The Padding That Hurts: Auditors Cannot Ignore Expense Account Cheating by Management

Davenport, an independent auditor, had a hot potato on his hands. He had just learned from Robert, his client's internal auditor, that an employee had reported to him possible expense account abuses by one of the company's managers. Robert said that this employee accompanied Murphy, a senior vice-president, on many business trips. The employee said Murphy had some curious habits: When getting out of a taxi, he would ask for extra blank receipts, and in restaurants, he would often do the same. Robert had followed up this tip. He pulled Murphy's travel file and found numerous irregularities: multiple receipts from the same taxi companies for the same days, extremely expensive meals, duplicate meal receipts for the same days and other suspicious charges for several hundred dollars each billed to an innocuous-appearing, but unknown source. Robert estimated he could safely document a minimum of $30,000 worth of phony charges over the last three years. When Robert told Davenport what he had found, he said: "The guy makes over half a million a year, and yet he evidently is hitting us for at least $10,000 a year in completely fake expenses. " Davenport added, "And if we know he is defrauding the company for $10,000 a year, then what is he up to that we don't know about? " The two men decided they would completely document Murphy's abuses and notify the CEO. However, as internal auditor, Robert was concerned--and not without reason. "Look," he said to Davenport, "Murphy outranks me. He and the CEO are very tight. This will look like I am ratting out a valuable company executive, and the CEO won't be happy with me. " But Davenport explained to Robert that when it came to high-ranking executives, there was no such thing as an "immaterial" fraud. Davenport knew his duty: He had to report Murphy's conduct to the next highest level in the organization--in this case, the president and CEO and then disclose it to the audit committee. THE BAD NEWS BEARS The two auditors met with the CEO, and Robert's intuition about his reaction was correct. After hearing the presentation, the CEO erupted: "Murphy makes millions for this company, and you people are in here claiming he is hitting us for pocket change. Don't you have anything better to do? " But, Davenport stuck to his guns. "I really hate that this has happened," he said, "but my duty as independent auditor is very clear. Murphy is an executive in this organization, and management fraud can have very serious consequences. Managers must set a proper example. If Murphy can cheat on his expenses and get away with it, then other people will try it, too. And if you discipline one employee and not another, the company opens itself to legal liability. Furthermore, a person in Murphy's position controls millions of dollars in company assets. If he is dishonest about his expenses, what else is he dishonest about? " But the CEO wouldn't listen. "I'm telling you," he said, shaking his finger in the air, "drop this now and leave him alone. I've known Murphy for over 10 years. I recommended hiring you as the company's auditor. I can just as easily recommend that you should be replaced. " It was clear to Davenport the CEO was furious, so he felt it best to end the discussion for the time being. By the next day, the CEO had relented. He called Davenport and said: "I have thought this over. I even talked to my wife about it last night. Of course you are doing the right thing. I'm sorry I acted the way I did; it's just that Murphy is such a valuable team member, and this thing is embarrassing for the company and me. I'll go ahead and talk to the chairman of the audit committee. You can come with me. " The two men informed the audit committee and the board of directors of Murphy's "petty" thefts. Most members were chagrined that they had to involve themselves in what they saw as such an insignificant matter. It finally was decided that three audit committee members would speak directly to Murphy. …