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June 25, 1998

Internal Audit: Watchdogs for University's money

John Elliott makes a point of sticking around his office on Friday afternoons. That's when people usually call him to report missing cash receipts, suspicious revenue shortfalls and other bookkeeping irregularities.

Elliott is director of Pitt's Department of Internal Audit. He and his 11-member staff serve as in-house watchdogs over University finances. Routine, scheduled audits comprise 80 percent of the office's workload, but unsolicited tips and inquiries have lead to investigations uncovering fraud amounting to tens of thousands of dollars.

"Three out of four of these unsolicited calls come on Friday afternoon, usually around 4 p.m.," Elliott said. "I think what happens is, people discover earlier in the week that they have a problem — maybe their office revenues are running lower than they should be — but they're not sure how they should deal with it. If they suspect that a trusted employee is stealing, it's human nature to deny it. A supervisor will think, 'It just can't be. This person has been working for me for 20 years.'"

But following a few days of denial and with the weekend approaching, supervisors overcome their reluctance and phone Internal Audit, Elliott said.

Campus police and the General Counsel's office get similar calls. "If it's a one-time event like one employee stealing from another employee, Public Safety will handle that without involving my office," Elliott explained. "But if there appears to be a pattern of misdirected funds, and especially if the University needs to look at years' worth of documents in its investigation, we have the resources to do that."

It was a tip from a former Pitt football coach, combined with a routine internal audit, that led to the uncovering of the University's most notorious fiscal scandal.

Inquiry into the Golden Panthers/Food Services scandal began in November 1989 when former head coach Mike Gottfried told Pitt's administration that Robert Heddleston, who was then executive director of the Golden Panthers sports booster club, might have improperly endorsed and cashed a $300 check from a Station Square nightclub in payment for a pep-rally appearance by Pitt cheerleaders.

Heddleston couldn't account for the check, and paid back the money the following month. A subsequent internal audit of the Golden Panthers office revealed that $52,000 in donor contributions and other funds apparently had been diverted. Heddleston denied any wrongdoing but resigned in April 1990.

In early 1991, a separate, routine internal audit of Housing and Food Services found evidence of theft, misappropriation of food and computer equipment and other wrongdoing there, including evidence connected to the Heddleston investigation. The audit led to the firing or resignation of most of Housing and Food Service's top management.

In August 1991, the Allegheny County District Attorney's office filed charges against Heddleston and three other former administrators of the Golden Panthers and Housing and Food Services. The defendants subsequently paid Pitt more than $115,000 in restitution.

Arthur G. Ramicone, associate vice chancellor for Budget and Administration, was manager of Internal Audit from 1988-91 and director from 1991-95. During those years, he said, Internal Audit was involved in about a dozen special investigations but the Golden Panthers/Food Services probe was by far the largest and most publicized.

Since 1992, the biggest case of financial wrongdoing that Internal Audit helped to uncover involved diversion of about $20,000 in University funds, according to Elliott. He would not discuss details of the case.

Internal Audit has helped to uncover crimes ranging from thefts of petty cash funds to sophisticated scams involving dummy bank accounts and forged checks.

"With today's electronic banking, a lot of checks get processed without bank personnel even seeing them," Elliott pointed out.

"It used to be that nearly every check the University issued came under scrutiny from a teller, who would make sure it had the right watermark and was properly endorsed.

"Now, a lot of checks are electronically scanned or quickly keypunched by someone who may not have time to look at them carefully." Check forgery, like currency counterfeiting, is enjoying a sinister new renaissance. Today, even a low-paid clerk can afford desktop publishing software, a cheap copier and official-looking check stock from the local Office Depot.

A common ploy for embezzling genuine Pitt checks involves depositing them in private accounts labeled "University of Pittsburgh" but with non-Pitt addresses and account numbers. A harried teller may not notice the discrepancy.

The problem for embezzlers is, the process leaves the checks unaccounted for on the University's books. When this prompts an investigation, the paper trail often leads straight to the perpetrator, according to Elliott.

Fortunately for Pitt, stupidity seems to be endemic among criminals regardless of era or technology.

"We do see our share of stupid attempts" at ripping off the University, Elliott said, half-stifling a smile.

For example, some staff with access to University credit card numbers (or the card numbers of businesses and individuals doing business with Pitt) have charged personal merchandise to those numbers, then ordered the goods to be shipped to their homes.

When the unusual charges showed up on monthly statements, banks notified the cardholders. Investigations ensued.

It doesn't take a Mellon Professor to trace such fraud to its source.

q To Internal Audit, there's no such thing as insignificant fraud against Pitt, Elliott said.

"Any time there's a breakdown in the [financial] controls at the University and someone steals money or equipment or misappropriates receipts, it's significant, even if it's just someone repeatedly stealing a few dollars out of a petty cash fund to pay for lunch," he said.

"Based on what I've seen, a person who will steal a small amount of money will steal again, and steal more money, if the opportunity looks safe enough and their need is strong enough. "Quite often, when we question suspects, that's how they describe the way it started — just stealing $10 or $20 here and there, knowing their boss was unlikely to detect what they were doing. Or sometimes, employees will 'borrow' $100 or $200 at mid-month, intending to pay it back at the end of the month when they get their paychecks.

"They do it the first time and they don't get caught, so the pattern continues until they're taking $500 or $1,000. Now, they can't afford to pay it back at the end of the month. But they still aren't getting caught, so they usually keep on stealing until somebody notices."

Typically, that "somebody" is a supervisor in the thief's unit, Elliott said. "The supervisor senses that something is wrong. Office revenues are running lower than they ought to be, or whatever. They make a few inquiries and grow suspicious. That's when they pick up the phone and either call me or their senior administrator, who then contacts me."

Such a phone call lasts anywhere from 10 minutes to several hours. If the problem sounds real, Elliott schedules a fact-finding meeting with the supervisor and, as appropriate, staff from Public Safety and the offices of the General Counsel and Human Resources.

Elliott said, "In nine out of 10 cases, we turn up enough information at these initial meetings to proceed with an investigation." But only about half of the investigations lead to accusations of criminal activity, he said.

"The other half of the time, we find nothing worse than haphazard office procedures.

"It may appear that someone was breaking the rules for personal gain, but in reality they were just taking shortcuts — maintaining an unofficial petty cash fund, for example." Some employees even bend rules just to make life easier for their supervisors and co-workers, Elliott said. To those employees, Internal Audit advises: Don't be a sap.

"By taking shortcuts, employees jeopardize themselves," Elliott said. "Ultimately, they are the ones who will be held accountable for mishandled money, and they can get in big trouble if they can't document how the money was spent." Employees whose supervisors ask them to violate Pitt bookkeeping procedures should contact Internal Audit or Human Resources, Elliott said. "I realize that lower-level staff may be hesitant to do something like that behind their bosses' backs, but they need to consider the alternative.

"I'm more than willing to talk with a supervisor and remind him or her: 'Look, you have to follow procedures.'" When investigations or routine audits turn up inefficiencies in University processes, Internal Audit can lobby to change the policy or help offices steer a middle ground between fast-and-loose efficiency and strict (but inefficient) observance of rules.

"Often, we can work out a compromise so an office may not be strictly following a procedure or policy, but the office is on safe ground should it be audited," Elliott said.

q Even in cases of blatant fraud, Pitt investigators aren't always in a hurry to confront suspects.

"If you can find a pattern [of illegal activity], obviously you can build a stronger case to present to the district attorney," Elliott said. "While campus police are doing background checks on a suspect, my office may spend weeks analyzing documents.

"Sometimes, the plan is to catch them in the act. We may send transactions [to suspects] that would be tempting for them to steal, without being so tempting that it constitutes entrapment. Maybe we'll send a transaction involving both cash and receipts, to see if the cash gets recorded.

"We've been successful in obtaining confessions because we've built substantial cases from a paper trail standpoint. Sometimes a suspect will deny, deny, deny when they're being questioned by campus police, but then I'll come into the room with piles of evidence.

"When you sit down across the table from a person and you're telling them exactly what they've been doing for the last three months or six months — a lot of people realize they've been caught and they confess." q Employees who confess to committing fraud against the University often say they stole to support drug or gambling habits, or to pay off medical bills or other debts, Elliott noted.

Some are even self-righteous, he said. "They rationalize what they did by saying things like, 'I'm underpaid' or 'I didn't get a raise last year.' A lot of people justify compromising their personal integrity by telling themselves, 'It's just little old me against this huge institution that's got hundreds of millions of dollars. I'm only taking what I deserve.'" But even the cleverest, most sanctimonious scammers often seem driven by a Raskolnikov-like need to come clean, Elliott has found.

"That's what you're taught in fraud detection training, and that's what I've seen: A lot of people want to get caught. It's eating them up inside. Getting caught is frequently what it takes for them to kick their drug habit or whatever."

While some confessors keep cool, others break down emotionally, Elliott said. "That's one reason Human Resources gets involved. We want to get suspects in touch with counselors from the Faculty and Staff Assistance Program so they'll be less likely to harm themselves or others." As satisfying as it can be to uncover fraud, "what's not so enjoyable is seeing [perpetrators] in tears, trembling in fear of losing their jobs or even going to jail," Elliott said.

Not that most offenders nailed by in-house audits go to jail.

"Almost by definition, the kinds of things we uncover are white-collar crimes committed by first-time offenders, and most people like that wind up with probation rather than jail-time," Elliott said.

Some avoid even a criminal record by successfully completing Allegheny County's Accelerated Rehabilitative Disposition (ARD) program for non-violent, first-time offenders.

If the D.A.'s office, the courts and prosecuting witnesses all approve, offenders in ARD do not stand trial. Instead, they receive up to two years of probation, agreeing to perform community service and, as appropriate, repay money they stole. Those who successfully complete ARD earn dismissal of charges against them.

q Though Pitt researchers attract about $250 million annually in outside grants, Internal Audit rarely reviews how such money gets spent. That's the responsibility of Pitt's offices of Research, Research Accounting and Research Integrity, along with the funding agencies themselves.

"Sometimes, we'll get involved in helping to determine whether certain expenditures are allowable under a particular grant, but that's about it," Elliott said.

"We haven't found a lot of activity done for personal gain using grant money. Keep in mind, for most of our grants the checks go through a 'locked box' arrangement which is accounted for through Research Accounting. People in the [Pitt] departments aren't handling cash for sponsored projects.

"Quite often," Elliott added, "the people who have a role in administering sponsored projects also have some role in handling cash for other types of University activities. So if they're going to steal for personal gain, it's easier for them to steal through those activities in which they handle cash."

For every employee who gets caught embezzling, skimming, forging checks, etc. — how many get away with it? "I get asked that question all the time by administrators as well as trustees on the [Board of Trustees'] audit committee, whenever I report on incidents where we've uncovered something," Elliott replied.

"There's no formula for estimating that. It would just be a guess. Is there illegal activity going on out there? My professional opinion is, I'm absolutely certain there is. In some cases, will it ever surface? Probably not. In other cases, though, it will surface eventually.

"Someone today, as we sit here, is stealing money from the University and they think they're getting away with it. But some event is going to happen eventually that's going to trigger someone noticing unusual activity, and I'll get a call — probably on a Friday afternoon. Someone will say, 'Hey, John, this doesn't seem right to me. Can you take a look at this?'"

— Bruce Steele

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