Tag Archives: Dixon

Something’s Not Right

306H

When I was just heading into my teenage years, something was not right. Not with me, but with my mother. It was unsettling for me and then miserable. It was difficult enough to be heading into my teenage years but my mother was not helping by being off.

First of all, she began to act out of character. She would come home from work and ask for a glass of water with lots of ice in it. You may not see anything wrong with that, on the face of it, but it was plenty odd because my mother never drank glasses of water with lots of ice in them. And now she wanted a glass every night. To make things even more stressful for us, each glass was closely examined and if it was not perfect – not enough ice, water somehow looked cloudy, the glass was not perfectly polished – one of us kids would have to get a new glass and make sure that it was perfect this time.

Then there was the language. My mom started using new slang. For all I know now, she may have started hanging out with a new lunch buddy and picked up some phrases from this new friend. But, along with the water, this new language mom was freaking me out. It was truly odd. But the breaking point came, for me, one Saturday morning. I was following my mother around the house and she watered and spoke to her many, many plants. This was totally in character so that gave me some comfort and was likely the reason why I was hanging about with her that morning. Then I noticed that her dress didn’t quite fit. It was tight on my mom and that was, once again, out of character for her. What was going on?

That thought was still with me as I spent time alone that afternoon. What was going on? Well, after an afternoon of pondering, I had narrowed it down to two options. Either my mother was having an affair or she had been abducted by aliens and they had left an imposter alien in her place. My two options seemed to be the only options that made sense to me at the time – I had friends at school whose parents were going through divorce. Something about our conversations made me think that divorcing parents did not act like themselves. But, if it wasn’t divorce, it could only be aliens. I blame Star Trek for getting me to believe that my mother could be abducted and a poor replica, that wasn’t quite the same size and betrayed itself with its weird speech patterns and love of ice, be left in her place. Both options were devastating for me; either way I was losing my mother and that filled me with despair. I even cried a little that afternoon.

Fortunately for my state of mind, just that week, as though she knew what was going on with me, my mother broke the news. She was pregnant (some may say I was sort of right about the alien in her body). What a relief!

It turns out that, despite all the clues that I noticed, I came to a completely wrong conclusion about what was causing the changes in my mother. Fortunately all my wrong conclusions led to was an afternoon of sadness and tears. In the work place, the consequences of taking data, red 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 had a growing stable of quarter horses and was often traveling far and wide with these horses. They assumed that the horses paid for themselves and more and this was how she could afford to keep them. People in the horse world, who knew that horses cost more than they made, thought that she had some kind of trust fund that paid for her extravagant lifestyle. When Rita would not let anyone do her work, or even collect her mail, they thought she was being a great treasurer who diligently controlled her city’s budget. No one saw all the clues and thought she was embezzling money.

If someone was paying attention to the clues and knew how to analyze all the red flags that Rita Crundwell left in her wake, her fraud would never have lasted for the two decades that it did. If, for instance, the city had taken on the services of a forensic CPA to analyze, design and implement control systems and to help them with fraud prevention and deterrence, they may not have lost over $53 million to Crundwell.

This is an excellent reminder of how important it is to have a CPA, with experience and qualifications in financial forensics, to analyze and assess your business’s operations and finances to see what clues are there and what those clues really mean. You may notice that things are amiss, but how willing are you to accept how expensive coming to the wrong conclusion can be for you?

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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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