Today’s auditing moment: Fictitious Vendor Embezzlement

The proof is so well hidden in the paper trail investigators need to know where to look.

First some mood music to set the theme:

I’ve Got Your Number ~ Journal of Accountancy

Frank Benford made a simple observation while working as a physicist at the GE Research Laboratories in Schenectady, New York, in the 1920s. He noticed that the first few pages of his logarithm tables books were more worn than the last few and from this he surmised that he was consulting the first pages—which gave the logs of numbers with low digits—more often. The first digit of a number is leftmost—for example, the first digit of 45,002 is 4. (Zero cannot be a first digit.) Benford extrapolated that he was looking up the logs of numbers with low first digits more frequently because there were more numbers with low first digits in the world.

OK, I know those of you that are not mathematically inclined are scratching their heads wondering what the heck I am talking about so here goes.  This morning Dixygirl left a comment on the Mississippi Department of Marine Resources post quoted above which described “Fictitious Vendor Embezzlement” aka “Ghost Vendors”.  Chubb, the world’s leading good faith insurer (as opposed to the bad faith variety) has put out a resource on this topic for their business insureds that is well worth quoting that described the scheme:

Toni, a human resources manager for ABC Company, has authority over an annual training budget of $3.5 million. She routinely contracts with new vendors for training programs and approves payments to those vendors. Toni asks Accounts Payable to establish a new vendor account for “XYZ Consulting Services” and authorizes payments to XYZ amounting to $300,000 over a six-month period. A subsequent inquiry about XYZ results in discovery that:

  • XYZ Consulting Services is a shell vendor operating out of a mail drop address. Toni is the only person associated with XYZ Consulting Services.
  • XYZ Consulting Services never provided goods or services of any kind to ABC Company. The invoices provided to Accounts Payable by Toni were never challenged, even though the service description was vague and no service agreement, nor any other documentation, was present in the company files.

“Ghost” vendors represent a common fraud device used by company insiders who have the abilities to approve new vendors to receive payments and to authorize such payments. In these types of schemes, a dishonest employee may establish a phony vendor account(s) that he or she controls and then direct fraudulent payments to that account(s).

So how does an auditor or a fraud examiner find this kind of fraud? Two ways and the first is via a practical application of Benford’s Law via the Journal of Accountancy article linked above:

Because human choices are not random, invented numbers are unlikely to follow Benford’s law. Here are some divergent signs that Benford’s law would have drawn attention to:

  • As is often the case in fraud, the embezzler started small and then increased dollar amounts.
  • Most of the amounts were just below $100,000. It’s possible that higher dollar amounts received additional scrutiny or that checks above that amount required human signatures instead of automated check writing. By keeping the amounts just below an additional control threshold, the manager tried to conceal the fraud.
  • The digit patterns of the check amounts are almost opposite to those of Benford’s law. Over 90% have 7 , 8 or 9 as a first digit. Had each vendor been tested against Benford’s law, this set of numbers also would have had a low conformity, signaling an irregularity.
  • The numbers appear to have been chosen to give the appearance of randomness. Benford’s law is quite counterintuitive; people do not naturally assume that some digits occur more frequently. None of the check amounts was duplicated; there were no round numbers; and all the amounts included cents. However, subconsciously, the manager repeated some digits and digit combinations. Among the first two digits of the invented amounts, 87 , 88 , 93 and 96 were all used twice. For the last two digits, 16 , 67 and 83 were duplicated. There was a tendency toward the higher digits; note that 7 through 9 were the most frequently used digits, in contrast to Benford’s law. A total of 160 digits were used in the 23 numbers. The counts for the ten digits from 0 to 9 were 7, 19, 16, 14, 12, 5, 17, 22, 22, and 26, respectively. A CPA familiar with Benford’s law could have easily spotted the fact that these numbers—invented to seem random by someone ignorant of Benford’s law—fall outside expected patterns and thus merit closer examination.
MARK J. NIGRINI / Journal of Accountancy

IMHO every auditor worth their salt should have a Benford’s law Excel spreadsheet through which the entirety of the non payroll disbursements of the auditee should be run and analyzed. This type of “data mining” is surprisingly easy and highly effective in determining fraud risk. The one I use generates the graphs like the one included with the JoA article I linked which I have reproduced here for illustrative purposes. The “ugly bumps” in the data really stick out and to the extent they are typically small in frequency of occurrence such lends itself to quick examination.

So, are the investigators at the Auditors office and the CFE’s that work for the FBI doing Benford’s law analysis at DMR?  The answer is most likely no for the auditor’s office and certainly yes for the FBI folks but it never hurts to get the word out for practical application. 😉

Benford’s law is what I would term a basic procedure and is one that should be used on every audit engagement. The next data mining procedure is specialized in that it is designed to detect the exact type of fraud Dixygirl described:

Data Mining

A wealth of information resides within the accounting system and the databases maintained to support any business operation. While much of this information is accessible through standard reports, many of the important relationships that can take business decision making to the next level are not readily apparent……..

Example 2: By comparing all addresses in an employee human resource file with all vendor addresses, companies can quickly determine if a “ghost supplier” may have been set up by an employee, with checks remitted to the employee’s address. This is only one test, but a relatively simple procedure that may lead to detection of a very common type of employee fraud.

A subset of this test is to identify all venders with the same remittance address.  These procedures which I am describing are indeed relatively simple and my experience is they are highly effective. We’ll see how much of this type stuff bubbles up at DMR because we know it is there.

There is nothing new under the sun but there are lots of old things we don’t know.

45 thoughts on “Today’s auditing moment: Fictitious Vendor Embezzlement”

  1. Holy Atomic Auditing Abominations and Bat Signals Batman,

    Super post but don’t yo’ tink dat you should take down dis’ post and Dixygirl’s blown whistle comment fo’ da’ JP Council done sees it and gets to tinkin’ on dere’ 4G terlits at 5AM on maybe how to hid dem phantom campaign deposits wit ‘phantom vendors. And da’ fraud bees so environmentally green & clean dat wit’ such a clean phantom action dey wouldn’t even need to wipe/deodorizer/ flush.

    Dis’ orchestrated fraud could ultimately be classified and defined as ” classical crony musick “- dat’ once played will bees so ‘preciated dat it will bees played alot mo’ on many mo’ different stages between out of da’ box tinkin’ politicos and crony capitalistic county/parish administrations:

  2. This all just makes you wonder how the DMR went for 10 years without an audit. The entire time Bill Walker was in charge no one outside of this agency verified anything. I wonder why? Does it have anything to do with political donations made with some of the money? Was it because who was the State of Ms. Auditor? There were more than one during Walker’s tenure. I have a hard time believing it is because of no funding for this purpose. When all of the waste ,fraud ,theft and misappropriation adds up in the millions somebody needs to figure out why it was allowed to go on for so long. In my opinion a proper audit would have stopped the looting of our money at the DMR

    1. I agree that an audit would help but I don’t even know if I would even trust it. Look at Frontier Strategies. They are major republican political consultants that have “somehow” scoffed up mega millions in state communications contracts and they have now started to make their appearance on the coast. Our state government operates like one large “worm and leach lodge”.

  3. I have read on other venues questions about this Frontier groups contract with the DMR thru the other Jackson company. Nobody seems to be able to show anything they did for the money except be good Republican soldiers and befriend Jamie Miller. The DMR should post the work product completed by this Cloyd person who opened the Frotitier Gulf Coast office and is part owner. Maybe to fulfill his contract obligations he took the employees to lunch at Shaggys or offered discounted rents to all at the DMR in one of his CDBG funded properties. At least that would be something for the money paid to them by the taxpayers. You are correct in the fact that none of the worm /leach lodge residents deserve to be trusted.

  4. Great post Doug! I had never been aware of Benford’s Law, ’till now.
    it is always great pleasure to learn something new from one of your articles, and then enjoy information surfing through the internet library. Thanx…again!

  5. The forecast is for increased heat in the City of D’Iberville.

    Ocean Expo’s delay means taxpayers may pay first bond note

    D’IBERVILLE — City officials expected Ocean Expo Aquarium to be built and open by now and ticket prices to cover the cost of repaying the bond to purchase the land.

    Instead the city may have to make the initial $318,668 payment — due in September — out of the general fund.

    A visit to EMMA has been scheduled to do some digging into the official statement.

    Additional Ocean Expo:
    Can anyone provide information on the contract for site work at the Ocean Expo site?
    IMMS solicited bids for “site preparation Phase 1”; the Daily Journal Of Commerce Gulf Coast (see page 17)
    reported that a local firm by the name of SH Anthony was among the plan holders. Bids were due on August 9, 2012. Was a contract let? Or was this the work that Harrison County did? (See Sun Herald article).

  6. Yes sir the heat is on with the bills rolling in, the FBI investigating, Moby Solangi squirming and the IMMS house of cards collapsing. Somebody better get control or we will all witness a crash landing soon. Now the taxpayers have to get out the checkbook to start paying for this portion of WALKERGATE.

    1. I just could not hold back from laughing when I saw the term “Walkergate”.

      With everything about spending and contracts aside, I would love to see upper authorities (federal or independent) perform a labor audit also. If it were possible to to obtain trust worthy information I would not be surprised if a truck load of labor laws and violations were found. This includes confidential surveys from employees regarding treatment while working at the DMR.

      1. To clarify so nobody jumps to conclusions when i said “i would not be surprized”. Not that anything has been officially violated but with all the other ongoing situations It would seem to have merit to be investigated also.

      2. Come on Gulfcoast peeps we had Watergate, Whitmergate so when will there arise the wise peep/prophet from the gaming shores of the East, born of a virgin CPA, riding a white porpoise with a golden horn unto the seaweed laden roads of Gulfport, banishing his slice and dice sword of Truth upon the marine moneychangers; and he shall be called ***** “WALKERGATE”

        Verily I say to you his name will comment for years as has been prophesied many times in da’ Book of Slabbed when the federal FEMA/BP manna began to reign down upon the glitzy gold fishing boats of the republican capitalist cronies.

  7. WalkerGate is very befitting this bunch of radical Republican oinkers. And I wonder how the Gulfport Mayor is feeling right about now? And his henchman Brother-in-Law? Wonder if the Feds are breathing down their throats? And the list goes on and on. Whose children, wives and familes have benefitted from monies that were sent down here to restore the Coast after Katrina and after the BP spill? How many employees at the DMR have covered up for the cons of WalkerGate and Zeigler? How many people have been used as Patsies by Joe Zeigler? What has happened to the employees who dared to follow State law and statute and were swept under the rug or pushed out of their jobs for trying to do the right thing for the Taxpayers? Who is going to rally for those poor folks? I can name several hard-working dedicated employees who were removed from their jobs for trying to protect the Taxpayers and for trying to do the right thing. Who is there for them? Who is going to restore them back to what Walker and his cronies have taken from them? Who is going to pay for the lives that were lost in this, and the families that will never be the same again because they tried to do the right thing?
    I’ll tell you what folks. Anyone who turned a blind eye on the conspiracy that was going on at the DMR needs to be punished. State laws and policy was ignored by the leaders of WalkerGate, ie. Joe Zeigler and his clan, and the FBI needs to get compensation from their hides if need be for these people who were only trying to do their job in an honest fashion. This is just absolutely wrong. I know that God will deal with them when the time comes, but we need to deal with them too. It is not fair for families to be without their loved ones and these thugs live nice comfortable lives. I hope the FBI doesn’t let us down and they leave no stone unturned. God Bless Us All.

    1. Someone on Slabbed once asked what Joe Ziegler was hired to do. He was hired to be a political lobbiest. His job was to smooze the local senators and such so they would vote in favor of bills that the DMR wanted passed.

  8. Thank you Mona I am one of the. “Casulties” I questioned the purchasing
    Practices and distinctly remember the day I was “punished” and placed in an office with a sign on my door that said no visitors. Yes my health deteriorated and I was placed in financial ruin because of the DMR I would gladly welcome the day to
    Place my right hand on the bible and tell the truth of what really went on that caused me to be appropriately punished. There is so much to be told, lives ruined, suicides , and on and on I do hope justice is somehow served.

    1. The bible would erupt in flames with your hand on the bible. Just how many of the Ten Commandments have you upheld in your life? You’ve lied, coveted thy neighbors…, committed adultery, until he got divorced, you were put in charge of an office with thousands of dollars coming through in cash. That was why the sign said “no visitors”. If it didn’t, Stanley Ritsburg and you would’ve spent the entire day gossiping and doing even less than you did in the business office. I know you kept up with the times everybody came and went, complained nonstop, and belly ached about having to do any real work. I see by your Facebook page that you aren’t sick enough to sit around and sunbathe. We’re you posing or did you get your upper chest enlarged to match your lower?

      1. We shall see in the end . She was put in the office with no visitors because even 4 years ago the Feds were investigating and she knows a whole lot. Personal jabs are just that someone is scared . But I did hear of another girl speaking of breast enlargement ghat took personal and medical leave to have hers done in the business office of course medical is definitely not allowed for boob jobs LOL

        1. Oh and one more speaking of adultery another of the chosen committed adultery for years with the Artificial a reefs director her navy husband even came to the DMR to confront the situation of course it was swept under the rug so people who live on glass houses shouldn’t throw stones.

      2. And 4 th of July at the condo posing of course…. The huge smile is because justice is finally being served . Was not put on charge of an office was strategically put there as punishment for refusing to go along with the fraud I distinctly remember leaving Tom Dosters office (who by the way I heard was told to leave or be fired ) I left his office that day and said I am not going to jail for anybody. But I will gladly testify the things that I know and have proof of (the proof is in my head of course) so sling all you want at least I sleep with a clear conscience and have no worries about going to jail.

        1. If u want clarification on the facts of the day I left the directors office and told him it was wrong and I refused to go along with coding property as a repair (this keeps it off the record as state owned property) this particular item was a new refrigerator installed on the Topaz. Anyway the purchase request, invoice, etc. are on the disc that DMR gave the Sunherald you will also find a copy in there of a handwritten note from Tom Doster to Karen telling her to change the code to property item.if you go to the Sunherald archives you can still look at all the documents. I’m not sure what idiot created this disc but it is a fountain of information. Even has detailed cell phone records. This was after my confrontation with him. I believe this is when the master plans began for my punishment.

          1. I will look for these documents and post links to them if I find them.

            Can you tell me what year to search?

          2. RFP I will have to go back to SunherAld archives they published a link to everything on the disc I believe it was project 606 around 2009 but I will post later

      3. Uh-Oh! It looks like our DixyGirl has enraged some of the employees that are involved in the missing money saga! Please tell me Miss Sr, who up there is splurging with the Taxpayers’ money? You seem to know a lot about a lot, so since you have spoken up, please do tell all.
        We are not interested in sparring among yourselves, but please speak to the things that have been brought up here, and please stop throwing personal insults, as this is an informational blog. Why would you jump on DixyGirl because she shared information on this blog? It is not only our Taxpayer money, it is yours too! You should be mad as hell also! Instead, you start talking about someone who is willing to share information on the problem at the DMR. If you know anything about the misappropriation or misspending of funds, please enlighten us! After all, the Public has the right to know.

  9. Very strong comments. I would be shocked if you both are not contacted by the FBI along with other previous employees. Do you know of any who have been questioned to date? People have been damaged by the actions of the Bill Walker and his cronies. I do believe those that have been should file suit

    1. Speaking of Walkers cronies, along with grants and CIAP, I am surprised a person by the name of Rhonda Price has not been mentioned more in the press. According to some rumors, they have mentioned she used to be plugged in pretty tight with Walker and Shumate before all hell broke loose last year. I cannot say this is true or not but when you conduct an Internet search on her name and CIAP there are tons of pages that come up with her name as a coordinator or primary contact. To me this would signify heavy involvement with grants and the program. Additionally I understand that she used to work in Shoemates office. Comments are welcome if anyone has any insight.

        1. Not to mention and correct me if I am wrong–didn’t some of the findings outline problems with grants and the grant programs?? I thought that was mentioned in the report from the contracted agency.

    2. Mad, I have been told that there are plenty of employees there who want to talk to the FBI, but are not being questioned. I do not know why. I do not know if the FBI is doing this in a structural fashion or not. They may be doing the worst first, or be taking it down in stages. But, seems to me that all of the people in the Finance department, including past employees, should be interrogated.

      1. I do believe that may have been Carrie Rose Productions AKA Gordon Larson who once worked with Wildlife Fisheries and Parks. I also heard a rumor about paying him several thousand to “teach ” DMR employees how to use camera equipment. It is my understanding that he was paid but this “training” never actually took place . I also heard the business office director at the time was questioned about it but retired shortly after . But like I said it would need to be checked out shouldn’t be hard to confirm it is in that paper trail (just have to know where to look and then ask questions).

  10. Ahh yes Rhonda Price she had an office on the sixth floor business office for years. Even brought ner newborn baby to work everyday for months turned the business office into a daycare the ladies fed him diapered him etc. not for sure how long this went on but a source told me nearly a year. But she is one of the “click”.

  11. After Katrina, there was a rumor about a 100k grant being given to a fellow to produce a video which was never produced. I wonder if the auditors found that faux pas?

    1. This is something else that I had heard about, but the number was much larger. I think that the FBI should be going back to right after Katrina when the $$ started pouring in. I am sure that is when it all started and then kept going when the BP monies came in. It is so sad that the people of the coast and the coastal resources were robbed by a bunch of rogue Republican Bottomfeeders. I, for one, hope that they all get caught.

    2. I do believe that may have been Carrie Rose Productions AKA Gordon Larson who once worked with Wildlife Fisheries and Parks. I also heard a rumor about paying him several thousand to “teach ” DMR employees how to use camera equipment. It is my understanding that he was paid but this “training” never actually took place . I also heard the business office director at the time was questioned about it but retired shortly after . But like I said it would need to be checked out shouldn’t be hard to confirm it is in that paper trail (just have to know where to look and then ask questions).

      1. Speaking of being checked out. It seems that any grant or anything that had anything to do with BP or FEMA or any kin of other fund/account should be looked at closely.

        1. It’s funny you mentioned taking the books home. Numerous rumors I had heard were in regards to “working from home” often and when at work–not even completing a full 8 hours of work in one day. It was like she had her own personal schedule. But of course, that is all “hear say”. 😉

          1. I’m surprised if she has any family members left–it was always an inside laugh–
            let’s see..i think her granddaddy passed away 6 times in 2 yrs..her uncle 3 times in 2 yrs..the same cousin numerous..she always had to leave because of the same people dying so she just took the “work” home with her. it was all such a big joke!

        2. Yeah and a good source told me her husband was always “working” on her computer and sometimes she would take that home wonder what that was all about?

      2. the old business mgnr built a massive home, bought a large travel trlr..we always wondered about how a state empl had all the money that she had

        1. Also, other common characteristics the rumors shared were:

          –making her own rules
          –over exaggerating her actual work accomplishments
          –throwing people under the bus to benefit herself
          –a typical used car salesperson

          1. she didn’t throw me under the rug, though. tried but, failed-in return, her pal got it!

        2. So who was her pal who got thrown under the rug and what for? Did anything really bad happen to them?

    1. That was the last time they did an audit. I guess they were told by somebody ,maybe Dr.Feel, that all was cool,crank up that money machine and start sending out the campaign donations. rest is now history. More than ten years later we find out the AGs attorney is even participating. Folks I think it is much worse than we thought.

      1. I would like to see the investigators go through all the grants and any other funding or business involved with the DMR, CIAP and GOMA. I think all of these are subject.

Comments are closed.