ETS’s Audits

Corrections or additions?

These articles by Kathleen McGinn Spring were prepared for the

September 5, 2001 edition of U.S. Newspaper. All rights reserved.

Monitor Employees, Including Top Dogs

Alan Stedman, director of the Family Business

Resource Center at Rutgers, pauses, searching for a word to describe

how it felt when a group of employees in his own family-owned business

conspired to defraud him. "Devastated," he says.

"Betrayed.

You think you take pretty good care of people, treat them well. You

get to the point where you don’t trust anyone."

Having to constantly "look over his shoulder" to protect his

business from employee theft was one of the reasons Stedman packed

it in, and accepted the challenge of starting up the three-year-old

Family Business Resource Center (E-mail:

astedman@crab.rutgers.edu). "You get worn down," he says.

Stedman, who holds an undergraduate degree from Washington and Lee

(Class of 1969) and an MBA from Dartmouth, was defrauded by hourly

workers in his retail beverage business, something he says is so

common

that it is "a cost of doing business," particularly where

there are cash registers or an inventory of easily-saleable products.

But, he says, theft by hourly workers is typically not the most

destructive

type of employee fraud. It is schemes by the very top employees that

can bring a business down.

Stedman has spoken with owners of small businesses that were destroyed

because "key employees were not monitored." As a rule, he

says, the more an employee is trusted, the more likely it is that

employee will be the one to embezzle or otherwise defraud his

employer.

"People won’t be looking their way," he says. "The

direction

and focus of control is on the lower level employees."

That appears to have been the case with Joseph Semrod, chairman

of Fleet New Jersey, and the former longtime CEO and chairman of

Summit

Bancorp. He trusted his secretary, Darlene Gentry, with access to

his personal checking account. In a suit filed in Superior Court in

Mercer County, he is accusing her of stealing $1 million from him

over 18 months and an unknown amount over a period of six years.

Semrod

had given Gentry limited power of attorney, enabling her to sign

checks

drawn on his account and to pay his bills.

In another high-profile local case, Jeanne Gaston, then a Hopewell

Township resident, was convicted of siphoning more than $3 million

from the checking account of securities executive Vincent Murphy.

Gaston had been Murphy’s secretary for 15 years, first at Salomon

Brothers, and then at Merrill Lynch in Plainsboro. After he retired,

Murphy retained Gaston as his private secretary, leaving blank checks

for her to use in paying his bills.

In a pending civil suit, Murphy and his wife are alleging that Joseph

Scandariato, a Merrill Lynch financial advisor, is also culpable.

Both Gaston and the Murphys were Scandariato’s clients, and he is

accused of failing to detect and disclose the theft.

In yet another instance of fraud by a trusted individual, the

treasurer

of the South Brunswick Upper Elementary School PTO, Delores Harbison,

has been charged with diverting $26,000 from that organization by

writing checks to herself.

Cases like this illustrate the importance of establishing — and

constantly assessing and upgrading — monitoring procedures.

Stedman

says that at the time the theft against his family’s business occurred

he thought he did have controls in place. He found, however, that

they were not enough to stop a number of employees in two of his

business’

locations from exchanging information and "carting off

inventory."

Small businesses typically have little in the way of structure and

control, Stedman says. Everyone is expected to know his job, and to

just do it, often with little supervision. As businesses grow,

controls

are put in place, but, he says, "administrative structures rarely

catch up with the growth." Generally, it is only in the mature

organization, Stedman says, that "everything is tied down and

codified." In small, or young companies, "there are too many

other things to think about." The cost for neglecting auditing

controls, however, can be the very existence of a small business.

And even in mature organizations, assessing auditing procedures needs

to be a constant, ongoing concern.

Top Of Page
ETS’s Audits

When Frank Gatti took over as CFO of Educational

Testing Service three years ago, upgrading that organization’s

internal

audit function was a top priority. Toward that goal, ETS will begin

what Gatti terms "a rigorous three-year audit plan," beginning

in the fall. "It’s not because we have had fraud," he is quick

to stress. "It’s something most organizations should do to make

sure administrative and accounting practices are the best

possible."

Gatti, a Baruch College graduate (Class of 1967) who earned his MBA

at Rutgers, was recruited from the New York Times Company, where he

was vice president for financial management. In addition to arranging

for the three-year audit, he has hired additional internal audit

professionals

for his organization, where revenues are about $600 million a year.

ETS must safeguard its money, of course, but perhaps even more

importantly,

it must safeguard the information customers around the globe entrust

to it. "We collect Social Security numbers, names, credit card

numbers," Gatti says. "We have to make sure individuals can’t

break in." And ETS also has to make sure no employee can use the

information for illegal purposes.

"We’re a deceptively complex business," Gatti says. "There

is a high degree of technology embedded in the design and delivery

of our products." With technology, he says, "there are always

new challenges. Once one starts to migrate toward more electronic

transactions — and the Internet — one needs controls that

are contemporary, and not outdated, left over from the age of the

pen and paper."

Internal controls not long ago centered around cash and checks.

Keeping

money in those tangible forms safe is tricky, but it is child’s play

compared with keeping tabs on money in an increasingly electronic

age, where, says Gatti, "Signing over checks is outdated."

At ETS, for example, employees receive notification that their

paychecks

have been deposited into their checking accounts by going online.

Soon, Gatti says, expense accounts will be filed online too. And

employees

will not even have to do a lot of typing. Charges on a business credit

card will be automatically uploaded right onto their expense account

forms.

In a much more complex migration, ETS is implementing PeopleSoft for

its business processes. The new system will direct orders and payments

to vendors, handle human resources functions, and more. The

organization

added auditing procedures as the new software took on more chores.

"We had to create the correct stratification for

authorization,"

says Gatti. Up to a certain dollar amount, transactions might require

two signatures, but as the dollar amount rises, so do the layers of

authorization.

Gatti knows that this monitoring system, no matter how sophisticated,

will never be the last word. Every company must constantly reevaluate

its internal audit systems, and, he says, it is vital that the

"tone

is set at the top." This is so, in good measure, because when

it comes to fraud by employees, Gatti says, "where there’s a will,

there’s a way." Hoping to avoid a costly lesson of his own, Gatti

says, "You have to stay a step or two ahead."

— Kathleen McGinn Spring


Previous Story Next Story


Corrections or additions?


This page is published by PrincetonInfo.com

— the web site for U.S. 1 Newspaper in Princeton, New Jersey.

Facebook Comments