ACCT 654 Week 7 Individual Learning Project Paper Example

A Fraud Examination of Payments to Tri-County Facility Supply at Harbor Valley Family Services

Introduction

Harbor Valley Family Services spends roughly $14 million a year running shelters, a pantry and counseling services for families in crisis. Last year an anonymous hotline caller reported that janitorial and food-service products billed by a small local firm rarely, if ever, showed up at the shelters. The finance director then found that the supplier's annual billings had climbed from $38,200 to $142,300 over three years even though the number of residents had not changed. This paper reports the fraud examination that followed. The hypothesis it tested came from the proposal: someone on staff, alone or in concert with the supplier, had the agency pay for goods it never received.

Nonprofit agencies are exposed to this kind of scheme. In a study of frauds against nonprofit organizations, Greenlee et al. (2007) found that most were asset misappropriations committed by employees, and they pointed to small staffs, trust-based cultures and limited oversight as conditions that make nonprofits vulnerable. Harbor Valley's purchasing function, staffed by one coordinator and one accounts payable clerk, fits that description.

Predication and Scope

Predication rested on two facts taken together: a specific tip and a rise in spending that operations could not explain. Either alone might have been dismissed; combined, they gave a prudent examiner reason to proceed. The work reached every Tri-County payment for three fiscal years, the supplier's master-file record, each purchase order, invoice and receiving log tied to those payments, the written purchasing policy, and interviews with six staff members. It did not include the vendor's own bank records, which the agency had no authority to obtain, or any other vendor except for comparison.

Procedures Performed

The work proceeded from the outside in, so that the evidence least likely to alert anyone was gathered first. Three groups of procedures were performed.

First, data analysis was run on the full disbursements file of 9,412 payments to 386 vendors. The vendor master file was matched against the employee master file on address, phone number and bank account. Each vendor's invoice numbers were sorted to test for unbroken sequences. Payments were stratified to find amounts just below the $5,000 limit above which the executive director must approve a purchase. A first-digit test was applied to Tri-County's invoice amounts and to the agency's overall disbursements; invoices built from units times unit cost are the kind of data that tend to follow the expected digit pattern (Durtschi et al., 2004).

Second, documents were examined. Each of Tri-County's invoices was matched to a purchase order, a receiving log entry signed at a shelter and a payment record. The vendor's registration with the Secretary of State and its listed address were checked, and the agency's purchasing policy and approval limits were reviewed.

Third, interviews were held in a deliberate order: the two shelter managers and a shelter storeroom worker, the accounts payable clerk, the finance director, and finally the purchasing coordinator. The last interview was planned around the documents, which were introduced gradually after the coordinator had described the vendor relationship, following research showing that strategic disclosure of evidence improves an interviewer's ability to detect deception (Hartwig et al., 2006). All interviews used open questions rather than accusation, an approach associated with fewer false confessions and more reliable accounts (Meissner et al., 2014).

Findings

Data analysis

The match of vendor and employee files produced one exception: Tri-County's listed phone number was the same as the emergency contact number in the personnel file of the purchasing coordinator, recorded there as the number of a household member. No address or bank account matched. Tri-County's 214 invoices over three years carried numbers from 1041 to 1254 without a gap, which suggests that no other customer was being invoiced during that time. Of the 214 invoices, 61 fell between $4,500 and $4,999, just below the executive director's approval limit, compared with fewer than 2 percent of payments to all other vendors in that range.

The first-digit test showed that Tri-County's amounts began with the digit 4 nearly three times as often as the expected proportion. The agency's overall disbursements conformed closely to the expected pattern. The deviation is consistent with amounts chosen to stay under the limit, although a first-digit test alone cannot establish why amounts were chosen (Nigrini, 2012).

Document examination

Every Tri-County invoice was supported by a purchase order, but all 214 purchase orders were created by the purchasing coordinator, and 197 were also approved by the coordinator under a policy that allows purchases below $5,000 without a second approval. Receiving evidence was much weaker. Of the 214 invoices, 158 had no receiving log entry at either shelter, and 41 of the remaining 56 were signed by the purchasing coordinator rather than by shelter staff. Only 15 invoices, totaling $11,900, were supported by receiving entries signed at a shelter. The vendor's state registration listed a mailbox at a commercial mail service as its address and was filed three months before the first invoice.

Interviews

Both shelter managers stated that cleaning and kitchen supplies arrive from the agency's large national distributor on a weekly schedule and that they rarely saw deliveries from Tri-County. The storeroom worker recalled occasional small deliveries the coordinator brought in personally. The accounts payable clerk explained that Tri-County invoices arrived by email from the coordinator, already matched to purchase orders, and were paid without a receiving check because the coordinator was trusted to confirm delivery. The finance director confirmed that no one reviewed vendor activity below the approval limit. In the final interview, the purchasing coordinator described Tri-County as a small local supplier used for emergency orders. When shown the receiving logs and the volume of invoices, the coordinator did not explain the missing receiving records and ended the interview to seek advice, which was the coordinator's right.

Questioned payments

Exhibit A schedules each invoice. Payments supported by shelter-signed receiving records total $11,900. Payments of $256,200 lack independent evidence of delivery: $203,100 with no receiving record and $53,100 with receiving records signed only by the purchasing coordinator. These amounts are questioned, not proven losses; some supplies may have been delivered without being logged.

How the Scheme Was Possible

The fraud triangle helps explain the conditions, without implying a conclusion about any person. Opportunity is the clearest element: one employee could create a vendor, issue a purchase order, approve it, confirm receipt and forward the invoice for payment, a combination of duties that removes every independent check. Research by Cressey (1953) on embezzlers found that a position of trust combined with knowledge of how to use it secretly was common to every case he studied, and the coordinator's role offered both. Pressure and rationalization cannot be observed from documents and were not explored in interviews, and the examination draws no conclusion about them. Those elements matter for prevention more than for proof. An organization that knows its people are under financial strain, for example after a pay freeze, has reason to tighten review during that period, and an organization that tolerates small irregularities supplies the excuses rationalization needs. Harbor Valley's leaders should consider both as they rebuild purchasing controls.

Detection was weak as well. Research on workplace deterrence links lower employee theft to a higher perceived certainty of detection (Hollinger & Clark, 1983). At Harbor Valley, no one compared vendor growth with shelter activity, and payments below the approval limit received no review, so the perceived chance of detection was low. The scheme came to light, as most occupational frauds do, through a tip; the latest global study of such frauds found that tips uncovered 43 percent of the cases examined (Association of Certified Fraud Examiners [ACFE], 2024).

Control Gaps

Four gaps allowed the questioned payments. First, the purchasing coordinator could add vendors to the master file without review. Second, the same person could create and approve purchase orders below $5,000. Third, accounts payable paid invoices without independent evidence of receipt from the location that used the goods. Fourth, no one monitored vendor activity for unusual growth, invoices clustered below limits or vendors with a single customer.

Each gap alone might have been tolerable in an agency of this size. A small finance office cannot separate every duty, and many nonprofits rely on trusted staff to fill several roles. The combination is what mattered here: the same person controlled the vendor record, the order, the approval and the evidence of receipt, and nothing downstream compared the payments with what the shelters actually used. Greenlee et al. (2007) describe this pattern of concentrated duties and thin oversight as typical of the nonprofit frauds in their study, and it is the pattern the recommendations below are designed to break.

Recommendations

Each recommendation addresses one gap. Vendor additions should require documentation, such as a tax identification number, a physical address and a verified bank account, and approval by the finance director. Purchase orders should be approved by someone other than the person who creates them, at every amount. Payment should require a three-way match with a receiving entry signed at the receiving location, entered by shelter staff in the accounting system rather than on paper forwarded by purchasing. Finally, the finance office should run quarterly data tests on the disbursements file, including vendor and employee matches, sequential invoice numbers and amounts just below approval limits. In survey research, practitioners judged data mining and digital analysis to be highly effective at finding fraud even though few organizations used them (Bierstaker et al., 2006), and the tests described here can be run with spreadsheet tools the agency already owns.

The agency should also announce the hotline again to all staff and explain that a report led to this review, without naming anyone. Showing that reports are acted upon raises the expectation of detection that deterrence research identifies as the main restraint on employee theft. The announcement should also remind staff that reports can be made anonymously and that the agency will protect any employee who raises a concern honestly, since fear of retaliation is one of the main reasons employees stay silent.

Reporting and Next Steps

This paper does not conclude that the purchasing coordinator or anyone else committed fraud. A fraud examiner reports what the evidence shows and the amounts it supports; whether a person is guilty is a determination for counsel, law enforcement and the courts. The evidence is sufficient to refer the matter to the agency's legal counsel and the board's audit committee, which can decide whether to place the coordinator on leave, notify the insurer under the agency's crime policy, seek the vendor's bank records through legal process and report the matter to law enforcement. Because grant funds may be involved, counsel should also advise on notice to the agency's funders.

Biblical Application

When Paul organized a collection for the church in Jerusalem, he arranged for others to travel with the gift, explaining that he wanted to do right in the eyes of people as well as before God (English Standard Version Bible, 2001/2016, 2 Corinthians 8:21). Paul did not handle donated money alone, even though his integrity was not in question. The principle applies directly to Harbor Valley, whose funds come from donors and public grants given for vulnerable people. Separating duties and verifying receipts protects the donors and the people served. It also protects honest employees, who should never be the only witness to their own handling of money.

Limitations

The examination had no access to the vendor's bank records, so it could not trace where the payments went or establish who benefited. Some supplies may have been delivered without being logged, which is why the amounts are presented as questioned rather than as losses. The interviews were limited to six people, and the purchasing coordinator's account was incomplete. A forensic review of the coordinator's email and the vendor's banking, available only through counsel, would be needed to resolve these questions. Finally, the examination relied on paper receiving logs that shelter staff admitted were sometimes completed days after a delivery, so the absence of a log entry is strong but not conclusive evidence that goods were not received.

Conclusion

The evidence supports the hypothesis that Harbor Valley paid for supplies it did not receive, but it does not establish who was responsible. Of $268,100 paid to Tri-County Facility Supply over three years, $256,200 lacks independent evidence of delivery, and the vendor's invoices, registration and contact details show patterns associated with fictitious vendor schemes. The conditions that made the payments possible are clear and correctable. With the matter referred to counsel and the recommended controls in place, the agency can protect the funds entrusted to it and the employees who handle them.

References

Association of Certified Fraud Examiners. (2024). Occupational fraud 2024: A report to the nations.

Bierstaker, J. L., Brody, R. G., & Pacini, C. (2006). Accountants' perceptions regarding fraud detection and prevention methods. Managerial Auditing Journal, 21(5), 520-535. https://doi.org/10.1108/02686900610667283

Cressey, D. R. (1953). Other people's money: A study in the social psychology of embezzlement. Free Press.

Durtschi, C., Hillison, W., & Pacini, C. (2004). The effective use of Benford's law to assist in detecting fraud in accounting data. Journal of Forensic Accounting, 5(1), 17-34.

English Standard Version Bible. (2016). Crossway. (Original work published 2001)

Greenlee, J., Fischer, M., Gordon, T., & Keating, E. (2007). An investigation of fraud in nonprofit organizations: Occurrences and deterrents. Nonprofit and Voluntary Sector Quarterly, 36(4), 676-694. https://doi.org/10.1177/0899764007300407

Hartwig, M., Granhag, P. A., Stromwall, L. A., & Kronkvist, O. (2006). Strategic use of evidence during police interviews: When training to detect deception works. Law and Human Behavior, 30(5), 603-619. https://doi.org/10.1007/s10979-006-9053-9

Hollinger, R. C., & Clark, J. P. (1983). Deterrence in the workplace: Perceived certainty, perceived severity, and employee theft. Social Forces, 62(2), 398-418. https://doi.org/10.1093/sf/62.2.398

Meissner, C. A., Redlich, A. D., Michael, S. W., Evans, J. R., Camilletti, C. R., Bhatt, S., & Brandon, S. (2014). Accusatorial and information-gathering interrogation methods and their effects on true and false confessions: A meta-analytic review. Journal of Experimental Criminology, 10(4), 459-486. https://doi.org/10.1007/s11292-014-9207-6

Nigrini, M. J. (2012). Benford's law: Applications for forensic accounting, auditing, and fraud detection. Wiley.