October 4th, 2010
Expense Account Fraud Of Criminal Proportions
Best Buy Ethics, by Kathleen Edmond.Individual expense accounts are a wonderful convenience and an efficient, cost-effective way for companies like Best Buy to process the ordinary business expenses incurred by their employees. However, with that convenience comes risk. The now infamous $6,000 shower curtain expensed by former Tyco chief Dennis Kozlowski was not an isolated incident. Similar frauds occur thousands of times each year nationwide and Best Buy is not immune. Sadly, we recently had to address a significant example of expense account fraud at one of our Enterprise subsidiaries.
From lipstick to electric bills
In the course of evaluating travel and entertainment expenses, Best Buy’s Finance Controller team noticed an unusual mix of purchases flowing through a certain employee’s expense account. In addition to the usual airfare, meals and rental car charges, other types of charges were noted that had no relation to Best Buy or its operations. Things like home utility bills, cosmetics and even storage unit rentals were being charged on this employee’s corporate card.
Ordinarily, one might assume this to be an honest mistake. It’s not uncommon for someone to accidentally grab the wrong credit card out of a purse or wallet and ring up a personal transaction. However, a little research proved beyond any doubt that this was an intentional, long-standing pattern of use, not an isolated incident. Exactly how this could have happened remained unclear, though. Expense reports must always be approved by an employee’s manager, a control in place all the way to the top of the house at Best Buy. How could an employee pay their electric bill and rent a storage unit using a corporate card and have it go unnoticed?
A closer look at the situation solved this mystery. The Asset Protection team learned that the employee held a uniquely influential position. As part of their role, the employee was granted expense account approval authority for many other people in the company. In the course of performing this task, the employee also used their manager’s ID for approval of their own expenses. Thus armed with the manager’s approval code, the employee simply authorized their own expense reports, making off with tens of thousands of dollars in services and merchandise. The employee always had what appeared to be legitimate reasons for such expenses when challenged from time to time. However, this individual resigned in the middle of the investigation and the case has since been turned over to the proper authorities for criminal investigation. My questions for you:
1) What breakdowns in internal controls do you see in this story? Be specific.
2) Whether at Best Buy or elsewhere, have you ever seen a workplace situation like this? How did it turn out?
3) For those of you who manage other people, what is your accountability on things like expense reports? Do you have a responsibility to protect the company from theft? Are you confident that you have solid controls in place?
4) What is the balance between trusting employees to behave ethically versus using internal controls to ensure they behave ethically? How can you be sure you’ve achieved the right balance?
5) If you suspected fraud, collusion or some other ethical breach in the workplace, how would you deal with the situation? Who would you take as a partner?
Re: what happened to manager who shared password? In this case manager left company prior to the situation coming to light.
Not sure about manager. Will find out and let you know. Thx – ke
I totally agree with Sarah. The breakdown began the first time this Associate was given their manager’s employee id and password. My thought process immediately went to, “with this type of ethical behavior being exhibited, what other things did this associate do unethically in their day-to-day business activities.” PS: what happened to the manger who felt comfortable enough to share their password?
Love your thinking and process on this. Thanks – ke
Why did the employee have the authority to use their manager’s ID? This seems like the most obvious breakdown. No one in any position should have the authority to use another’s ID without clearly stating that they are acting as intermediary. Either your ID needs to be enough to approve it alone, or you should have that person approve it. When the manager saw their ID on things they didn’t directly approve, or a note that the employee was acting as intermediary in such an innappropriate situation, that should have been the red flag. I know that in some areas of our company we have people approve things in the name of someone else, but I know that if I do that for someone they are checking up on what I’m attributing to them, and my name is always on it as well. When the situation is reversed, I spot-check the person acting under my authority to ensure that there is no abuse. We should all behave in ways that are above reproach. Managers should not delegate the task of managing an employee to the employee. This is a company-wide measure for a reason. We see the conflict of interest, and to avoid question, we require that someone other than the employee review the expenses.
In my experience, it’s best to just take the personal out of it. If you were an outside observer, would this merit further review? If yes, then take it to someone in leadership or directly to the ethics line.
Dear Mr. Heller,
Please accept my apology for an experience that is clearly not what either we or our customers expect. I have forwarded you comments on to our Customer Care team to handle. Please let me know when this has been resolved.
Best –
Kathleen Edmond
Is this how Best Buy does quality control?
http://www.somethingaboutkate.com/2010/10/dear-best-buy-flexi-compras-review-part.html
Dear Ms. Edmond,
Please tell me why your company is so difficult to do business with.
I went into my local store (Goleta, CA) last Tuesday to give your company several thousand dollars in exchange for a big ticket TV and console plus accessories and extended warranty. I knew what I wanted and didn’t require any advising by your sales associates. Still, the sale took over an hour because your computer systems are so old and obsolete, but I put down my $3600 and got the promise of delivery in a week.
When I got home I had a feeling the sales associate had failed to arrange in the assembly of the TV console, which he had mentioned required a separate charge. So I called the store, and was told I had to go back in (I live 25 minutes away) to pay for and arrange this, as I had to sign a contract. Once in the store, it took about half an hour and a lot of contortions to add on the furniture assembly, because the warehouse delivers the TV and sets it up, but the Geek Squad assembles the furniture (ridiculously low tech work for real geeks, and a total waste of their training). This required separate employees, appointments, etc. So now I was not only paying $69 for the delivery of the TV console (even though the TV was coming in the same shipment with no shipping charge, as part of the sale), but another $129 for the Geek Squad set up. Further, these had to be done on separate days, so now I was having to set aside two different periods to stay at home and wait for delivery/service. Finally, your sales associate accidentally used the wrong SKU in charging me for the assembly appointment; when I pointed this out to him (as it actually charged me much less than the fee I’d been quoted), he voided the sale. When I got home last night, I found an email notifying me that the entire sale (TV, console, etc.) had been cancelled and I would have to go back to the store AGAIN to get my refund. Since I didn’t want to cancel the order, or to drive another 50 minutes round trip to fix the problem or get my refund, I tried to address the problem by phone.
I confirmed the cancellation by phone with your 1-888 service people — however, they transferred me three times to answer a simple question. I tried to reach your store by phone in order to talk to the assistant manager, who had kindly given me his direct line during yesterday’s ordeal, which he had really tried to make simple. (His name is Bill Putnam and he’s the only truly rational and practical person I’ve dealt with in your system so far). The person who answered the phone at the Goleta store (itself a rare occurrence, as you will see below) told me to call at 10 when the manager would be in; I pointed out that it was 10, and was then told Bill would be in at 1 pm. Since I knew I would be busy at 1 pm, I tried the store again hoping to talk to the main manager, and could not get anyone to answer the phone, despite repeated tries.
Since my father is an investment manager who invests several billion in publicly traded stocks, I know that when this sort of thing happens, you bypass the peons and go to corporate, since presumably the top level folks care about keeping customers happy. I was transferred to your “Executive Resolutions” line, and after sitting on hold, I got a very nice associate who told me that no, my order was not cancelled. However, she could not confirm that my Geek Squad appointment was still good and I needed to talk to the store. She promised she would stay on the line with me until I got someone (since she was transferring me). Eventually someone did answer, but your Executive Resolutions associate was not there when that happened, or she would have known that the store then made me call the 800 number for the Geek Squad in order to confirm that my appointment was still good. I then sat on hold and got transferred a few more times before being assured that my appointment still stands.
Tell me how your corporation can report profits to shareholders when your customer service system is so shoddy. All those transferred phone calls are employee time wasted, as was the in-store time trying to help me give your business money. The frustration I experienced trying to do something simple — buy expensive electronics and get them delivered and installed — has left me with a very bad taste in my mouth regarding Best Buy. I’m paying separately for assembly and delivery of items, having to stay home for two appointments, and still having to fight your system just to make sure it happens.
Frankly, for all this hassle I could have bought from Amazon.com and then paid some local handyman to help me with the bigger items. Amazon’s price on the TV is a few hundred dollars lower, so I’d have saved money too. Or I could have gone to my local TV/stereo store (yes, a few still exist in Santa Barbara) and paid more, but not had to spend hours of my own billable time. I bet I would have at least broken even.
It’s a mystery to me why Circuit City went bust but Best Buy is still in business, if this is your business model.
Sincerely,
Lee E Heller, Ph.D, J.D.
Summerland CA