Thursday, October 6, 2016

Embezzlement through Corporate Credit Card Purchases

Here's a fraud case that should prompt companies to review their own internal control systems for preventing employee  fraud, waste, and abuse.

Stuart Teshima, the former CFO of Epsilon Systems Solutions (a Government contractor headquartered in the San Diego area) pleaded guilty last Tuesday to embezzling $825 thousand from his company over an eight year period. He did this from his trusted positions of Vice President, Senior Vice President, and Chief Financial Officer of the company.

How did he do it? According to the Department of Justice Press Release, Teshima used the company credit card to pay for personal expenses including airfare and other personal travel, jewelry, gifts for family members, furniture, lavish dinners, and even his personal income tax bill. Then, before submitting invoices for reimbursement, Teshima would conceal the personal spending by altering his account statements to replace the personal items with fictitious business expenses. He then falsely reported to company representatives that the statements he submitted were generated directly from his credit card account, when in fact he altered the records himself before submitting them for reimbursement.

There are obvious internal control weaknesses in Epsilon's system. First of all, it appears that the company was paying its credit card balances without any support in the form of source documents. It merely relied on the signature of a trusted employee. Second, Epsilon was paying based on a "downloaded" statement which, of course, can be easily altered. It should have been paying based on printed statements received by mail that were reviewed and approved by a independent party. The independent reviewer should have insisted that charges be supported by original receipts.

It should not be surprising that auditors (both financial auditors and contract auditors) ask for original source documents. They are not trying to be obnoxious but when they put their name on a report asserting that the financial representations fairly present the objective of their audit, they need to be certain, beyond a reasonable doubt, that the company's representations are not misleading (or worse).

Epsilon has 1,000 employees and its not unlikely that with this many employees, there will be plenty of opportunities for those so bent, to poke around and find internal control weaknesses. Companies need to stay one step ahead of the fraudsters.

Teshima pleaded guilty but has not been sentenced. He has agreed to pay restitution for the amount embezzled. In addition, he faces probable fines and possible imprisonment.

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