Fraudulent Bank Statements

The article below is based on a real case; however, names have been withheld and certain facts changed to protect confidentiality of the parties.

Every month, the Treasurer of a non-profit organization prepared a neat package to support the monthly financial reports. She made notes on the bank statements as to the nature of each deposit (program income, fundraising, etc) and the disbursements (postage, supplies, meeting expenses, etc).  The members of the Board (including a CPA) appointed to review the financial records found the deposit slips and original expense receipts included in each month’s financial envelope, and noted that the financial reports footed and reconciled to the bank statements. There was every reason to believe that the all the activity was legitimate and that the Treasurer was doing an excellent job of keeping records.

Unfortunately, this was all an illusion.

We do not know what drove this young woman who was Treasurer of the organization to steal.  Whatever the reason, she used her personal computer to create a bank statement of her own that looked remarkably like the real thing – including bank logo, format, and even the bank’s warning on page 1 about the increasing risk of bank fraud. In 2006, if one had looked closely, it would have been relatively easy to identify the fraudulent statements. However, by 2009, the re-creation was nearly perfect.

The fraud was discovered, as many are, accidentally.  The Treasurer was unable to fulfill her duties because of illness and another Board member went online to check the bank balance, only to discover that the  approximately $40,000 that the Treasurer had reported to the Board was gone.

The investigation eventually revealed that the Treasurer was writing checks to herself and using her debit and ATM card for personal purposes, such as restaurants, retail outlets, and online purchases. She also initiated online payments for her property taxes and other bills.

When the Treasurer received the original bank statement at her home address, she marked through the illegitimate transactions, re-calculated the activity based on the real transactions, and created fake bank statements. She changed the total deposits and withdrawals and ending balance values in the statement account summary, as well as the average and lowest bank balance. She thought of everything.

The Treasurer was so careful that she kept every single original bank statement with images of the checks that cleared and her notes as to which transactions needed to be excluded from the revised bank statements. Her notes undoubtedly kept the juggle manageable for her. They also proved helpful to us as we began tracing how many transactions were unauthorized.

The account maintenance must have required meticulous notes, frequent ATM inquiries, and time-consuming recreation of the monthly bank statements. So much time that one wonders how she may have used the time and effort to make money in a legitimate manner. The stress may have very well been the cause that led to deterioration in her health. Subsequent doctor-mandated bed rest prevented her from checking the account and depositing funds as needed to float the balance between legitimate deposits.

Imagine the president’s surprise when a check bounced. Only the week before, the Treasurer had reported that the cash balance was over $30,000. The juggle sequence was broken and the truth came crashing down. The aftermath was not pretty as the president and other volunteer members struggled to understand how this could occur.

How could the board members have prevented this? If even bank statements can be so easily manipulated, how can one own a business or operate a volunteer agency with peace of mind?

There are simple measures that can be taken to prevent this kind of opportunity:

1. Original bank statements should be mailed to a member of Management or the Board who does not have check writing authority or the ability to make electronic transfers and check card purchases.

2. Designate a member of Management or the Board who does not have check writing authority to review banking activity (including check copies) online. (Note: Review of banking activity should be a daily accounting procedure. While business owners have 30 to 60 days to dispute most transactions, some electronic transfers and ACH transactions must be disputed within 24 hours or the business owner forfeits the ability to recoup funds. Many threats exist.)

3. Restrict check writing authority, access to ATM and debit cards. The approved check signers should not include the individual responsible for reconciling the bank statement to the general ledger.

4. DO NOT rely on banks to enforce internal policies regarding number of signers of checks. As long as checks are signed by someone whose signature is on the signature card, they will probably be processed and the bank may not have any liability.