Question

24. Please identify four (4) weaknesses in the following scenario (there are more than 4!):

An agent for a large insurance company has a small office in a rural town. There are only two employees in the office: the agent and his secretary.

The agent spends all of his time in meeting with customers and selling insurance products to them. The secretary processes all of the paperwork connected with the insurance policies, including processing the collection of premiums and the paying out of claims.

The agent feels that he is a “big man” and that his time is very valuable, and that he should not bother himself with “clerical work,” so he does not supervise the secretary’s work, nor does he look at the accounting records, cash documents or bank statements. Besides, he trusts the secretary as she is very hard-working; in fact, she has never missed a day of work in five years and does not even take her annual leave.

The agent works for a large insurance company. However, because the number of policies and customers handled by the office is relatively small, the insurance company’s internal audit office has not bothered to audit the office’s records/cash for several years. The external auditors have also never visited the office.

25. The following article appeared earlier this year: By David Owens, Hartford Courant, 02/13/2020 Winsted woman pleads guilty to stealing $850,000 from physically, mentally disabled people in conservatorships:

A 72-year-old Winsted woman who stole more than $850,000 from people with physical and mental disabilities pleaded guilty Thursday and faces up to seven years in prison.

Sheila Grochowski was arrested by Avon police and the chief state’s attorney’s office in November 2017 on more than a dozen larceny and forgery charges and had previously turned down a plea offer. But with her case called in for trial and jury selection scheduled to begin Thursday, she asked if the state’s plea offer was still available and accepted it, pleading guilty to a single count of first-degree larceny and two counts of second-degree forgery.

She is scheduled to be sentenced April 29 to 10 years in prison, suspended after she serves seven years, plus five years of probation.

Her lawyer, public defender John Stawicki, will be able to argue for less prison time and probation. Grochowski was a bookkeeper and secretary for Barbara H. Hance Associates, a Farmington company that handles the financial affairs of people whose affairs are controlled by probate courts. Prosecutor Christopher A. Alexy told Hartford Superior Court Judge Laura F. Baldini that Grochowski wrote 437 checks to herself from the accounts of Hance clients. The state had video obtained from Grochowski’s bank showing her depositing two of the stolen checks, and bank records from her bank and those of her victims showing the extent of her thievery.

Grochowski pleaded guilty under the Alford doctrine, meaning she disputed some of the state’s evidence, but acknowledged the state had enough evidence to convict her at trial. According to the warrant for Grochowski’s arrest, Grochowski forged Hance’s signature on 591 checks and two withdrawal slips and stole $851,811 between January 2010 and May 2016, when Hance fired Grochowski.

Authorities do not know where the money went, but when confronted by Hance in early 2015 about the embezzlement of $4,829, Grochowski admitted the forgery and said she needed the money for medical expenses, according to the warrant. After that incident, Hance kept Grochowski as an employee, set up a repayment plan, and did not notify the police. In May 2016 more problems with checks were found, and Hance determined that Grochowski’s alleged thefts were more extensive. A forensic audit by an accounting firm, and a review of thousands of pages of Grochowski’s bank records by Avon Det. Edward Espinoza and state Inspector Jack Bannan revealed the massive scale of Grochowski’s thefts.

The investigators identified 25 people they say were victimized by Grochowski, including her own father who suffered from Alzheimer’s disease and was under a conservatorship. Grochowski allegedly wrote herself checks from her father’s accounts and listed herself as executor of his estate, although he was still alive at the time. The investigators also found that it wasn’t the first time she has stolen. In 1988 Grochowski was charged by Torrington police with first-degree larceny, second-degree larceny, and third-degree forgery. She was convicted in November 1989 and sentenced to five years in prison.

Required:

(a) In order for fraud to occur, two elements must be present, opportunity and motivation. Please make reference to the text in the article above that supports/describes each element.

(b) In addition, there are several important characteristics (different from opportunity and motivation) that appear in many fraud cases. Please describe at least three of these characteristics that are described in the article, using the “Fraud” checklist posted on page 7 of the “Additional PowerPoint – Required Reading” in the Chapter 8 section of “Course Content” on BlackBoard as a reference. Note: if you do not make reference to this specific checklist, you will not earn any points for this question.

(c) The article mentions that Grochowski was caught stealing by Hance in early 2015, however, Hance did not press charges or terminate Grochowski’s employment at that time. This is actually more common than you may think; in 70% of cases involving employee fraud, no criminal charges are filed against the employee. Do you think this is a good idea?

Answer 1

(24): 4 weaknesses in the given scenario are:

1. No segregation of duties – All the clerical work is done by the secretary herself. The secretary processes the collection of premiums as well as pay out of claims. As such there is a high risk of errors and fraud in this case. Any error made by the secretary will not get detected. Moreover any fraud made by the secretary will not be noticed. She can easily embezzle cash from the company as she is handling all receipts and payments and this will, most likely, not get detected.

2. No supervision controls – The secretary has a free hand with regards to her work and as there is no supervision of her work the risk of fraud gets amplified and augmented in this case. Ideally the work of the secretary should be supervised on a periodic basis to ensure that things are under control and in order.

3. No internal check – There is an absence of internal check as well in this case. Internal audit serves the purpose of independent appraisal function. Here no internal audit of the office that has been mentioned in the case is being done and this is a red flag. This is because the office is exposed to key risks and lack of compliance which may, at some point in future, cause troubles for the company.

4. No authorization and approval limit – The secretary has a free reign and has no authorization and approval limits bound to her. Thus she is free to approve claims of any amount. This is again fraught with risk as it gives secretary the power to indulge in fraud and embezzle money from the company.