Unformatted text preview: fraud B y Any True Accounting,
The Deed Was Fraud
Editor’s note: FEI Atlanta Chapter member Jim Wanserski has uncovered fraud
multiple times — at Sprint, Telecom USA
and MCI — and has assisted some of his
consulting clients in ferreting it out.
During his Sprint tenure, his success
spurred internal clients to seek his help.
Those experiences, common sense and a
natural skepticism positioned him to
uncover a large receivables fraud at MCI,
putting the perpetrators behind bars. Here
is his first-hand account. sonal knowledge and experiences.
Here is the story:
A decade ago, I was the Director of
Customer Financial Services at MCI,
responsible for nationwide credit and
collections for all commercial customers. One line of business was “carriers,” wholesale customers who
established their own customer bases
and provided telecommunications
services via capacity purchased from
facilities-based providers like MCI.
Management of carrier
billing and collections came
to me in April 1996, on the
heels of the two largest disconnections of service experienced at MCI. I was tasked to clean up
this portfolio. From April 1996 until
his separation, Walter Pavlo, then a
senior manager, reported to me. By Jim Wanserski Jim Wanserski today, nine years
after he reported fraud at MCI © GETTY IMAES | MARK ADAMS D ata from the Association of
Certified Fraud Examiners
(ACFE) indicates outsiders are
far down the list in terms of
uncovering fraud. My own experience
confirms that active managers have
the best opportunity to detect fraud
and the direct responsibility to do
something about it. We need to act
more aggressively on our instincts.
I have worked for a variety of large
companies, in staff, auditing, management and consulting roles. I have
uncovered fraud multiple times. In
retrospect, that prior experience prepared me to uncover and deal with a
multi-million dollar fraud at MCI Inc.
My observations and descriptions
of events are generated or supported
by sworn testimony given by me and
others in the civil and criminal litigation, supplemented by my own per- Rules Were in Place
My primary emphasis was on enforcing MCI’s customer contracts. Each
carrier contract included payment
terms, surety and specific descriptions
of all requirements as dictated by contract execution processes. Leverage
for straightforward collections action
existed. Policy documents addressing employee behavior, the rules of
engagement for committing the company contractually and who was
authorized to do so had been distributed in late 1996. The “rules of the
road” were vividly clear.
Ultimately, I uncovered the carrier
fraud executed by Pavlo and others,
dealt with it internally and worked
actively with white-collar crime
resources. We communicated proactively and regularly with law enforcement. I also prepared for and testified
in subsequent litigation, totaling 40
hours under oath.
“Proof-positive” of the fraud was
uncovered in February 1997. I confronted the internal perpetrators with
the inappropriate transactions they
had directed. However, finding the
hard evidence was merely the endgame, the “smoking gun.” My own
internal control and gut-level suspicions had already peaked due to a
number of occurrences, behavior
changes in the group and judgment
lapses, if not just the difficulty in getting crisp information.
In mid-1996, several sales and
business analysis people contacted
me, expressing concerns about how A former financial services manager at MCI recounts what
happened in a well-publicized case that he came to know
intimately, and offers advice to others about how to deal
with fraud and any ensuing litigation. March 2006 www.fei.org 29 Lessons Learned
You MUST build and maintain multiple, reliable, cross-functional relationships across the organization. You cannot detect fraud in a vacuum. This is
the most important realization I have
come to and my strongest recommendation.
Hard facts, street-smarts, awareness
of behavior changes, inquisitiveness
and experience are critical skills. You
will need all of these to effectively prevent and detect fraud.
Develop and use recurring but sophisticated reporting to address the “usual
suspects” and specialty areas. Go personally to the details. “Sacred cows”
deserve special attention. Analytical
review techniques still work.
Managers must establish and regularly communicate direction and tone, be
it on policy, process, expected behavior
or operational results.
I f you cannot get crisp answers,
probe. People either do not understand, or they are hiding something …
and both are problems.
You cannot rely on memory alone.
Document as if you are going to court.
Early on in detection efforts, document
everything; you will likely need all that
“ Whistleblowers” are not wellreceived. Arm yourself with FACTS. Anticipate that you may become the target of
potentially desperate acts.
Rely upon knowledgeable legal staff,
internal and external. When outside
expertise is brought in, take full advantage. Consider the need for your own
R equire organizational separation
between financial operations and
accounting. At MCI, this nearly provided very early insight to suspicious transactions. Vigorously pursue accounting
and reporting questions across
E xpect you will have to push the
action. In less than 10 months, I suspected fraud and ultimately uncovered it. According to the ACFE, the
average fraud goes undetected for 18
months. On a conference call early in
the investigation, an FBI agent told
me two things: MCI was “handing this
case to authorities on a silver platter,”
and “to find fraud, you have to be
good, and lucky.”
Managers are responsible for fraud
prevention and detection. 30 FINANCIAL EXECUTIVE March 2006 Q: You describe Pavlo’s accounts as
“entertaining fiction, at best.” He’s given talks on his fraud…reactions?
A: The First Amendment is a wonderful thing, and fiction is entertaining.
However, the distorted accounts I’ve
seen about Pavlo — who has become a
speaker at ethics forums and before
business students — motivated me to
write this article. The wide-ranging stories have multiple inconsistencies. graduate-level, business ethics class at
the university where Pavlo got his MBA. Q: Give us examples of conflicting
events in Pavlo’s commentaries.
A: His claim of trying unsuccessfully
to get MCI to take a $180 million
charge blatantly conflicts with the
facts. In a 2002 article, he had claimed
the number was $88 million. Either
inflation has increased his number or
he didn’t review his earlier stories!
Q&A with a whistleblower
It is fact that during
According to Pavlo’s accounts, one
1996, MCI wrote off $120 million of
might even surmise his message was
carrier receivables and recognized even
“the environment made him do it!”
more exposure by adding to bad debt
Understanding the testimony and
reserves. So, his claim that MCI “hid”
facts, however, provides a far different
bad debt expense is just bogus. He furview. This was a willful, active fraud
ther claims “his bosses” said the maxiinvolving a very small group of cusmum that could be written down
tomers, executed by a very small group
would be $15 million, and that is also
of people, some of whom ended up
going to jail. Fraudsters typically act
Finally, the published account that
deliberately, out of greed, power and
“Pavlo’s crime unraveled when his boss
perhaps even stupidity… and most ultidiscovered discrepancies between what
mately get caught. These perpetrators
some of MCI’s customers said they
exhibited many typical fraud behaviors. owed and what the company thought
Because of my experience, I had seen it
they owed,” is also negated by facts.
before, but I had to get “proof posiMy suspicions had increased over a
tive” to end it, and I did.
period of months, but the “proof posiI have presented this fraud case in a
tive” was the inappropriate recording certain customers were being dealt
with by carrier collections. Their
observations mentioned inconsistencies, mishaps explained away as poor
communications and difficulties getting needed customer information.
However, I also heard about suspicious activities, questionable tactics
and inappropriate customer commitments, including occasional references
In the midst of this behavior, I presented the “state of carrier receivables” to my finance bosses in August
1996, at a major review session. I summarized how the carrier marketplace
had changed, what the current financial exposure was and what we were
doing about it. Consistent and continued support for direct actions to control carrier receivables was expressed
from all levels. Messages confirmed at
that meeting included: “cash is king;”
“take whatever service-disconnection
action you deem required;” “impediments to collection will be removed.” Top management support for collections action was clear.
My growing frustrations forced me
to take over direct negotiations with
key, high-risk customers. During those
negotiations, I became convinced that
judgments and decision-making by
my staff were growing inept, if not
worse. Legal direction was not being
strictly followed. Finally, after disconnection of one particular customer,
Pavlo resigned the first time. I was
convinced of fraud, but I had to get
him back into the office to lock it
down. I convinced him to return
under the guise of participating in a
“transition period to make organizational changes.”
‘How Much Do You Know?’
In the midst of those changes, the first
set of inappropriate transactions was
discovered. With hard evidence in
hand, I confronted the fraudsters. I
vividly recall the phone conversation
with Pavlo, especially when he asked, of a large settlement payment from WorldCom. Pavlo directed $5 million of the $41 million payment to be applied
against a customer account I had personally negotiated and
had disconnected… pretty dumb!
Q: Describe some comical events.
A: You’ve heard that rule, “never ask a question you don’t
know the answer to?” One attorney interrogated me on a
topic where he believed he had all the answers. When I
replied far differently than he expected, he torturously
skipped over five pages of further questions! By reputation,
he was a tough guy. I enjoyed that one very much.
I recall testifying on a particular event where my account
totally conflicted with a defendant’s. His attorney quizzed
me about how I could so confidently know the defendant
was wrong. I simply said, “Because I asked the person the
defendant said he had gotten approval from, and that person told me neither had he given [the perpetrator] approval,
nor had he ever seen the document in question.” I liked that
one, too — that’s called a “gotcha” in legal terminology.
Q: Was testifying intimidating?
A: Anticipation was the worst part. I had been deposed in
prior civil proceedings; this was much different. At times, I
felt my own integrity was being questioned. Counsel’s recommendation was simply to “own the facts.” I would rate
my performances on the stand as a bit stiff to very good.
The ultimate compliment, however, was the “high fives” I
received from FBI and Treasury agents.
Q: Any disappointments?
A: Despite uncovering this fraud in less than 10 months, I “ Well, Jim, so how much do you
know?” He quickly resigned a second
time and hired legal counsel, first civil, then criminal.
The carrier fraud possessed several
components, as the internal perpetrators joined forces with an outside loan
broker and a factoring company, who
both played significant roles. The base
element required the perpetrators to
convince a selective, small group of
customers to divert payments to other
parties. They then manipulated
accounting records to camouflage
these illicit activities. Unauthorized
“agreements” executed by the perpetrators memorialized the deals. One of
those concoctions even required MCI
to guarantee payments to the factoring company if the customer did not
pay. (Obviously, only the fraudsters
would gain value from such an illogical arrangement!). Finally, investigative efforts revealed a series of payments improperly directed to a software developer. was personally frustrated that no one had come forward
from the carrier group. Granted, I had taken over carriers in
April 1996, so not much time had passed, but I had always
taken pride in my “open door policy.” It is likely some people had been paid off or received favors for their participation, but someone typically gets uncomfortable enough to
talk, just not this time… That’s still disappointing.
Q: “Whistleblowing” has costs, doesn’t it?
A: Absolutely; be prepared. For example, I was personally named in a far-reaching Racketeer-Influenced and
Corrupt Organization Act (RICO) suit, later dropped. Circumstances can get ugly in spite of doing the right thing.
At times, I was concerned for my safety, and for my family.
I knew my actions to uncover this fraud would have consequences, just not some of the ones that ultimately played
out. At Sprint, when I uncovered a fraud against the company in 1984, I received a chairman’s award; at MCI, well…
I ended up leaving.
This “whistleblower” experience was very unlike any
other. In 2002, Forbes published an article about the MCI
fraud in the midst of active litigation. I have noted over
40 inconsistencies, errors or apparent fabrications vs. the
sworn testimony and factual knowledge. In 2004, Internal Auditor published an apparently uncorroborated
interview with Pavlo. I have an email from the author
basically apologizing, though the magazine has declined
to publish a “correction.” More recently, someone historically connected with the bank consortium that had originally funded the factoring company caused me to lose
consulting opportunities, nearly six years after testifying!
So, I felt it was time to disclose the “rest of the story.” I uncovered further dealings with
outsiders, drove the internal investigation and dealt with the multitude of
auditors and consultants, including
one of the most skilled and impressive white-collar crime people I have
Two things I did not anticipate: the
ultimate reactions of certain executives (as opposed to other companies I
had worked for); and the unsubstantiated accounts of this fraud subsequently appearing in the press. Based
upon my testimony and knowledge,
“fiction” has prospered in the media,
unfounded, under-researched and
A key reflection on testifying:
speak from fact. Presenting the truth
is the best offense, and the only
defense. Time after time, I had to
explain the facts in inordinate detail,
yet in their simplest form, all for clarity. Defense attorneys continually “put
words in my mouth” (from their
clients). Developing a working knowl- edge of the facts required much time,
study and attention. Face it, you must
develop a mastery of the data by wading painstakingly through the details.
Overall, testifying skills are similar
to those developed for negotiating,
except you’re on the receiving end.
You wait for each question to be presented, state what you know, directly
responding to each specific question.
You must also admit when you don’t
know, and that is sometimes difficult.
Your inclination is to educate the
questioner on the topic, which is not
your role. I regularly heard, “Wait for
the question to be asked and then
answer it specifically; fuller explanation can be given during cross-examination, if warranted.” My preparation
forced a command of the facts, a
requirement for success.
Jim Wanserski ([email protected]) is
an independent consultant in Atlanta
doing work with specialty and turnaround
consulting firms. March 2006 www.fei.org 31 ...
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