In this episode, one ordinary Thursday cracks open a decade of misplaced trust. What starts as a simple payroll question quickly spirals into a trail of inflated salaries, personal charges, and checks written to someone who was practically family. The money is gone, but the real cost runs much deeper.
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00:00:00 Dan Ramey
Hello, I'm Dan Ramey, contributing editor to Internal Auditor Magazine's Fraud Department and president and founder of Houston Financial Forensics.
00:00:09 Dan Ramey
I am pleased to introduce this episode of Fraud on the All Things Internal Audit Podcast, which provides fictionalized accounts of fraud based on actual events.
00:00:23 The IIA
The heartbreaking fraud, part one, a Thursday that changed everything.
00:00:30 The IIA
It started on an ordinary Thursday.
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Joe Richardson, president of Jr.
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Plastics, was preparing for the company's weekly payroll.
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Normally, that responsibility belonged to the company's office manager, Tiffany Smalley, but that week was different.
00:00:47 The IIA
Smalley had unexpectedly called in to take time off to care for her sick child.
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For the first time in many years, Richardson had to run payroll himself.
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Jr.
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Plastics was a small, family-owned business that fabricated custom plastic products and components.
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Richardson's father had started the company 50 years earlier, and it had grown steadily through word of mouth and a reputation for customer service.
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Trust was the foundation of the company.
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Richardson ran the business much the same way his father had.
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He relied on instinct, especially when hiring employees.
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That instinct had led him to Tiffany Smalley.
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Smalley had worked at Jr.
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Plastics since high school.
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She was the daughter of a family friend, and over time, Richardson had come to see her as part of the family.
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A decade later, as office manager, Smalley was indispensable.
00:01:46 The IIA
In that role, she oversaw the company's financial administration so Richardson could focus on growing the business.
00:01:54 The IIA
She handled payroll, expenses, and all accounts payable and receivable.
00:02:00 The IIA
Additionally, she performed wire transfers and originated ACH payments to employees and vendors.
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And she did it all without dual control.
00:02:11 The IIA
Smalley could enter payment information, create templates, pay invoices, and run payroll without Richardson's approval.
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She also had access to the company's online banking system.
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In fact, she was the only administrator, while Richardson himself was set up as a user.
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He logged in occasionally to check balances or make transfers, but day-to-day financial operations were left to her because he trusted her completely.
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Part 2, something doesn't add up.
00:02:50 The IIA
The week Smalley was absent, Richardson followed the written instructions she had left behind to run payroll using one of the company's templates.
00:02:59 The IIA
Partway through the process, he had a question about the procedures.
00:03:03 The IIA
But not wanting to bother Smalley while she cared for her sick child, he decided to review previous ACH batches instead.
00:03:12 The IIA
That is when he noticed something unusual.
00:03:15 The IIA
In the first few batches he reviewed, Smalley's salary appeared higher than her normal payroll amount.
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At first, he assumed it was a mistake, but as he continued reviewing records, the pattern repeated itself.
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Her payroll amount was consistently elevated.
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Concerned, Richardson contacted his community bank and requested ACH batch records, going back as far as it could provide.
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When the records arrived, he began examining the transactions closely.
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Then he pulled the company credit card statements.
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Part 3, peeling back the layers.
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Several charges immediately stood out.
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There were payments to AT&T, charges to Netflix, and other expenses that were clearly not related to the company's business.
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The deeper Richardson looked, the more irregularities he found.
00:04:17 The IIA
Next, he began reviewing checks that had cleared the company's bank account.
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That is when he discovered another problem.
00:04:24 The IIA
When Richardson traveled out of town, he sometimes left blank, signed checks with Smalley in case an unexpected expense came up.
00:04:33 The IIA
But Smalley had occasionally used those checks to write payments to herself.
00:04:38 The IIA
Over time, the pattern became clear.
00:04:42 The IIA
For two years, Smalley had been padding her salary, charging personal expenses to the company credit card, and issuing checks to herself.
00:04:52 The IIA
By the time Richardson finished tracing the activity, the total loss exceeded $200,000.
00:05:00 The IIA
He was stunned.
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More than anything, he was heartbroken.
00:05:13 The IIA
Part 4, the truth.
00:05:16 The IIA
When Richardson confronted Smalley, he hoped there had been some mistake or a reasonable explanation.
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But the truth was exactly what he suspected.
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Smalley admitted that two years earlier she had run into financial trouble.
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As a single mother with a small child, she was struggling to make ends meet.
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She said she initially paid herself a little extra one month, believing she could cover her bills and then fix the situation later without anyone noticing.
00:05:47 The IIA
But things did not improve.
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Soon after, her son became ill and medical bills began piling up.
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The financial pressure worsened and the fraud continued.
00:06:07 The IIA
Part 5, A Hard Lesson.
00:06:11 The IIA
Richardson felt sympathy for Smalley's situation, but he also knew he had no choice.
00:06:17 The IIA
He terminated her immediately.
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He told her that if she had come to him for help, he would have assisted her however he could.
00:06:26 The IIA
But stealing from the company was something he could not tolerate.
00:06:31 The IIA
Because of his long relationship with Smalley's family, Richardson decided not to press criminal charges.
00:06:38 The IIA
He also chose not to pursue reimbursement for the stolen money.
00:06:42 The IIA
Still, the experience left a lasting impression.
00:06:47 The IIA
Richardson learned that while trust is important in any organization, it cannot replace effective controls.
00:06:54 The IIA
In the end, the lack of oversight cost him more than just money.
00:06:59 The IIA
It cost them trust.
00:07:08 The IIA
This has been the All Things Internal Audit Fraud Podcast, fictionalized accounts based on actual events, brought to you by the Institute of Internal Auditors.
00:07:18 The IIA
IAA members can access the full story in this month's issue of Internal Auditor Magazine, including bonus materials on lessons learned.
00:07:27 The IIA
To read more, visit internalauditor.theiia.org.
00:07:33 The IIA
For more fraud-related resources, including guidance and thought leadership from the IIA and the ACFE, visit theiia.org/acfefraud.
