Tag Archives: embezzlement

Not Again…

I don’t know what life was like for you, growing up, but my youth was full of lectures. I never just got into trouble. I got into trouble AND I got a lecture to go along with it. We never just went on vacation; we went on vacation, had to write an essay about our experiences AND we got a lecture about how both things were important. We didn’t just discuss our report cards, good or bad; we discussed our report cards AND got a lecture about the long-term benefits of each class we were taking. The lectures often came with true-life stories about one or both of my parents, someone they knew or someone who lived in their “day”. I am not saying that I was lectured a lot, but I did hear some stories more than once. On the occasions that I tried to interrupt to say that I had heard the story, I was told either that there was a new lesson to be learned, or asked why, if I knew the story and the wisdom it imparted, I continued to make the same mistakes.

Well, at last, I get it. Because the other day, I came across a case that includes so many lessons on fraud that, if I were teaching a semester on fraud, I could use it as an example in just about every lesson. This is the case of Christopher Myles, a former bookkeeper in New York City. He worked at Central Park Realty Holding Corp., and some of its affiliates, and reported to the President of the company. Tragically, in May 2010, the President, suffered a stroke and ended up in “a comatose-like state until her death in February 2012”.

With the president incapacitated, no one stepped in to VERIFY Myles’ work. By the time September 2011 rolled around, Christopher was aware that he could pretty much do whatever he wanted without anyone really questioning what was going on. He knew that he now had the OPPORTUNITY to defraud his employer and he took advantage of this opportunity. True to the trend, Christopher Myles started his fraud on a small scale, using the President’s credit cards to pay for personal expenses. He escalated quickly and by early 2012, he was transferring funds out of her personal bank account in order to pay his and his mother’s bills. He did this until there was no longer any money in the President’s bank account. Myles did not let this empty bank account stop him though; he then started transferring money from the business accounts, first, into the President’s personal bank account and, subsequently, into his own personal accounts. On days when he felt particularly bold, or reckless, Myles would transfer money straight into his and his mother’s personal bank accounts. Christopher Myles had unfettered access to all of these accounts, both business and personal, and never needed anyone else to sign off on any of the funds he moved into and out of these accounts. The lack of segregation of duties made this fraud simple for Myles.

If anyone had been watching him and taking notice, they may have noticed that Christopher Myles was living beyond his official means. He used his ill-gotten funds to buy a new home, go on shopping sprees and fancy vacations. This is another red flag for possible fraud. Throughout this fraud, created falsified bank statements and recorded all of these illicit transfers as business transfers. Unfortunately, no one followed up closely on any of these untruths. Perhaps none of those looking at the fake bank statements understood how the company worked and what kind expenses would appear as out of character, or maybe no one was familiar with the ledger and how to analyze it. I am not sure, but, the result was that Myles was able to continue his fraud for over two years (just a little bit longer than the median duration of a fraud), until November 2013, when he resigned.

It was only when his replacement discovered the fraudulent invoices that Myles created, in attempt to disguise his embezzlement, that Christopher Myles’ theft was discovered. A forensic investigation revealed that, in two years, Myles had stolen about $1.3 million from his employer. Myles’ former employer reported all of this to the authorities and, in addition to an indictment for the theft, Christopher Myles is also facing tax evasion charges. This is because, in the manner of Al Capone, Christopher Myles did not report any of his fraudulently acquired income on his tax returns.

Almost like a bonus in the lesson that keeps on giving series, once his theft had been exposed, Christopher Myles sent an email to all parties involved. In this email, he RATIONALIZED his fraud, claiming that he was entitled to the funds because he was due a raise and compensation for having to deal with a difficult coworker.

As I read the press release about Christopher Myles’ indictment, my jaw hung open. I said out loud, “wow, this has all the classic markers; it’s unbelievable!” Yet, the markers are classic for a reason. There are probably a lot more lessons to learn from the story of Christopher Myles, but don’t get me started!

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Oh Yes, She Did!

james_ano_silly

In previous posts, when talking about the importance of controls in a system to help prevent fraud, I discussed the case of Amy Wilson. These posts were specifically about how trust is not a control. Regardless of how nice a person seems to be (or is) or how long someone has worked for you, you should never decide that you can trust them enough to forgo system controls. It really cannot be said enough, trust is not a control. It does not matter how good a person is or how long they have worked without ever considering defrauding their employer, there may come a time when they face great pressure to commit fraud. It is important that, should this time arise, there are controls that deter them from giving in to temptation.

In my first post about Amy Wilson, I discussed how many controls I come across when I run a race compared to how few controls I have seen in many businesses. I continue to be amazed by this; people will put so much into making sure folk aren’t fabricating their running times, yet they are willing to trust those very same folk with their money and assets. The second time I wrote about Amy Wilson, I had watched her enlightening interview on the Attestation Update website. Here and in the articles she has authored, Amy Wilson speaks very clearly about what she did and how she could either have been caught or have never had the opportunity to perpetrate the fraud.

Well, fast forward to today. I received notification, this morning, that Amy Wilson had visited my website and left me a comment. She was very complimentary (whew!). I am glad because Ms. Wilson does have great lessons to impart and I appreciate that she does not take issue with how I have shared her story and lessons. To have real life examples of where the weaknesses in a system were, how they were exploited and the ultimate consequences of all of this is absolutely priceless. When it comes to designing and instituting controls in a financial system, it is imperative that this is performed effectively and consistently. In order to make sure that this process is correctly implemented, the stories must be told clearly, correctly and honestly. It is fantastic that Ms. Wilson is unflinching when she talks about what she did; that kind of thing does not happen often. This kind of honesty helps forensic accountants get better at what they do and, hopefully, businesses get better at deterring, preventing and detecting fraud. Finally, feedback like Amy Wilson’s helps me feel happier about what I do.

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From The Horse’s Mouth

Mister-Ed-Talking-HorseEarly 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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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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