SIPHONING CFO GETS CAUGHT IN AN 8-YEAR FRAUD

The chief financial officer (CFO) for Chesapeake Petroleum and Supply Inc. has pleaded guilty to embezzling more than US $2.7 million from the Maryland-based company, according to a recent article published in The Gazette. In a statement, the U.S. Attorney’s Office for the District of Maryland said that the CFO — employed by Chesapeake Petroleum for 30 years — authorized and signed company checks made payable to himself and to the bank that held the mortgage to one of his properties. The executive also stole thousands of dollars from the company’s petty cash fund, according to the statement.

How could the embezzling CFO’s activities been detected earlier? Could this fraud been avoided altogether? What can internal auditors learn from this situation that will help them remain vigilant for future fraud schemes?

Lessons Learned

  • Adequate controls were not in place to prevent a “resourceful” employee from stealing company funds. The CFO had both authorizing and signing control over company checks, as well as exclusive control over the petty cash fund — both of which demonstrate the organization’s failure to segregate duties adequately.
  • The CFO had the power to create and authorize checks. This procedure should require a minimum of two people: one to create the checks and one to authorize them. Also, an effective “signing control” practice would require two authorizing signatures on a check.
  • Management should regularly review the check register to compare payees against employees.
  • Management should review cancelled checks and match the payee and amount to the check register, as well as ensure that all payees are people and companies with whom the organization does business.
  • Internal auditing should perform random spot checks on petty cash to verify that appropriate documentation exists to support all payments and that the petty cash balances

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