Are you familiar with any embezzlement cases? Do you know how felony embezzlement cases occur and what behaviors to look out for?
We’re delivering insights for accountants with our partner CPA Academy. The webinar “Fraud: What Do Morocco, Albania, and Fraudsters Have in Common? Red Flags,” featured insights from Greg Kyte and Caleb Newquist, and you can view the full webinar here.
Greg Kyte is a unique voice in the accounting world. With 12 years of standup experience, he brings a fresh, funny take to accounting education. Caleb Newquist bridges finance and communication as Editor-at-Large at Gusto and founding editor of Going Concern. Caleb combines his editorial eye, content expertise, and accounting background to create his unique brand.
The duo discussed fascinating case studies that reveal how fraudsters commit their crimes.
The case of James Rupard
James Rupard’s case is a classic example of asset misappropriation, a type of occupational fraud. In the early 2000s, James embezzled $200,000 from a fire department for which he worked. While Caleb and Greg acknowledged that this isn’t on as grand a scale as some frauds, the case itself demonstrates a number of traits that the Association of Certified Fraud Examiners (ACFE) points out as warning signs. Additionally, James stole from two of the most vulnerable types of organizations:
“Small businesses can be prone to larger frauds than bigger businesses, but the interesting thing as well is that you really see small government entities being especially vulnerable to fraud.”– Greg Kyte
James had just moved to Stewartsville, North Carolina when he quickly ingratiated himself to the volunteer fire department. After joining, he held positions as both captain and treasurer. He was seen as a trustworthy person, and he eventually became Stewartsville Firefighters Association president. This was a separate, charitable association that was in charge of collecting and disbursing donations to the fire department.
James worked his scam from two angles. On the one hand, he opened multiple fake volunteer firefighter checking accounts in addition to the one legitimate account. This wasn’t difficult for him to do. He simply went to the bank with the forged signatures of two other firefighters and used them to open the fake accounts. Considering that it was a small town with little fraud detection experience, no one asked any questions. James kept those two accounts hidden. In the meantime, he still had a legitimate account. He would then transfer money from the legitimate account into the fake accounts and disperse it to himself. He also wired money out of the account to his ex-wife.
James stole tax money going to the volunteer fire department and charitable donations that were coming through the Firefighters Association, but it didn’t stop there. James also operated an insurance business. He convinced the board of both organizations to invest in insurance annuities. He painted it as a sound decision and an investment in their future, but instead of purchasing the annuities, he pocketed the money.
James got away with his scam for some time before he was eventually caught. At one point, the department received a grant to buy equipment. After they’d made the purchase, James went to the treasurer—he was no longer treasurer at the time—and told him that he’d bought the equipment out of his personal business account and needed to be reimbursed.
Since everyone trusted James, the treasurer cut the check for him. It wasn’t until after the interaction that the treasurer reflected on the odd behavior. Most people wouldn’t pay for fire department equipment out of their personal account and want it reimbursed. At this point, the treasurer got suspicious and began reviewing everything. He went to the bank, discovered the fake accounts and the transaction history, and turned James in.
Red flags in the James Rupard case
James exhibited several warning signs commonly exhibited by fraudsters. By examining his case, you can get a clearer picture of what to look out for. You can also see how it would be unwise to separate any single red flag—especially one that much of the population might have—and use it as a way to profile someone. Fraudsters are likely to exhibit multiple warning signs as well as have the opportunity to commit fraud.
James had an extensive criminal history that included multiple heinous crimes.
“He was released from prison in 1994 after serving 15 years for second-degree murder—shooting [of] his grandparents. … Maybe that’s a red flag.”– Greg Kyte
Furthermore, he’d stolen $35,000 from his former mother-in-law. While criminal rehabilitation can happen and may not always be a dealbreaker during some company recruitment processes, this was an obviously extreme situation. Performing a background check is often prudent when hiring anyone new and ask any clients whether they did a pre-employment check.
It also turned out that James was a pastor and in debt for divinity school. He used $2,600 of the stolen proceeds to pay for his school debt. According to the ACFE, someone who is in significant debt is more likely to commit fraud out of desperation. Again, considering that most people have some debt, that’s not reason alone to suspect someone. But keep aware of those struggling financially; this could create pressure to turn to fraud to better their circumstances.
ADHD and bipolar
Greg and Caleb shared another red flag: James had been diagnosed with bipolar disorder and ADHD. Mental illness, addiction, and emotional problems have been shown to be potential indicators increasing one’s likelihood of committing fraud, but consider this only as a factor if many other red flags are present.
Never assume someone is capable of fraud simply because they suffer from mental illness or are neurodivergent. Remember that mental illness is a vulnerable topic, and it is also a private topic. Consult with a Human Resources professional if you’re questioning whether your investigation infringes on someone else’s rights. Be aware that mental illness is far more prevalent than many people think and that mental illness stigmas prevent capable, kind people from opening up about their struggles.
Unusually close relationship with a vendor
James also had a close relationship with the vendor of annuities, as they were part of his insurance company. This is a clear conflict of interest. If an employee has a personal investment in another entity you are working with, observe that relationship closely. The same thing goes for an employee who is seen spending personal time or is invested in a client or customer.
The fraud triangle
James exhibited classic components of what is known as the fraud triangle. Fraud experts state that many who commit fraudulent acts go through a cycle of perceived pressure or incentive, rationalization, and opportunity.
The pressure or incentive could be financial desperation due to bad credit, poor choices, significant debt, drug addiction, or dissatisfaction with one’s current pay scale. It could also simply be due to greed. In James’s case, he had school debt and possibly debt owed to his ex-wife, to whom he regularly wired money from his fake accounts.
The second aspect of fraud is rationalization. This is where a person convinces themselves or others that what they did was fine or acceptable. They may tell themselves or others that they’ll pay it back or that they need to do it for the good of their kids. Alternatively, they may say that they have worked long enough and deserve a raise. In James’s case, he stated in court that he had always intended to pay the money back. Considering that he stole $200,000, it’s unlikely that would have been possible.
“[The] fraud triangle [has] three components … pressure, opportunity, and rationalization. [James Rupard’s] rationalization [for committing] this entire fraud was that he was going to pay the money back. … He said, ‘I had no intention of stealing anything permanently, only using it and replacing it,’ which is wild.”– Greg Kyte
Finally, the opportunity presents itself in the form of poor internal controls, ineffective monitoring of the controls, or assets that are easy to steal. James had clear opportunities to commit fraud because both the bank and the fire organizations had inadequate or nonexistent systems of checks and balances. James was also able to oversee all aspects of transactions when he funneled money first into the legitimate account and then into the fake accounts.
On this last point, a lack of proper controls is likely why businesses lose an average of 5% of revenue due to occupational fraud. Small businesses face higher value fraud scams than larger corporations because of this lack of security measures.
Learn more about embezzlement
The case of James Rupard is a classic example of asset misappropriation, a type of occupational fraud. He was able to carry out his scam due to poor internal fraud controls, including having the ability to transfer funds without any oversight from colleagues. This lack of oversight is what presented James with the opportunity—one component of the Fraud Triangle—to commit fraud.
James also exhibited a number of recognized red flags. He had a criminal history, significant debt, an unusually close relationship with a vendor, and mental health challenges. When all of these components are combined, we can see the potential for criminal activity. However, it’s essential that you don’t evaluate someone based on these factors individually because that would be considered profiling.
Gusto’s mission is to create a world that empowers a better life. Don’t forget to check out our other two articles based on the same webinar, “3 Types of Occupational Fraud and How They Affect Your Accounting Career” and “A Fraud Case Study: $8.5 Million Stolen from ING.”
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