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In his first days as manager of the Salt River Project's risk management department in late 1991, William R. Powell was confronted by unexpected losses from white collar crimes.
The crimes shook SRP to its core. Company officials had believed they were putting good people in positions of trust, recalled Mr. Powell.
But the perpetrators circumvented the company's financial security measures.
The first incident, which was discovered shortly before he took over the department, was particularly unsettling for Mr. Powell because it involved an SRP claims manager charged with creating false automobile liability claims. His scam led SRP to issue settlement checks for the false claims.
The claims manager was killed in a car accident days after he was told of the discovery of improprieties.
In conjunction with two relatives, he was suspected of filing false claims totaling $887,834.
"I really anticipated the distinct possibility we were going to have cancellation of fidelity coverage," Mr. Powell said. "Particularly because it was with a carrier that did not offer it as a major line; it was a loss leader line."
Mr. Powell directed his insurance department to notify the utility's fidelity insurer, which he declined to identify, and begin gathering the information needed to file a claim.
Mr. Powell also led the investigation by SRP's security department, which reports to him, and its financial auditors.
Investigators succeeded in developing a case for the prosecution of the two relatives and in establishing the extent of the company's losses from the scam, leading to a successful claim settlement, Mr. Powell said.
The investigation Mr. Powell directed established every cent of SRP's loss.
An SRP security services investigator spent months meticulously poring over claims records, found a pattern, and then interviewed and confronted the alleged claimants.
Meanwhile, Mr. Powell helped provide SRP'S media relations department with company statements to be released to reporters if they inquired about the case.
"When we were so consumed in trying to prove what was a very devastating loss to this company, the last thing we needed was to deal with extraneous factors that could take us away from the importance of what needed to be done," Mr. Powell said.
Just as that loss was being resolved, however, SRP's financial auditors uncovered another alleged crime in August 1993.
A longtime employee, allegedly taking vendor kickbacks, presented SRP with the potential of $1 million in losses for "way over-market pricing for marginal service," Mr. Powell said. Playing a support role in that investigation, he negotiated another settlement with the same insurer.
Despite the evidence SRP'S investigators had collected, the company was unable to convince prosecutors to take the suspected perpetrators.
With two major scams and renewal of its fidelity insurance near, Mr. Powell contracted with Alexandria, Va.-based consultant Risk Concepts Ltd. to review the adequacy of SRP's security procedures and whether they contributed to the losses.
Risk Concepts' analysis found that the losses did not result from flaws in management oversight or internal controls, but were simply the sort of losses that can occur despite even the best safeguards.
Nevertheless, SRP did follow Risk Concepts' recommendations for additional security measures.
Mr. Powell restructured his security services unit by promoting the investigator, Joe N. Smith Jr., who pored through claims in the first incident, to manager of the unit. Additionally, two more "top notch" detectives with police department experience were hired. Other changes were made as well, such as outsourcing some patrol responsibilities and strengthening relations between SRP'S financial auditors and the security unit.
Risk Concept's security review and improvements helped Mr. Powell portray a positive image of SRP's fidelity exposure to insurers, he said. During renewals in 1994, the incumbent insurer agreed to renew the account, though it asked for "substantially more" premium. SRP, though, instead contracted with underwriters in the London market that offered improved terms and conditions at a better rate based on the risk manager's presentation.
It is a three-year policy with a guaranteed premium, assuming no significant changes in the risk, with a 10% discount in subsequent years for no claims. To date, there have been no losses
The company's coverage now includes an audit expense to cover the cost of investigations should losses make it necessary.
SRP incurred $75,000 in uninsured expenses substantiating the two claims, Mr. Powell said.
In addition to beefing up security, SRP used the losses to show employees that the company does not tolerate theft and will seek prosecution and restitution.
Risk managers need to be aware that fidelity losses can happen anywhere and they need to know how they will respond when they do occur, he advised.