Tag Archives: FBI

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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Hey, That’s My Stuff!

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I have written before about the fraud triangle and how the three elements, pressure, opportunity and rationalization, tend to be the factors that drive a person to commit fraud. Well, a few days ago, my husband and I were talking about Scott London and his insider trading charges. We began discussing the issues in relation to the fraud triangle – what was the pressure that he felt and how did he rationalize his actions? The opportunities for him to pass information on to his friend were, as far as he was concerned, quite plenty as he was operating outside of the system in which he worked and its established controls. However, he had not fully factored in the FBI and the SEC and their activities to attempt to thwart fraud.

My husband then said – but how do you really take away the opportunity? I don’t understand how you can really stop someone from trying to steal. That is true, however, you can put in safeguards to make it very difficult for the theft to occur, I responded. My husband, a photographer, is in the process of moving into a new studio space so I decided to use this as a way to explain my point.

Before moving his equipment and furniture into the space, my husband spent a lot of time thinking about the security in the building he is moving into. He walked around the premises, noting where the security office was located, in relation to his studio; he took a look at the various points of entry into the space and assessed how easy it would be for someone to gain unauthorized access; and he looked at the building and what security it came with. Armed with this information, he then sat down and made a plan. He researched alarm systems, door and window locks and various barriers to entry of his studio. Also, within his studio, he took steps to further secure his equipment with lock-boxes, storage containers and other measures. This, I told him, is how you attempt to take away the opportunity. He could have moved into the office spaces as is, without taking any steps to secure his space and its contents, but he did not. He took the time and energy to dissuade a potential intruder from entering his space. By making it as difficult has possible for someone to get into his space, he is working to break the triangle.

Controls to protect ones assets can be physical, as with the studio space, or procedural, as with an authorization process for processing checks in an accounts payable department. In both cases, they are very important when it comes to trying to break the fraud cycle and prevent theft, insider trading or whatever the crime of the day is.

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Who’s Toning the Top?

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This week, Scott London, a KPMG ex-partner was busted. It was the getting busted that resulted in him going from partner to ex-partner. It turns out that, for several years, Scott London had been passing on non-public information about at least two of his clients, Herbalife and Skechers, to a golfing buddy, Bryan Shaw. Shaw then used this information to make over a million dollars on the stock market. London was caught during an FBI sting that included a photo of him receiving a bag of money from Shaw in a parking lot. A parking lot. Straight out of the movies. It is a very interesting case that is still unfolding. We are learning a lot about how and what happened and perhaps we shall also learn why it happened. Why did this KPMG partner (at the time) decide to share confidential client information with his friend and take expensive gifts and cash, a fraction of his annual salary, for this information? Discovering the motivations will be interesting but right now, this case has me thinking about another issue.

This case brings up, to me, the issue of “the tone at the top”. This is the example that a company’s management sets that may affect how ethically employees may behave. As a CPA, forensic accountant and a former auditor, I know that ethics are a big part of our education and continuing education. The stress on ethics is part of why CPAs have been found to be the most trusted business professionals, according to surveys. In addition to the required ethics continuing education that credentialed forensic accountants, and CPAs, have to complete, laws and firm policies go a long way to trying to ensure that an accounting professional is objective and, in many cases, independent from his or her client. For example, audit firms practice partner rotation with their public company clients. This means that every five years public firms will have a new partner managing their audit. Also, forensic accountants, before accepting an assignment, will run a check to ensure that there is no conflict of interest. Even the appearance of a lack of independence can result in people not trusting their accountant, whether that accountant is performing an audit or forensic services.

There are many rules and regulations to try to maintain the integrity of the accounting profession but as partners are at the top of the totem pole, it is very important to know who is watching those at the top? What is being done to make sure that those at the top are not abusing their positions of power by compromising their ethics. The evidently casual way that Scott London shared confidential information with his golf buddy implies that he either did not believe that there would be significant consequences if he were caught or that he would not get caught at all. Although he took his actions outside of the control systems created by the audit firms which include the disclosure of investments to prevent a conflict of interests, there were the investigations by other agencies, the FBI in this case, that flagged Shaw’s suspicious trades. That is a comfort. Hopefully, as this case and story unfold we will have the full power of the law descend upon London for his insider trading. In addition to the charges being leveled against London by the FBI and the SEC, KPMG has stated that it will be bringing legal actions against London. It should be more than lip service. KPMG and other CPA firms must realize that how they deal with their most powerful and senior practitioners goes a long way to ensuring that they remain trusted and held in high esteem.

Granted, every profession will have bad apples – unscrupulous people who have little regard for the profession. When it comes to being a CPA, a license where members agree to practice according to very high standards, it is imperative that those who are caught violating the code of conduct and the law are dealt with strictly. Partners of the Big Four accounting firm are more in the spotlight than other accountants and it should be clear that a position of power does not exempt one from discipline – in fact, the position of power should mean that you are more disciplined.

Finally, according to the United States Golf Association, London has a handicap of 10 and Shaw’s handicap is 12. Generally, a lapse in honesty tends to extend beyond just one event. A person who is gaming one system is likely gaming others. It is probably a good idea to check on that handicap, though I doubt either of those two men will be playing golf any time soon (at least I hope they are too busy paying for their behavior to do so).

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