Maxwell and Company: Staff Auditor Embezzlement at a Small Client

Ryan Campbell                                                                January 27, 2015

Anitra Peterson                                                                 AC 473/ 573

Kimberly Ball

Lauren Cameron

Maxwell and Company: Staff Auditor Embezzlement at a Small Client

        This report deals with an investigation of Maxwell and Company based on documented evidence that an employee was fraudulently using a client’s credit card to obtain personal purchases. The investigation determined that the employee had charged and obtained large cash withdrawals from the client’s credit card over a period of approximately two and a half years. Recommendations on how to handle this situation will be discussed.

        The actions and reasoning into the employee’s fraudulent use of a client’s credit card will be discussed in the report. Due to the perpetrator being an employee of an accounting firm in the performance of duties, the following documentation is intended for use by accounting firms, regardless of size as well as businesses of varying sizes who hire external Accountants to perform various functions.

        The investigation revealed that the charges were from the accounting firm’s employee, Anna Thomas. Her activities began shortly after her permanent assignment to perform bookkeeping and tax preparation services for Rusher Automotive. After the initial fraud was discovered, her manager conducted an examination of the records of her other clients. No fraudulent activities were uncovered there.

        Jerry Maxwell is the owner of the referenced company, Maxwell and Company. Since 1986, the firm has provided tax planning, preparation, attestation, and bookkeeping services to local clients. Rusher Automotive is a large automotive client that the company has been providing bookkeeping and tax preparation services for over ten years.

        Anna Thomas joined Maxwell and Company four years ago right before tax season after another valued employee resigned. The time frame in which Ms. Thomas was hired did not allow for Mr. Maxwell to properly check her resume for references. Maxwell and Company is a fairly small firm with many local clienteles. Therefore, checks and procedures normally used in hiring new employees were not practiced. The needs of the firm were placed over the quality and credentials of the job applicant. Additionally, Ms. Thomas was the daughter-in-law of a prominent and well-respected local attorney. Her familial relations, combined with the immediate needs of the company appeared to make Anna the best available hire for the vacant position.

        The study of fraudulent activity is intertwined with the study of behavioral psychology. This is due to the fact that many frauds are often committed by those who understand the only way to acquire someone else’s assets is through an understanding of how to manipulate others while simultaneously observing work processes and practices in relation to their environment. In The Evolution of Fraud Theory, Jack Dorminey referenced Donald Cressey’s early behavioral studies to provide an outline for the progression of fraudulent activities committed by individuals in an organization. Cressey’s studies, which later became the basis of the Fraud Triangle further referenced in SAS No.99, are found to prevalent in most cases of fraud. The case of Anna Thomas can be explained using this model of behavior.

        A thorough background check including credit checks, employment history, and peer references may have been a “red flag” for Maxwell and Company to seek another available candidate. Investigating Anna’s credit history might have uncovered her dire financial situation. She and her husband had two children, but it appears the family was being supported through her income with assistance from her father-in-law due to her husband’s disability. Anna worked at a sales job while completing her undergraduate degree, and she had acquired large educational expenses.  Furthermore, she seemed to always be in competition with her peers from college. She purchased a vehicle as a gift to herself upon graduation.  Her immediate need to keep pace with her peers who were employed at much larger firms combined with her financial situation at home internally created pressure. Thus, the first element of the Fraud Triangle is revealed.

        Allen Rusher’s trustworthiness and non-segregation of duties for Anna, combined with the lack of company internal controls allowed Anna the opportunity to perpetuate the fraud over the course of approximately two and a half years. A major portion of SAS No. 99 ironically deals with auditor’s activities in brainstorming and assessing fraud risks inside their client’s business. In the Maxwell Case, the external accountant is the actual fraudster scamming the client. However, the blame for the perpetuated fraud and the opportunity that allowed Ms. Thomas to commit it can be shared by both Rusher Automotive and Maxwell and Company. The 2012 Report to the Nations examines the impact of occupational fraud cases. The median loss caused by occupational fraud cases in the reported study by the AFCE was $140,000. This study further concluded that occupational fraud is a more significant threat to small businesses because they suffered the largest median losses. The reason behind this alarming statistic is due to smaller organizations typically employing fewer anti-fraud controls than larger corporations. “The vast majority (77%) of all frauds in our study were committed by individuals working in one of six departments: accounting, operations, sales, executive/upper management, customer service, and purchasing.” (2012 Report to the Nations: Key Findings and Highlights). Using these statistics, we find more clearly how Anna was allowed to perpetuate her fraudulent activity.  Anna performed the accounting service at her client through bookkeeping and recording journal entries. However, since Anna was not a company employee, she should not have been allowed to perform the accounts payable function of preparing checks for company bills, nor should she have been tasked with running errands for the company at the bank and post office.  Furthermore, after a few months, Mr. Rusher began trusting her enough to authorize payment of company invoices without his approval. Misguided trust allowed her the opportunity to steal company assets. Allowing all these duties to be performed by one individual who is an employee is a bad management practice due to a lack of duty segregation. Allowing these tasks to be performed by a non-employee reveals incompetency.