unions of similar size. Regardless, Wren granted
Gordon more authority and autonomy throughout the years.
Gordon frequently worked long hours and weekends. She was not married,
did not have a significant other or children, seldom visited her
faraway family and was not close to other employees and had few
friends. Gordon did gravitate toward Steven Edwards, one of the credit
union’s investment brokers. Edwards, an older distinguished gentleman
with a silver tongue, always was impeccably dressed and manicured. He
would send flowers to Francine on her birthday and visit her
regularly.
Though the credit union had three approved brokers, it consistently
awarded Edwards about 90 percent of its investment business. Because
it was a small financial institution, STFCU relied on its brokers to
analyze investments and to detail how individual investments and the
total portfolio fit into the credit union’s balance sheet and future
goals. However, Edwards did not provide these analytics and did not
appear to have a solid understanding of how to manage an investment
portfolio. In fact, he did not seem to understand financial
institutions very well. Apparently, his skills were more social than
financial.
--
CA Ramachandran Mahadevan,M.Com.,F.C.A.,
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