School of Fraud

School of Fraud

Professor Nessan J. Ronan

Roger Kaunda lived life in the fast lane. Tall and imposing, he had a well-deserved reputation for being a ladies’ man. Roger was about 35-years-old when I met him. He had a degree in public administration and worked as an administrative officer for the specialized accountancy college in the South African country of Lesotho. Before working there, he was a teller with one of the country’s major banks.
Roger was well-liked as the administrative officer. The staff especially appreciated his willingness to recommend that their houses be repainted by the college. There was no doubt that he had great interpersonal skills. Roger knew the best person to contact when there was a problem or a difficult job to be completed. He had an excellent relationship with the director of the college who relied heavily on him to keep the wheels moving.
Roger was married with two young children. His wife, Gladys, was a secretary in the same bank where Roger once worked. Rumor had it that she was not very happy in the marriage. Whenever Gladys would complain about the excessive time he spent away from home he would retort, “I gave you two babies, what more do you want?”
Some of his colleagues often remarked that Roger seemed to neglect his wife and children. He was fond of taking weekend trips with one of his many girlfriends. He was known to take plane trips to South Africa to visit one mistress in particular.
Roger was a great believer in the powers of the witchdoctor. His friends thought that he was able to engage in risky behaviour due to his belief in traditional medicine. His remedy was to get medicine from the witchdoctor if he had a work or domestic problem. He believed that all he had to do in order to harm someone he didn’t like was to buy the appropriate medicine. Roger would laugh heartily when boasting about the latest concoction that he had acquired. He told everyone that he had the most powerful witchdoctor in the mountains.
I never saw Roger in a bad mood. He seemed to go through life with child-like optimism. He was always on the move, trying to solve some problem or sort out some human relations issues. One day, I remarked to a colleague, “I hope you realize the great job Roger is doing for all of us.” My colleague readily agreed with my assessment of Roger.
The College of Accountancy was established in 1980 with financial assistance from the World Bank. Its specific purpose was to train professional accountants for both the public and private sectors. Most of central and southern Africa at that time was emerging from colonialism and was making serious strides in developing its professional cadre.
The college also received significant technical assistance from the United Nations Development Programme (UNDP), International Labour Office (ILO) and the governments of Britain and the United States. As a result, the national government was very anxious for the college to be a success. The technical help meant that international staff could be recruited to work alongside their national counterparts, who came from the United States, England, Scotland, Australia, and Ireland.
The college had two campuses at that time, one in the political capital and the other in the commercial capital. It had about 2,000 students enrolled in accountancy, banking, and financial management classes. Most were graduate students studying commerce and economics. Because the country was ruled under British power until 1964, all of the courses offered at the college focused on internationalization. These students were trained for British professional accountancy qualifications; specifically, they were prepared to become involved in the Chartered Association of Certified Accountants and the Chartered Institute of Management Accountants. The banking courses were offered by the Chartered Institute of Bankers in the United Kingdom. The financial management course was also UK-based.
When I arrived at the college as ILO Chief Technical Adviser in Accountancy, the institution was beginning a second phase of technical assistance. The first phase had by all accounts been a complete failure. During a period of 10 years, not one professional accountant had been produced. The image was so bad that the firms in the country had decided to establish their own college of accountancy. Both international and bilateral donors were extremely concerned with the clear lack of progress. It’s fair to say that they very reluctantly agreed to a second phase of assistance.
Many explanations were offered for the lack of academic success, ranging from alleged poor students to lecturers not committed to their work. There was also a strong suspicion that the director of the college lacked leadership and strategic skills. In reality, all of these reasons were true. The tragedy was that the lack of success was hampering the economic development of the country, the poorest in Africa. There was only one qualified accountant in the entire government. Among the chartered accountancy firms, all the partners were expatriates. In the private sector there were about 20 qualified accountants. So it was urgent to increase the supply of accountants in a nation that screamed for development and the alleviation of poverty. This was the only public sector college of accountancy in the country, which meant that both the national government and the international donors were anxious for the college to start producing qualified professional accountants.

The Letter
About six months after arriving at the college from Ireland, I was required to take over the directorship of the college. About a month into the new post, I was faced with the biggest challenge of my career. I remember the day well. It was a Tuesday, one of those beautiful African mornings with blessed sunshine and only a hint of breeze. I looked out my office window and stood for a minute admiring the jacaranda trees waving gently in the wind.
After taking in the inspirational sight of the trees in full bloom, my secretary, Leomile, brought me the morning mail. One of the letters was unusually addressed to “The ELO man.” I laughed, realizing that they meant “The ILO man.” I can resist everything except curiosity, so I decided to open the letter immediately. It consisted of one page torn out of a child’s notebook. I must have read it twenty times. It completely bewildered me. Here I was in the middle of a foreign country with very little knowledge of anything African, and I was confronted with what seemed like a very sensitive issue. The letter, written in pencil, stated:

“Mr ELO man, be warned. Your administrative officer is robbing the college. You don’t know him but be warned. He will come to a bad end. He is involved in a lot of things. Don’t ignore this.”

The letter was not signed. I wondered if the sender was playing a practical joke on me. What credence should I give to an anonymous letter?
As I was pondering my next move, I remembered my experience in Ireland when I worked as an accountant. I had discovered two frauds as the result of tip-offs. With this in mind, I could not ignore the letter, but at the same time I wondered how the authorities would react to my suspicions. After all, I was a Caucasian expatriate in a country which had only recently won its independence from white rule. If this had happened in Ireland I would have no problem deciding what to do. On the other hand, I realized that if I did nothing (and that would have been easy), it might come back to haunt me later. I looked back out onto the peaceful jacaranda trees and thought long and hard about my decision for the rest of the day.

I decided that before taking any action that I would consult my friend, Marty, who had been working in the country for about two years. He had a strong appreciation of the culture and knew the local language. Marty could see when I met him—I was very agitated about something. After I briefly described the situation to him, he scratched his head and warned me to be very careful. His main piece of advice was that I should work through the “national” employees.
I wanted to proceed carefully because I was suspicious of Happy Banda, the college’s accountant, and felt that he might be working in collusion with the administrative assistant, Roger, in a possible fraud. Happy was a small middle-aged man with a goatee. He was single and had a reputation for carrying a good supply of condoms in his briefcase, often boasting about his conquests. He had been with the college for about five years and had a relaxed style of management.
The college had recently hired an assistant accountant due to the increase in the workload. David Mtonga was in his mid-20s. He was married with a young daughter. He had recently completed his technician accountant qualification. He was a quiet, introverted person with a serious outlook on life.
I decided that I would engage the assistance of David to carry out a preliminary forensic audit. I called David to my office and explained my concerns to him. I arranged to meet him at his house where I put him on notice that the information was most confidential. It was clear that if the two officers got any hint that we were investigating fraud, they would likely destroy the evidence.
David lived in a township within the suburbs of the college. I greeted him and his wife and then fully briefed him about my suspicions. We worked out a strategy to carry out a preliminary forensic audit. We would conduct the investigation after-hours in order to avoid controversy. We agreed not to waste any time and to start the investigation the following evening.
We spent every evening for two weeks sifting through the latest purchase orders and invoices. The evidence was shocking. In our view, fraud was clearly visible from the financial records. We compiled a preliminary report. I then called the permanent secretary in the Ministry of Education and explained that we had established what appeared to be a prima facie case of fraudulent activity at the college.
I recommended that he request two internal auditors from the office of the Auditor General to assist us. Internal auditors in the office of the Auditor General have extensive powers. They may go into premises and demand access to documents and compel testimony from people. They also have the powers of arrest. The permanent secretary took my advice. I decided to wait for the internal auditors and not to pursue the investigation on my own. About a month later, they arrived at the college.
The two auditors investigated the purchase of supplies, the rendering of services, and the operation of the transport system. The rendering of services appeared a prime candidate for fraud. The auditors discovered that Roger would issue a purchase order to a painting contractor who was hired to paint a staff member’s house. The college would be invoiced with the cost and Roger would approve it for payment. Happy would write a check for the invoice and pass it to the principal for signing. Then the check would be taken to Roger, who would take it to the painting contractor. The problem was that Roger, Happy, and the painting contractor had conspired to defraud the college. In fact, no houses were painted and all the payments were fraudulent. The three conspirators shared the proceeds of their scam. The auditors estimated that the total amount involved was about $50,000.
The next area of investigation was in the purchase of supplies. Some invoices were selected for scrutiny; there was no record of supplies for many of them. The auditors visited the suppliers and found that a considerable number of the invoices were false. It wasn’t clear if the suppliers were involved in defrauding the college but certainly the invoices didn’t represent supplies.
We estimated that these fraudulent invoices amounted to about $40,000. Moreover, we determined that the accountant was in the practice of forging the college principal’s signature. The second signature on the check belonged to an academic, who was apparently in the habit of relying on the principal’s signature and didn’t bother to check the supporting documentation.
The third and final area of the investigation dealt with the operation of the transport system. The college had about 10 motor vehicles and the purchase of petrol was a major activity. Again, the auditors found massive fraud. The administrative officer would approve invoices and receive checks for petrol that was never purchased. Since Roger controlled the transport system, there were no checks and balances in operation. This fraud cost the college about $30,000. In total, the two officers defrauded the college of about $120,000.
Triple Threat
One of the auditors entered my office at noon one day. He told me that he had obtained all of the fraud-related evidence and was going to challenge the two suspects. He casually remarked that the accountant, in addition to forging the principal’s signature on the illegitimate checks, had also tried to forge my signature. It was one surprise after another. I was also threatened by Roger. He said that he was going to complain about me to the president of the country, and ask that I be deported. I informed the auditors of this threat and they went to the secretary, who briefed the president on the matter. Roger also said that he was going to poison me. So the auditors warned me not to go to the canteen during the investigation.
One day, things came to a climax. I had a visit from one of the auditors who told me that Roger had threatened my sons. I reported this incident to the police and they quickly drove up to the college to escort Roger and Happy to the police station in handcuffs. There, they were interrogated and charged with fraud.
While I was relieved that the two officers had been removed from the college, I still had many reservations. I wondered if the evidence would be sufficient in a court of law. Another thought was that perhaps the evidence would be “lost” and these two officers would be found not guilty. Worst of all, the officers might have been reemployed by the college. As the alleged frauds had taken place over a period of six years and the college had the same public auditors during the entire period, I decided to visit the senior partner in the audit firm.
Before my visit, I made sure not to state my reason for making the appointment. I was shown into the plush boardroom of the firm and invited to pour myself a soft drink. Very soon the senior partner arrived and greeted me warmly. I told him briefly what we had discovered regarding the fraud at the college. The partner nodded and said, “Yes, I am very sure there is fraud going on there.” This came as a surprise to me. I wondered if he believed that fraud was going on, why the auditors had not taken any specific steps to report it when carrying out the audits.
I decided to also visit the chairman of the college’s finance committee. He was the chief accountant of a large multinational company. Unlike the audit partner, he didn’t suspect that fraud was taking place. He agreed that we should allow the law to take its course. But he suggested that we should request that the public auditors to provide us with a report on their observations on the fraud. In particular, we wanted to know why the public auditors had not discovered these frauds during the course of their audits over a period of six years.

When the End Doesn’t Justify the Means
Finally, Roger and Happy were officially suspended from their posts at the college. The government auditors filed a detailed 100-page report on what they had discovered. I sent a copy to the Ministry of Education and I convened a meeting of the College Board.
Our lawyers were briefed on the matter and given a copy of the auditors’ report. I also filed a report outlining the circumstances that led us to suspect fraud in the first place. Roger and Happy were brought before a magistrate’s court. They pleaded not guilty to all counts of fraud and theft and were released on bail on their own sureties.
In the meantime, the public auditors responded to our request for an explanation of why they had not discovered the fraud over a period of six years. The auditors stated that their procedures were designed, among other things, to uncover fraud if it exists. But they pointed out that the discovery of fraud is not one of their functions. This is the responsibility of management. They also emphasized that considering the annual expenditure of the college over six years, the amount of loss due to the fraud was not material. While the auditors may have been technically correct, some of us in management felt that they were not giving sufficient weight that $120,000 had been stolen as well as severe disruption to the functioning of the college. There was also the issue that the discovery of the fraud caused trauma to staff members and led to a lower morale. All in all, we weren’t impressed with the manner in which the auditors dealt with the fraud, and in particular, their attempt to hide behind the technicality of “materiality.”
The college requested that the government auditors establish if there was collusion between the suppliers and the suspended officers. We also asked them to investigate whether the principal of the college, who was on study leave during this time, was in any way implicated in the fraud. In the case of the traders, the auditors were unable to establish a link which would stand up in court. But there was a strong suspicion that they must have had some involvement. Otherwise, it would have been difficult to see how the officers could have obtained the false invoices.
In the case of the principal, the auditors were satisfied that he was not involved in the fraud. But they did remark that he was certainly negligent for not ensuring that proper accounting controls were in place. It seems that he failed to exercise proper supervision over the work of the accountant and the administrative officer. Both of these officers reported directly to him.
When the officers’ case came before the courts, Happy was found to have fled the country and was working as a salesman in a neighbouring country.
Roger turned up for his court hearing, but when the case was tried we found that most of the evidence was missing. Due to the fact that he was the nephew of the Minister of Education, his case was dismissed. Happy was subsequently shot dead in the neighbouring country by bandits who robbed him for the large sum of money he boasted about carrying.
Some time later I saw Roger crossing the road in the town where the college was located. He was shabbily dressed and noticeably thinner. His suave appearance and confident smile had disappeared. His wife left him and he was unable to get another job. In some ways I couldn’t help feeling sorry for him. I wondered if he would have taken the path to fraud if he had a chance to do it all over again.

Lessons Learned
The first lesson I learned was that investigating fraud in a Third World country is very different than in a developed nation. It seemed to me that there was a greater tolerance of fraud and corruption in Africa. Even the public auditors seemed to accept that fraud was taking place in the college. I was surprised by the fact that Roger was desirous of poisoning me. He didn’t seem to realize that the investigation would go on irrespective of whether I was there or not. I learned that it is crucial to have a sufficient knowledge of the country or region’s culture where one is conducting investigation, to ensure that all precautions are taken to safeguard oneself.
It’s important that a thorough investigation be carried out before any administrative action is taken. Looking back, I can see that if I had suspended the two officers before we found the evidence, they may have launched a legal action for unfair dismissal. This would have distracted us from our task of collecting evidence.
I found that carrying out a lifestyle analysis on one of the officers assisted in pointing us in the right direction. I have come to believe that fraud is committed by two groups of people: those in need and those with greed. Roger combined both motives to sustain his extra-marital affairs.
I think it is fair to observe that an organization shouldn’t rely on its public auditors alone to discover fraud. The public auditors in this case have firmly rejected any attempts to hold them responsible for discovering the fraud. It is management’s responsibility, they claim, to ensure that controls are in place to prevent and detect fraud.
An investigator may do a tremendous job in uncovering fraud and may compile a solid file of evidence, but it’s worthless if the legal system doesn’t support the process. It’s not sufficient that fraud examiners do their work properly; they must also able to rely on a legal system that is efficient, transparent, and not corrupted by either political or financial influence.
The two fraudsters grew confident over the six years they had been perpetrating the financial crimes. It helped them that the same principal was employed during the entire time. They had studied his methods and knew how to outfox him. They also knew how to forge his signature. They came to recognize that the internal controls exercised by the principal were simply designed to send a warning to employees, but they were not strong enough to prevent them from committing fraud.
Roger, who was clearly the leader in the fraudulent activities, worked himself into a corner with his extra-marital affairs. These affairs required more and more funds to sustain his expensive lifestyle. Clearly he was living beyond his means and he exploited the weak financial controls of the college to fund a style of living that he had become accustomed to. It’s likely that he would have continued stealing from the college if he had not been discovered. There was a pattern to his frauds. He became more daring in his actions and steadily increased the amount of money he was stealing. Clearly the more he was getting away with the frauds, the more confident he was became and the more risks he took.
It became clear during the investigation that some of the staff members at the college knew about the fraudulent activities that were going on, but they decided to stay silent. It’s difficult to fault them given the hostile environment that existed for whistleblowers.

Recommendations to Prevent Future Occurrences
Implement Strict Internal Controls.
A strict system of internal controls is of paramount importance to prevent fraud in any organization. There should be clear division of labor in order to prevent one person from doing a number of different jobs, especially where it involves disbursement of funds. An important dimension of the system should be the rotation of staff, if feasible.
Mandatory Vacations and Time Off.
Both the administrative officer and the accountant in this case had been at their respective posts for a considerable period of time without taking any mandatory vacations. In order to ensure that an organization can test the effectiveness of the internal control system, employees should be required to take mandatory vacations and time off. During the periods when the staff is away from holidays, take the opportunity to test the system of internal control and review a sample to make sure that everything is in order. Senior management should take an interest in the operations of the internal control system. They should arrange for random checks to be carried out on the accounting records. In this case the most senior manager, the principal, didn’t provide proper oversight of the work of his immediate staff. This resulted in an exploitation of the obvious weaknesses in the system.
Conduct Lifestyle Analyses.
I would recommend that lifestyle analysis be employed by internal auditors and senior management to identify possible fraudulent activities. Also, it is clear that some staff know when fraud is taking place, even though they have no involvement in it. Staff should be encouraged to report their well-grounded suspicions to management. At the same time, management should ensure that whistleblowers are protected from adverse consequences when they do report their suspicions.
Set an Ethical Tone at the Top.
A code of ethics, which is concise and coherent, should be disseminated to all the members of staff to minimize the incidences of fraud. Top management should make it known that the prevention of fraud is everyone’s business. Good governance principles need to be announced and employees should be made aware that their organization is serious about fraud prevention. Top management should lead by example and observe the highest ethical and managerial standards. The board of the organization needs to put governance on the agenda and make it clear that observing good financial governance is a cornerstone of the management of the organization. There must be zero tolerance for fraud and corruption and no ambiguity about the issue.

Journal Comments

  • Rusty  Gladdish
  • Patrick Ronan
  • Vonney