MR. BACH had 10 kids at home and a wife. Mr. Bach was a state employee in charge of supplies for public schools. His job was to order and keep track of the pricing , the quality, the ordering, and approval for payment. One day Mr. Bach received a $100 money order at his home, payable to him, but it was not clear where it came from . Mr. Bach was believed that perhaps it was a guardian angel trying to help him. out financially, which was truly something he needed.
The next day he received a call from one of the vendors he used for school supplies and the sales rep from the vendor, who was friendly with Mr. Bach, asked Mr. Bach if he got the "check". Mr. Bach said yes and asked "why". The sales rep said it was a token of his appreciation for getting the business under Mr. Bach's supervision.
One thing led to the next such that eventually this sales rep offered Mr. Bach a 10% cut if he ordered supplies for the state from the sales reps company- and other related companies. Mr. Bach did not see the problem with just being friendly about it and set up a dozen related companies of the sales rep into the accounts payable approved vendor system. He then proceeded to order supplies from these companies. At first it was on an as needed basis, but then the "friendly" 10% checks Mr. Bach was receiving became material since with his large family Mr. Bach was in financial need above his paycheck. Mr. Bach upped the orders from these vendors accordingly, but the sales rep said that he couldn't handle all the extra orders and asked Mr. Bach if he had a problem if the goods never arrived, but the invoices would still be paid. Mr. Bach figured out that he could do this by keeping all the orders under the threshold for supervisor approval, which he did.
One day Mr. Bach didn't feel well and needed to stay at home for a few days. He had not taken a vacation in three years and so didn't think too much about taking off knowing that it sohuld only be for a few days. While he was away the sales rep called the accounts payable clerk (when Mr. Bach did not answer the phone or emails) and said that there was some invoices needing to be paid that had been sent to Mr. Bach. The a/p clerk went to Mr. Bach's office hoping to find the invoices and hoping that Mr. Bach had approved them for payment so the a/p clerk could send out payment.
The a/p clerk found the invoices on Mr. Bach's desk, but he noticed that they were not approved as of yet so he called the warehouse to inquire that the goods were there so the a/p clerk could get approval through his supervisor and do Mr. Bach a favor by getting the bills paid while Mr. Bach was out on leave. Well, you can imagine that based on the facts presented, no such supplies were at the warehouse and were not even in the normal course of inventory. The a/p clerk started digging and one thing led to another and the scheme of paying for items never received was uncovered.
A forensic examiner was called in and quickly figured out what was going on by, amongst other things, the fact that there were about a dozen vendors being paid that all had the same address. The examiner made copies of the invoices in question and left the originals in Mr. Bach's office. The examiner researched and was able to come up with the extent of the amount involved. When Mr. Bach came back to work the examiner wasted no time calling Mr. Bach in and confronting him with the evidence, which consisted of almost all the invoices paid to the vendor and related companies, proving a scheme that involved paying these vendors over $350,000 for merchandise never received in the warehouse.
Mr. Bach confessed to the scheme and as they say...the rest is history.
QUESTIONS:
1. What internal control problem(s) existed that allowed this fraud to happen? Think preventive and detective controls. (I count at least three).
2. Describe how the fraud triangle would have possibly pointed to Mr. Bach.
3. What data analytics (SQL) did the examiner most likely use to uncover the extent of the fraud?
4. Why did the examiner immediately confront Mr. Bach upon his return to work?
5. The copies made by the forensic examiner would have been acceptable in court under what rule of evidence?