This article reports on a fraud committed by the president of a public university. It was uncovered by CPA Mary-Jo Kranacher, an adjunct professor, with help from a local reporter.

The president was a “ruthless dictator” who fired anyone who questioned her actions. Subordinates were often required to assist in her nefarious activities, but because they felt intimidated, they did not disclose them.

Kranacher’s investigation started with a tip from a colleague. Kranacher earned the trust of some administrative employees and was thus able to obtain documentation of illegal expense account usage and diversions of funds aggregating at least $500,000. A journalist was attracted to the case by rumors of financial stress at the university – stress aggravated by the president’s spending habits. The journalist was referred to Kranacher and provided her with additional records obtained under the state’s open records law. Although Kranacher reported her findings to university officials, nothing was done until the president’s behavior was reported in the newspapers. Then an outside audit was conducted. But because the president had wide discretion, it was not possible to prove fraud. Ultimately the president was asked to repay $12,000 and to resign.

This is a quintessential case of management override that goes unreported because the executive’s subordinates are intimidated. A system providing for anonymous “whistle-blowing” might have stopped this fraud early on. Other lessons include:

• Despotic managers should be closely watched.
• Regular outside audits often prevent fraud. ACFE reports that audited organizations have half the fraud losses of non-audited organizations.
• Background checks on CEOs should be more extensive than for other positions.
• Executive are the worst abusers of expense accounts.
• CEOs must be accountable to boards, and the boards must seriously exercise their oversight responsibility.

From Journal of Accountancy, February 2006. For the complete article, click on the following link: http://www.aicpa.org/pubs/jofa/feb2006/wells.htm.