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CASE STUDY: COVER STORY: INTERNAL FRAUD 2

Sometimes fraud is discovered by chance instead of deliberate effort. In the $4 million embezzlement fraud by an employee of a magazine publisher, more than one coincidence brought down the perpetrator.

A popular magazine and large direct-mail publishing house decided to outsource much of its direct-mail operations to specialized mail vendors. The company began converting its plant in Pleasantville, New York, from a direct-mail-order factory to an office complex. Part of the office complex construction involved building an auditorium that was to be identical to another auditorium in historic Williamsburg, Virginia. Terrence McGrane had just begun his third day on the job as chief internal auditor. In an effort to get to know his new company, he had scheduled a series of interviews with all the vice presidents. His first interview was with the vice president of administrative services, Harold J. Scott, who was in charge of many construction projects and maintenance services. Because of the massive renovation project, it was not unusual for hundreds of invoices to be forwarded to Scott.

Coincidence one: McGrane stopped by the accounts payable department and retrieved a series of recently submitted invoices for various trade expenses related to the auditorium construction project. “One of the things I wanted to accomplish was to understand how the accounting codes worked—what was capitalized; what was expensed; how it was recorded, etc.” So he grabbed a stack of processed invoices with accounting codes and went up to the construction site to meet with the vice president for an hour-long interview.

As the two walked around the grounds, McGrane asked the vice president if he could explain the accounting codes to him: “He stared at the [top] invoice for approximately 30 seconds and said: ‘That is not my signature on the invoice!’

As he looked through the stack, he found what appeared to be about three or four other forgeries. He was completely baffled.”

The initial investigation revealed that all of the forgeries were in the painting division, budgeted at approximately $500,000 a year. The company employed only one person to oversee the painting operations in its facilities department: Albert Miano.

Miano, a 35-year-old from New Fairfield, Connecticut, earned about $30,000 a year. It was his job to coordinate time-and-materials contracts with the scores of painters, carpenters, electricians, and plumbers who toiled daily on the renovation, repair, and construction of the building complex. As facilities supervisor, Miano regularly forwarded invoices to the vice president of administration services for approval. Miano launched his scheme by crafting false invoices for the jobs done by the painters. He took a copy of a trade invoice from an existing painting contractor and, using his home computer, created a replica into which he would record slightly different hours for the trade contractors’ work.

McGrane related a probable scenario of how Miano executed his scheme. “Let’s say he knew that during the month of February, as an example,” McGrane said, “there were twenty-seven painters on the grounds during the course of one week.” Miano also knew the total number of hours and the volume of materials used in that time. “He would create invoices that were similar in nature, but record only eleven painters on the grounds,” McGrane said. Miano would not reinvoice exactly the same work done during a week, but he would make it look so similar that no one’s suspicions were ever aroused. Effectively, there were no work orders on the “phantom work” he created on these invoices. Miano always listed fewer painters on the false invoice than the actual number who had worked that week, and he registered less time for their services than they had actually worked.

As part of his job, he regularly brought the trade invoices into the administrative VP’s office for signature approval. After delivering a stack of these invoices, he would return to collect them within the next day or two and deliver the approved invoices to the accounts payable department. “It was this opportunity,” McGrane said, “that this individual was allowed to go and collect the approved invoices and insert his own replicated fraudulent invoices as approved. This was the first piece of an ‘electronic circuit’ that allowed him to commit the fraud.” The second piece of the circuit for the fraud to ignite, McGrane said, was allowing this same employee to transport the invoices to the accounts payable department, and ultimately to collect the check.

After seeing how easy it was to slip in his own false invoices in the stack of approved ones, Miano became bolder in his scheme. He began calling accounts payable, claiming that a carpenter or painter had arrived on the grounds and needed his check “immediately.” To keep the project flowing, the employees in the accounts payable department accommodated him. Many employees knew and liked Miano, who had worked for the company for nearly 15 years.

Eventually, this routine became so familiar to employees in accounts payable that Miano did not even need to make up an excuse to pick up checks. Each time he would collect them, he stashed the check for the false invoice in his pocket. When he returned home to New Fairfield, Connecticut, he took the check to his bank, forged the contractor’s name on the back, then endorsed it with his own name and deposited the check.

McGrane explains that Miano was able to pull off the scam due to failure of internal controls and employees not following standard accounting procedures. “For any business transaction, the invoices should be dispatched independently to the approving authority. Once signed, the approved invoices should be sent independently to accounts payable. When the check is prepared by accounts payable, they should mail it directly to the third party. Under a strong internal control system, the employees and/or contractors should not be allowed to come in and collect checks directly. Direct contacts with accounts payable personnel make it too tempting for someone to try to misappropriate funds.”

Accounts payable also failed to combine the invoices into a single check—they wrote a check for each invoice. “Had they combined it,” McGrane said, “his false invoice would have been added into the legitimate painter’s monthly invoice summary, and the money would be mailed to the legitimate contractor,” McGrane said. Accounts payable neglected to study the invoice signatures for forgeries, and the accounting department dropped the ball by not perusing processed checks for dual endorsements, another red flag for potentially misappropriated funds.

Miano’s first transaction totaled $1,200. His second transaction jumped to $6,000—his third, $12,000. His largest single transaction came to over $66,000. Miano refined his strategy by pacing, on a parallel basis, a certain amount below the total due the painter. “If the painter submitted an invoice for $20,000 a month,” McGrane said, “Miano would submit an invoice for, say, $14,000. If the painter submitted a $6,000 invoice, he’d submit one for $3,000.” The individual invoice amounts, because of the continuing construction, would not have alarmed even an auditor.

Miano’s behavior at the office was the same as ever. He dressed the same way, drove the same car to work, and shared little of his private life with other workers. He had not taken a vacation in over four years, and his boss thought he should be promoted (a move Miano resisted, for reasons now obvious). After hours, however, Miano was a different person.

Coincidence two: McGrane’s secretary was not only on Miano’s bowling team, she was also his neighbor. They saw each other regularly at the local bowling alley. She took notice when Miano’s behavior became somewhat extravagant. At first he took to buying the team drinks, a habit most appreciated by his teammates. However, the secretary began wondering where all the money was coming from when he showed up in his new Mercedes (one of five cars he bought) and talked about a new $18,000 boat. He also invested in real estate and purchased a second home costing $416,000.

McGrane’s secretary approached Miano one night after he had spent some $800 on drinks for the team. “Did you win the lottery, or what?” she asked. He explained that his father-in-law had recently died and left a substantial inheritance to his wife and him. Miano’s father-in-law was actually quite alive, but no one ever bothered to check out the claim. No one suspected Miano of doing anything sinister or criminal. All of his associates considered him “too dumb” to carry out such a scheme. One person described him as “dumb as a box of rocks.”

Coincidence three: After four years without a vacation, Miano took what he considered a well-deserved trip to Atlantic City. But he wasn’t there long before he was called back to Pleasantville. One can imagine his chagrin at having to leave the casinos and boardwalks and head back to the office. Little did he know that things were about to get a lot worse.

Upon his return, Miano found himself confronted by the auditor, the vice president, and two attorneys from the district attorney’s office. He readily admitted guilt. “He said he had expected to get caught,” McGrane said. “He did it strictly based on greed. Miano claimed there was no one else involved, and the sum total of his fraud was about $400,000.” But the internal audit found that Miano had forged endorsements on more than fifty checks in those four years, totaling $1,057,000. Ironically, the auditors could only identify about $380,000 spent on tangible items (boats, cars, down payment on a home, etc.). The investigators could not account for the other $700,000, although they knew Miano had withdrawn at least that much from the bank.

Miano served only two years of an eight-year sentence in a state penitentiary. At the time of his indictment, his wife filed for divorce, claiming she knew nothing of her husband’s crimes. Miano told a reporter in jail that the loss of his family and the public humiliation had taught him his lesson.

“For a nickel or for $5 million, it doesn’t pay,” Miano said. “You enjoy the money for a while, but you lose your pride and your self-respect. It ends up hurting your family, and no money can ever change that.”

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