Bilking a company of hundreds of thousands of dollars might seem as easy as, say, stealing an elephant. Such a crime might seem as rare as wanting an elephant. But in fact, according to the “2004 Report to the Nation on Occupational Fraud and Abuse” from the Association of Certified Fraud Examiners (ACFE), U.S. organizations lose an estimated 6 percent of their annual revenues to fraud. Applied to the 2003 U.S. Gross Domestic Product, that’s about $660 billion in total annual losses.
“Most frauds are not complex schemes,” says Shirlee Walker, certified fraud examiner (CFE) and certified public accountant (CPA) at the Missoula accounting firm Elmore & Associates. “It’s just [that] people see opportunity and they take advantage of it, and usually they start out small, and they get away with it, and a lot of people rationalize that, ‘oh, I’m just borrowing it and I’ll pay it back.’ And then as things grow and as they continue to be successful at it and they need the money more and they get used to it, it really has a mushrooming effect.”
As recent area cases have proved, fraud is neither difficult nor infrequent in Montana. In December 2003, administrative assistant Twila Hallford and her husband were arrested for embezzling more than $290,000 from the Teller Wildlife Refuge near Corvallis. Two weeks ago, Kalispell bank teller Cheryl Serfoss pleaded guilty to defrauding First Interstate Bank out of $759,000 over six years. Currently, Kalispell residents Richard and Amy Ockey of Keystone Contractors are under investigation by the Flathead County Sheriff’s Office for possible bad-check fraud. And then there’s the case of former Missoula International Airport Director John Seymour, who pleaded not guilty at his Jan. 24 arraignment to four felony theft charges and four counts of official misconduct for allegedly stealing about $645,000 from an airport escrow account set up for the purchase of new runway land.
While fraud comes in all shapes and sizes—from investment scams targeting individuals via phone or fax to small-business employees pocketing miscellaneous monies without recording them—fraud generally requires the confluence of three factors, Walker says: opportunity, need and rationalization. “Many people have the opportunity and the need,” she says, “but they don’t have that rationalization until something happens in their lives—whether there’s illness or a divorce that they need money for. It could be a number of things.” The most common cause of fraud, she says, is a lack of segregation of duties within an office: “You’ve got one person that writes the checks, sends them out and reconciles the bank balance, and they can easily take money and cover it up to where nobody knows.”
Interim Airport Director Joe Easton explains that in the airport’s case, Seymour allegedly created a company, Aviation Management Consultants, and requested that funds from the airport’s escrow account be disbursed to that company. Additionally, he drew two checks on an escrow account at Insured Titles, Inc., the airport’s title insurance company, for work that was never actually contracted—one check to his own Aviation Management Consultants and a second to the airport’s Tulsa, Okla., consulting firm Barnard Dunkelberg & Co. Months later he contacted Barnard Dunkelberg & Co. and requested that the money be sent to him in a check made out to First Interstate Bank; he then deposited that check with Aviation Management Consultants as well.
Because Seymour was in charge of keeping track of where this money was going, and because the escrow accounts operated outside of the airport board’s monthly review of the airport’s financial performance, Seymour didn’t get caught until airport Fiscal Manager Teri O’Leary tried to reconcile accounts of the airport’s land acquisitions for the FAA, explains Easton. When Seymour couldn’t justify or document the work he’d contracted, O’Leary went to the airport’s attorney and they began to investigate. (Seymour’s attorney, Milton Datsopoulos, did not return the Independent’s calls.)
In some ways, 46-year-old Seymour fits the profile of a typical fraudster. “Anybody can commit fraud,” says licensed private investigator Jeff Patterson of Missoula-based Patterson Investigations, but “the larger frauds are typically [done by] the middle-aged, white, male, educated company officers. They are the ones that have the intelligence and the availability and the trust of companies…to get away with it for a longer period of time because people do trust them.”
Patterson, too, agrees that rationalization is a big factor in fraud: “Many corporate executives do rationalize their crime because they become maybe arrogant, or they believe that the corporation owes them more than what they’re paying them,” he says. “Sometimes it’s just a matter of greed or habits that have caused an individual to need more than they’re making. Maybe it’s a gambling habit. Maybe it’s a drug habit. One way or another, there’s usually some factor that causes a fraudster to decide that they need a little more income than what they’ve been getting.”
Then again, there are also exceptions to any profile. Spokane CPA and private investigator Larry Larsen, whom the airport board hired to investigate Seymour’s case, says Seymour is somewhat different than the typical fraudster in that he didn’t seem to have any of the usual motivations. “I couldn’t find any evidence that he had a girlfriend, and he appeared to be a pretty squared-away guy,” Larsen says. “Good relationships. Making good money. That was the strange thing about the case.”
While fraud may sound like a big-city or big-business problem, it is in fact small businesses that fraud hits hardest. “Fraud exists everywhere per capita at a certain rate,” Patterson says, “and I don’t think any small town is immune to the effects of fraud more than any big towns.”
According to the ACFE’s 2004 report, fraud committed by business owners and executives nationwide accounted for median losses of $900,000 between late 2003 and early 2004, six times higher than frauds committed by managers, and 14 times higher than fraud losses attributable to employees. Yet small businesses, the report finds, suffer disproportionately higher fraud losses than larger companies. While a large company may have more sophisticated systems of monitoring for fraud, smaller businesses, Walker says, “don’t have enough people maybe to put the controls in, and they don’t have enough time to enforce them.”
For example, she says, one common fraud scheme committed in small businesses like restaurants, where employees handle a lot of cash, involves something as simple as the misuse of discount coupons clipped from newspapers. “The employee is able to obtain those [coupons], and then when a customer pays the full price, the employee puts the coupon in the register and rings up the discount and takes the money,” Walker explains. It’s not that the employee is taking advantage of any loopholes in the business, she says, so much as “there are just weaknesses in what we call internal controls.”
Missoula County Auditor Barbara Berens remembers a fraud scheme at a Ronan Cenex station back in the late 1980s. In that case, a store manager set up a fake vendor—himself—and then ordered inventory from that fake vendor. “He would claim that the vendor was in the store and needed a check right away,” recalls Berens. “Checks required two signatures, and he was also a check signer. So the office manager would write the check, and [the store manager] would sign it and give it to the so-called vendor.” But the fraudster was also in charge of counting the inventory, Berens explains, so he would make up inventory sheets for nonexistent inventory.
Fake vendors, fake inventory—because there is often a lack of evidence in such cases, fraud can be tricky to prosecute. While the Internet may make us all more aware of the number and kinds of frauds being committed nationwide, Walker says, “I still think that a lot of it is not getting reported, mainly because people don’t have all of what they would call evidence, and they don’t want to prosecute. People don’t want a wrongful discharge suit. It takes a lot of time and effort a lot of times just to find out what’s been going on, because you get a case where the income never hits the books.”
In a state like Montana, where well-paid jobs are hard to come by, it’s also tough for an employee to question a superior’s actions, as airport Fiscal Manager Teri O’Leary did. The ACFE’s 2004 study reports that 40 percent of occupational fraud cases from late 2003 to early 2004 were uncovered by tips, as opposed to internal (24 percent) or external (11 percent) audits. Sixty percent of those tips, says the report, came from employees.
But employees don’t come forward in every case. Walker recalls that when Enron employees were first questioned by investigators in the 2001 Enron accounting scandal, “a lot of employees said, ‘well, we knew this was going on, and that was going on.’” When the investigators asked the employees why they hadn’t reported the crime, their comment, Walker says, was, “No one asked.”
As a result of the Enron (and Arthur Anderson) accounting scandals, Congress passed the Sarbanes-Oxley Act on July 30, 2002, requiring publicly traded companies to adhere to new governance standards that broaden the roles of board members overseeing both financial transactions and auditing procedures. The Enron scandal also expedited the passage of new rules from the American Institute of Certified Public Accountants (AICPA), the governing board for all CPAs, so that “basically now when we go in and do audits on certain [publicly held] entities,” Walker says, “we have to look at fraud risks and we have to ask direct fraud-related questions to the employee: Do you know of any fraud? It can’t just be management. It’s got to be a broad spectrum of employees.” While these new rules were written just for publicly traded companies, Walker says such changes can have a “trickle-down effect” to entities that aren’t publicly held—such as, say, Missoula’s airport.
In Missoula, the shock felt by airport staff in the wake of Seymour’s alleged embezzlement is due, in part, to “feeling like they didn’t know this person who they worked with for some 20 years,” Easton says. Seymour first came to the airport in 1984 doing outdoor grounds work. “John is a small-town guy,” he elaborates. “He has worked at the airport forever, worked his way up. It’s a great story, and he was personally championed by several members of the board to be director, so I know there’s immense personal disappointment on the board level and with the executive staff.”
And, typically, personal factors influence both the cause and prosecution of fraud, say experts. “In Montana, we’re very trusting, and so we don’t think that people are doing [fraud-related] things, or would, so we don’t have controls to monitor them, and even the businesses that do have controls or policies in place don’t always monitor them to see if they’re working,” Walker says.
Patterson concurs: A small business might start out with a payroll clerk, a bookkeeper and a timekeeper, he says, but “pretty soon I’m consolidating this with Mary Sue because she’s been here for a while and is trustworthy. And Mary Sue might be very trustworthy for a period of time until she has some personal issue or some habit that has all of a sudden required her to step over that line.”
And across the board, frauds are underreported. Fraud cases can be extremely complex, Patterson says, and thus difficult for a sheriff’s department to investigate without bringing in outside resources. But he adds that he has seen a change in recent years such that “fraud is becoming an issue and people are wanting to investigate it. A year or two ago, if you said ‘fraud,’ people looked at you like you were from Mars. They didn’t want to touch it. There was a lack of education in fraud.”
Even increased awareness of fraud, though, may not change one of the main reasons these crimes go underreported: embarrassment. Missoula County Attorney Fred Van Valkenburg says that fraud victims “are not as desirous of having cases prosecuted as you would think they would be. They’re very embarrassed about the fact that they’ve missed what in hindsight seem to be obvious clues that this was going on, and so they just want to go lick their wounds and hopefully learn a lesson, and just get paid back what’s been taken from them opposed to being a witness in a trial.”
Patterson says he has counseled corporations and boards of directors victimized by fraud, and says, “They really didn’t want to go to the county attorney’s office. They don’t even want me really to embark on a large-scale investigation, because it’s maybe more damaging for their business for the public to know they’re such a victim than the cost itself of being victimized.”
Luckily in the airport’s case, no federal money was taken, no public funds will be lost, and Seymour has already returned $628,602.97, Easton says. More often, Walker explains, “fraud costs consumers, because if people are stealing as employees from a company, those costs have to be passed on, and so fraud hurts everyone.”
Van Valkenburg agrees that fraud is a serious issue and says that when it comes to investigating fraud, “Missoula is better off than most places, at least in Montana, and where it’s necessary we can get additional expertise beyond what’s in our local law enforcement community.” Still, he says, as we continue to see more scams in our area, law enforcement will have to think seriously about devoting more resources—including more detectives—to investigating these kinds of cases.