Trust… But Verify

Image Like many others, I have been fascinated by the case of Rita Crundwell, the comptroller and treasurer of Dixon, Illinois, a city 100 miles away from Chicago with a population of almost 16,000. Crundwell grew up in Dixon and started working at city hall in 1970, while still in high school, as part of a work program. After graduating from high school, she stayed at city hall and became a clerk. In 1983, Dixon’s comptroller retired. At that time, the annual budget for Dixon was $9 million. Rita Crundwell, put herself forward as the best candidate to replace the outgoing comptroller, citing her many years working for the city. She got the job and held her position until her arrest in 2012. In December 1990, Crundwell opened an account in the name of RSCDA, the Reserve Sewer Development Account, in care of Rita Crundwell. A cursory look at this account made it appear as though it was a City of Dixon account, but Crundwell was the only signatory on this account. Between when she opened the account, in 1990, and when she was arrested, in 2012, Crundwell transferred over $53 million to this account and used this money for her personal use.

As I have mentioned before when people steal, they tend to start small and then escalate. In 1991 Crundwell transferred $181,000 to the RSCDA account; in 2008 she transferred $5.8 million. Between May 2011 and April 2012, Crundwell moved $4.8 million to her RSCDA account from the city coffers. During that year, the city’s revenues were $9.7 million and it’s property taxes were $1.4 million. At a point, Rita was embezzling more than half of what Dixon was spending on city expenses. She used the money that she stole to fund an extravagant lifestyle and create a world-class quarter horse empire. When she was arrested, Rita Crundwell had 311 registered quarter horses and had been named leading owner by the American Quarter Horse Association for eight consecutive years. With all the stories of her excesses and blatant wealth and spending, it seems incredible that Rita Crundwell was able to defraud Dixon for over twenty years – how did no one notice what she was doing and why did no one question how someone earning $80,000 a year could live so extravagantly?

The story of Rita Crundwell and her crime is a great illustration of the working of the fraud triangle. Her family had been involved in the horse breeding and showing business, she had grown up on their farm, and it appears that she was obsessed with going back into the family business and bringing glory to it. As far back as 1978, Crundwell started showing horses on a regional level, winning the Indiana State Quarter Horse Championship and the National Texas Classic State Hunter Under Saddle Championship in 1985. She bought three horses in 1989. The quarter horse business is a very expensive one and she probably felt great pressure to come up with the adequate funds in order to continue on her desired path in the trade. I have no idea how she rationalized her crime. Maybe she told herself that she deserved more than the $80,000 that she was paid to manage the finances of Dixon, especially after all the years that she had worked for the city. Either way, there was great opportunity for her to steal. There were barely any controls over the city’s finances and she took full advantage of this situation. We know that Rita Crundwell opened her the RSCDA account in 1990 but it is unclear if transfers through that account were the only fraud that she perpetuated on the city of Dixon. She worked in city hall for over 20 years, understood how things worked and took full advantage of its weaknesses. I would not be surprised if she stole from the city in other ways and just was not caught doing so.

As the comptroller and treasurer of Dixon, Illinois, Rita Crundwell had unfettered authority over the city’s finances. There were barely any system controls in place, including an inadequate separation of duties and Crundwell ended up having control over every aspect of the financial process. For example:

  • She opened and authorized bank accounts. This is how she was able to open the RSCDA account and name herself the sole signatory of this account.
  • She wrote the city’s checks and also was able to move money between accounts. This made it simple for her to move funds into the RSCDA account without anyone asking questions.
  • She made payments for the city. So when she created rudimentary fake invoices that were purportedly from the Illinois Department of Transportation and made payments to “Treasurer” for funds that were funneled into the RSCDA account no one raised any alarms about how unlike other Illinois Department of Transportation invoices these invoices looked or about how much money was being paid to the treasurer of this mysterious entity.
  • She reconciled the city’s bank accounts meaning no third-party reviewed them and asked about large and mostly unexplained transfers out of the money market and capital accounts.
  • She prepared the financial statements for Dixon and no one reviewed them or the supporting financial records so no one could possibly ask why, for example, so much money was being spent on capital expenditure, where she hid her embezzlement.
  • She reported the city’s finances to the mayor and the city council and was able to brush off their questions about why the city was struggling financially, tending to blame debts owed to the state of Illinois for financial shortfalls. No one in the city council thought to check with the Illinois state government to verify these claims.
  • For reasons unknown, Rita Crundwell picked up and distributed mail within city hall. In this way, she was able to intercept bank statements from her RSCDA account which, in order to appear official, she had sent to city hall. It is odd that the city comptroller would have mail delivery duties and the risks this presented were not recognized by the city. Mail delivery should not be a duty of anyone responsible for the finances of an entity. Control over mail gives a person the opportunity to intercept information, such as secret bank accounts or illegal financial business, which can potentially expose fraudulent activity.
  • Dixon’s financials were audited every year and yet, they did not find anything amiss with the city’s financial statements and they never verified any of the large capital expenditures the city made. Had they done so they would have discovered that many were fictitious. The city of Dixon has filed civil charges against the various auditor firms who audited their accounts over the period of the fraud and the case is currently ongoing.
  • The city’s external auditors noted, in 2011, that management’s discussion and analysis for the city of Dixon was missing and had been omitted for the six previous years. This discussion is an important aspect of an entity’s financial reporting and yet, no explanation was given for this omission. The city should have looked into why this was missing and understood that this report was important. However, it seems that no one really wanted to be concerned with the ins and outs of the city’s finances and everyone was happy leaving this up to Rita Crundwell.

People in Dixon assumed that Rita’s wealth came from her award-winning quarter horse business, while those in the quarter horse business thought she came from a wealthy family that was bankrolling her business. Rita, in turn, took advantage of the city residents’ lack of knowledge about how much money went into and how little came out of the business. As time went on, she was emboldened by her ability to pull the wool over the eyes of those around her. As she took more and more money from the city, she was fiscally tough on the various departments of the city, cutting their budgets and turning down their expense requests. Rita Crundwell appeared to be concerned with saving the city money when she was probably concerned with keeping increasing amounts for her to dip into in order to fund her lifestyle. Also, Crundwell had four weeks of paid vacation a year and took additional unpaid vacation regularly – twelve weeks in 2011. This meant that she ended up being paid less than her approximately $80,000 salary, thus coming across as an employee who was saving the city money. It is surprising that no one thought there was something wrong with a city’s controller who spent a little more than half the year on the job, especially when the city seemed to be unable to stay within budget. Instead the mayor and city council seemed to be grateful that she was saving them $20,000 a year during her unpaid leave times and serving the city when she was so wealthy and didn’t appear to need to do so. Finally, Rita was a local who had grown up in and around Dixon. People knew her and thought that this meant that they could trust her. She was also known to generously help people in her community; little did they know that she was using city funds to do so.

For CPAs performing audits, the importance of practicing professional skepticism is emphasized. The concept of skepticism is one that it would be wise to adopt beyond the audit. Those stealing money within an entity bank on their coworkers trusting them and not questioning their actions. Rita Crundwell’s fraud was discovered while she was on one of her unpaid vacations. Taking vacation time is a very important system control within an entity. However, this control only stands a chance of working if, during an employee’s absence someone else performs the vacationing employee’s duties. A report was needed and a clerk requested bank confirmations. The confirmation included the RSCDA account and the clerk took this information to the mayor. Finally, after over 20 years, people started asking questions and stopped blindly trusting.

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10 thoughts on “Trust… But Verify

  1. […] like a client or coworker, you should still practice professional skepticism and, although it is nice to trust, it is always smart to verify. Verification from an independent third party is the method that gives the most comfort but in […]

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  2. […] cases such as that of Rita Crundwell, the fraudster is the kind person who helps out when we are in trouble. How could that person be […]

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  3. […] Back in August, I came across an article about court documents that were filed in the prosecution of some of Bernie Madoff’s former employees. The court documents alleged, “One of the defendants was in a love triangle with Bernard Madoff himself” in addition to other employees and customers who were engaged in sexual or romantic relationships with each other. This is not the first allegation of deviance at Bernard L. Madoff Investment Securities, the massive Ponzi scheme that Madoff created and ran for many years until he was busted in 2008. In 2009, court documents alleged that Madoff held drug-fueled sex parties that included employees, feeders, prostitutes and strippers. Then, just this week, I read about an ex-FBI agent pleading guilty to leaking secret government information, about a bomb plot, to a news agency. Slotted casually into the article was this little nugget of information – “in addition to a separate sentence for unrelated child pornography charges”. I have been wondering what else we are going to find out about recent fraud cases, such as the ones involving Scott London and Rita Crundwell. […]

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  4. […] example, in the case of Rita Crundwell, she AUTHORIZED payments and transfers made by the city of Dixon. She also EXECUTED the […]

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  5. […] Early last year, I wrote about Amy Wilson and the lack of controls that existed in the company that she stole from. The complete lack of controls and reliance on trust gave her the opportunity to steal from the company, which she did… for four years. She was actually caught by the fraud department at the credit card company, not by her employers. Anyway, I am talking about her because Jim Ulvog has an excellent post on his website, Attestation Update. Here, Amy Wilson tells us about her fraud, how she was caught and how she got away with things for as long as she did. It is an excellent watch and a great reminder of the very wise words – “trust, but verify.” […]

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  6. […] in any city record. Had, someone else in the city’s finance department routinely performed banking and mail duties while Crundwell was out of the office (of even at random times when she wasn’t), this […]

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  7. […] in any city record. Had, someone else in the city’s finance department routinely performed banking and mail duties while Crundwell was out of the office (of even at random times when she wasn’t), this […]

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  8. […] the president incapacitated, no one stepped in to VERIFY Myles’ work. By the time September 2011 rolled around, Christopher was aware that he could […]

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  9. […] that many employees have been playing lip service to that value and we know that, even with trust, it is important to verify. Take the time to check in on your finances. There may be mistakes that need fixing and there may […]

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  10. […] flags and other clues to incorrect conclusions can be far more costly. A classic example is that of Rita Crundwell, who defrauded the city of Dixon of over $53 million. The people who worked with her saw that she […]

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