Investigation of one fraud leads to discovery of another at dental school

Fraud seemed to plague DEERFIELD College’s School of Dentistry,  with one bad case erupting after another. One supervisor’s minor transgression opened a Pandora’s box of fraud perpetrated by his assistant.

It all began when Bruce Livingstone, a married supervisor at the college’s three-person business office, took his girlfriend on a business trip using school funds drawn from a suspense account (a temporary account in which entries of credits or charges are made until their proper disposition can be determined). Livingstone did not submit an expense report to offset the charges that month, a violation of a policy governing the college’s extensive travel budget.
Once officials realized that employees had grown lax about submitting timely expense reports, they attempted to reconcile the suspense account by requiring employees to settle their own accounts before receiving their paychecks. Not wanting his indiscretion revealed, Livingstone had to disguise the additional expense of taking his girlfriend on a business trip. He submitted a phony expense report in which he unwisely named a female senior auditor at the college as his traveling partner. He forged the auditor’s signature on a letter that stated she had participated.
As luck would have it, the unsuspecting auditor herself reviewed the bogus report. She was quite surprised to find she’d taken a trip with Livingstone. She immediately informed Harold Dore, the director of internal audit for the institution, of the forgery. Dore alerted others.
Following a short interview with college officials, Livingstone admitted his wrongdoing and was promptly terminated. The executive vice president authorized Dore to conduct a full fraud examination. As they were soon to find out, they had not seen the worst of it yet. Livingstone’s amorous business trip was just the tip of the iceberg.
“Whenever there’s fraud found here,” said Dore, “I automatically conduct what I call a ‘magnitude investigation.'” He has learned that perpetrators rarely limit themselves to the fraud initially uncovered: “Chances are, they did something else.”
As part of the information-gathering portion of his investigation, Dore decided to interview Cheryl Brown, the 30-year-old administrative assistant who had worked under Livingstone for three years. The interview was to be conducted with the dean of the dental school president, so Dore headed across campus toward the business office.
But Brown left before Dore arrived. She told coworkers that her uncle had been shot and that she had to depart for California immediately. In her haste to get away, she even left her paycheck behind.
Taking that as a sign, Dore immediately sealed the empty office Brown and Livingstone shared and began searching its contents. The search uncovered bags of expensive dental tools and prostheses, which it turned out he had been illegally selling to dental students for years.
Knowing vendor kickbacks are common—and since one of the main functions of the business office was to process invoices submitted by vendors—Dore started by reviewing the master file. The list had never been purged and contained tens of thousands of names—all the vendors who had ever supplied goods and services as part of the college’s annual budget of $55 million. He selected 50 vendors, deliberately choosing those without a phone number or street address.
Then Dore took his list to the next stop in the payment process, the accounts payable department. After methodically pulling all corresponding documentation, he quickly focused on one vendor: Armstrong Supply Company. It regularly billed two or three times a month for strange items named but unknown by Dore, and always for amounts under $4,500, thus eliminating the necessity of two authorized signatures. All of the request-for-funds forms attached to the invoices either bore the signature of Livingstone or the dean of the dental school. Furthermore, Dore could find no vendor application on file for Armstrong Supply. He also failed to find any competitive bidding process in place.
“Once I looked at the actual invoices, that really got me going,” said the fraud examiner. Some carried invoice numbers; others did not, but they did carry a four-digit post office box number. (Subsequent research revealed that postal authorities had switched to five-digit and six-digit PO boxes years earlier.) Billed items included such things as “3 dozen TPM pins” (the identity of which baffled even the long-time stockroom manager).
“The invoices just smelled fake,” said Dore, who packs more than 20 years of auditing experience. What’s more, he later found blank invoices for Armstrong Supply in one of Brown’s desk drawers. He even noticed one completed invoice that had been readied for submission. (Apparently, Brown left in too much of a hurry to dispose of the smoking gun.)
Based on those questionable invoices, the accounts payable department would issue a check for the stated amount. On the request-for-funds forms attached, Brown always indicated that she would personally present the check to Armstrong Supply. (Due to lax controls, vendors and employees were allowed to pick up checks.) Canceled checks revealed that a man named Claude Armstrong III cashed them at various check-cashing services, which sometimes called Cheryl Brown for additional verification, as noted on the backs of the checks.
Further research showed yet another scam, according to Dore. The office mail contained a department store gift card with a note from a vendor to Brown, thanking her for her recent business. The California vendor had billed the college for roughly $42,000 worth of copy machine cartridges—running $4,500 apiece—and Brown had processed the invoices. After a fruitless search for this valuable cache in the school’s storerooms and copy centers, Dore called local dealers and discovered that their most expensive cartridge cost only $483. Under his direction, private investigators located the vendor’s “corporate headquarters” in a rental unit at a retail postal center, but the college abandoned their long-distance pursuit of recovery when it proved too costly.
Although Dore tried to keep his three-month-long investigation quiet, the campus buzzed with news of his activities. Brown’s many friends, including two in the accounts payable department, kept her abreast of his movements.
Next he pulled in Livingstone for a chat about the new evidence supporting vendor fraud and kickbacks, as well as his backroom sale of orthodontic supplies. According to Dore, it became apparent during the interview that the philanderer knew nothing about the vendor schemes. Brown had perpetrated the $63,000 vendor fraud without Livingstone’s help. He seemed quite taken aback that it had occurred under his nose by someone he trusted so much. In some cases, Brown had forged the signatures of her supervisor and the dean of the dental school. In others, the unwitting bosses actually signed the bogus forms.
At the same time the Livingstone interview was being conducted, the school’s general counsel received a call from Brown’s lawyer. “He asked if we had ever given leniency to an errant employee in the past, if he were to admit to everything,” said Dore. Once the general counsel deemed it a possibility, they scheduled a meeting for September. It was to be attended by both attorneys, Dore, the executive vice president of the college, and Brown, who had never returned to work since her hasty departure. Her lawyer also relayed her request to bring along a friend as a character witness, a nurse for whom she had once worked and who could attest to the good nature of this unmarried mother supporting three small children.
Brown was quiet and cooperative at the meeting. Dore took her through his voluminous file folder on Armstrong Supply, the sham company she had created. She willingly identified each and every document that detailed her duplicity, which had begun five months after her hire. Dire cash emergencies prompted the first few deceptions, she said. As Brown realized how easy it was in light of the weak controls, her confidence grew and she stepped up her thefts with no signs of stopping. “It became addictive, in her words,” recalled Dore.
To illustrate her need, she explained that her husband had developed a drug and alcohol problem and that she had been dragged into drug abuse as well. She claimed that after she had become addicted, her husband abandoned her and the small children. She then broke down and cried, the first of many times during the interview. Brown went on to point out that she was seeing a doctor for her addictive behavior. When Dore asked how long she had been seeing her doctor, “She said her first visit was going to be next week.” (Months later, a casual conversation between Dore and a coworker who had once dated Brown raised doubts about her excuses. “He swore she never touched drugs or alcohol,” said Dore.)
She said her accomplice, Claude Armstrong III, was a friend with a history of drug abuse. (Background checks showed an arrest and conviction on drug charges for Armstrong; Brown had no prior arrests or convictions, and her references proved favorable.) She also admitted that her cover story about the uncle in California was fabricated.
After Brown expressed remorse over the fake invoices, Dore asked her about her relationship with the phony cartridge supply firm. She totally disavowed any knowledge of that scam. She insisted that the invoices were legitimate and the cartridges were stacked in a storeroom. (Note: No one has found the cartridges to date.)
Even without owning up to the recent $42,000 cartridge scam, Brown seemed surprised to learn that her Armstrong Supply fraud had netted $63,000 over two years.
Given the small percentage of the annual budget that was pilfered, college officials were not surprised that the fraud went undetected by the Big Four firm that served as their external auditor. Their contract stated that “audit tests are not all-inclusive and not designed to find fraud,” a disclaimer that auditors rely on to absolve them from possible culpability. “If they were that detailed, nobody could afford an external audit,” said Dore, also a certified internal auditor.
Looking back, he saw that some good stemmed from the frauds. Since then, the college has instituted much stronger controls and makes sure to enforce them. Dore said tales of his dogged investigation enhanced respect for the audit function, “[a]nd probably instilled a bit of fear among the 4,500 employees, because the college officials did pursue a criminal prosecution against Brown.”
During the course of her trial, the district attorney informed Dore that his testimony was not needed, even though it would have shown hell-bent intent on the part of the defendant. With her lawyer acting on her behalf, Brown struck a deal with the prosecutor. She was placed on probation and ordered to pay partial restitution. (Brown was found three-fourths culpable and Armstrong one-fourth. Because half of the stolen funds came from federal grants, $30,000 was charged off to the federal granting authority.)
As part of the deal, Brown was also sentenced to six months’ house arrest—with exceptions granted for her to attend work and church.

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Content retrieved from: https://brainmass.com/business/forensic-accounting/billing-schemes-614230