What businesses can learn from the NBA’s $13M fraud case

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We’re only one month into the 2019-2020 NBA season and the Sacramento Kings recently have been in the news for the wrong reasons. An ESPN report revealed that the Kings’ former chief revenue officer, Jeff David, stole in excess of $13 million from the organization. The bulk of the funds were stolen over the course of a single NBA season.

It turns out David had formed a fictitious sports consultancy, Sacramento Sports Partners. During the Kings’ negotiations with two of their largest sponsors, David developed a scheme to cause payments (which should have been made to the Kings) to be directed to Sacramento Sports Partners. Unbeknownst to the rest of the Kings’ leadership team, David altered the terms of a 20-year, $110-million naming rights agreement to cause a $9-million upfront payment to be paid to Sacramento Sports Partners. He also caused another sponsor to make a $4.4 million upfront payment to Sacramento Sports Partners as part of a 10-year, $28 million sponsorship arrangement.

This begs the obvious question: How did the Kings allow this fraud to occur? While most NBA franchises have a handful of sponsors who pay seven figures on an annual basis, David was able to defraud the Kings and two of their sponsors out of an amount that exceeds most NBA sponsorship contracts.

To be fair, David was blatantly dishonest. He forged the signature of the Kings’ then-CEO on revised sponsorship contracts. Then, he invoiced the two sponsors on Kings letterhead directing them to pay Sacramento Sports Partners.

Ultimately, David’s fraudulent activities were accidentally discovered by the Kings’ vice president of human resources when David’s old computer was searched for purposes of locating a commission incentive structure. By then, however,  David had left to take a job with the Miami Heat two years after he completed his theft.

Hindsight almost always provides perspective that was limited in real time. However, the Kings undoubtedly should have had better practices in place to help identify and prevent embezzlement by an employee, especially embezzlement on the scale at which it was perpetrated by David.

The following practices are advisable for companies of all sizes.

Confirm all major invoices and periodically spot check smaller invoices

Accounting departments should have a process in place to regularly communicate with top vendors and customers and to periodically check on payments with less significant vendors and customers. For the naming rights sponsor especially, given the $5.5 million average value of the sponsorship, the Kings’ accounting department should have called to verify payment details concurrently with the sending of an invoice. This level of communication may have helped the Kings identify the fraud up to two years earlier.

Calling to confirm invoices has a benefit beyond preventing embezzlement. Fraudsters have become increasingly sophisticated in recent years and wire fraud is an increasing concern. Calling to confirm payment details can further help to prevent nefarious actions by illegitimate actors.

Create checks and balances

In any company other than a sole proprietorship, checks and balances should be created to manage the flow of funds. When possible, an employee other than the employee who entered into an arrangement with a vendor or customer should be responsible for writing checks, sending invoices and processing payments. Separating duties in that manner allows for a natural structural check on the activities of other employees and helps minimize the risk that fraudulent invoices can be prepared to siphon funds that should otherwise be the property of the company.

Perform monthly reconciliations

Most larger companies perform reconciliations on a monthly basis. Smaller companies sometimes find monthly reconciliations to be overly burdensome. However, performing reconciliations on a monthly basis can help identify incorrect account balances in real time and stimulate investigations that can determine why account balances are not properly reconciling.

Require co-signers on transactions above a certain threshold

We regularly recommend to clients that they identify a threshold amount which expenditures cannot exceed without the approval or co-signature of other officers or owners of the company. The Kings very well may have had a process such as this in place as David forged the CEO’s signature. However, it is difficult to expect that the CEO would not be intimately involved in a sponsorship agreement of $110 million and that good procedures for assuring all parties were involved in signing the final agreement.

Define payment practices within key customer and supplier contracts

Some companies define payment practices within the contracts they sign with their key customers and suppliers. Identifying the account to which payments should be sent in a written agreement reduces the risk that a rogue actor can successfully divert funds by sending an invoice that identifies a different account to receive funds.

Retain an outside auditor for routine audits

Auditors typically provide a spot check of a company’s books and accounts. Since a substantial minority of small businesses that fail are victims of employee theft, it is worthwhile to have an outside third-party identify potential red-flags from time-to-time.

Contact appropriate parties when fraud is suspected

If you believe your company may be a victim of fraud, whether by an employee or outside service provider, you should immediately contact your lawyer and accountant. Lawyers are well practiced in conducting investigations into fraudulent activities and often can help get to the bottom of fraudulent behavior quickly. Likewise, forensic accountants are highly skilled in determining how the flow of funds evidence a fraud and can effectively aid in stopping a fraud.

In certain circumstances, it may also be advisable to contact law enforcement. The Kings ultimately contacted the FBI, which was able to help investigate the fraud conducted by David and ultimately resulted in him going to jail.

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