Tag Archives: Rita Crundwell

Something’s Not Right

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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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Checking Up

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Several years ago, I was working on an assignment that had me flying out to Boca Raton, Florida, every Monday and returning to New York City on Friday night. It was great because it was a brutal winter in New York City and pleasantly warm in Boca Raton. It was terrible because it was close to impossible to get anything done over the weekend. One week, I had to admit that there I needed to get one of my teeth looked at. It had been causing me some pain and I knew I had to sort it out before it started hurting a lot. My challenge was to find a dentist who took patients on weekend days and who I could get to easily. I found one online and went in to see him on a Saturday morning. He determined that I needed a filling fixed and he got to work. What I remember about that day is how incredibly painful it was and how unsympathetically the dentist kept ordering me to “be strong”. I was traumatized – so much so that I did not go anywhere near a dentist’s office for years after that. I knew I should, but the memory of the pain and a dentist who was in need of a heart kept me away. Other aspects of my body were very well taken of; I went to my annual physical and that was always a pleasure, compared to my dental disaster. I brushed my teeth but, other than that, they were pretty much on their own.

One nights, I fell asleep while sucking on a throat sweet and, the next morning, I woke up feeling as though my teeth were about to fall out of my head. I was in a panic; I was too young to be toothless. I was desperate and looked up dentists located close to my office. Thankfully, I was able to find a dentist, a few blocks away, who was able to fit me in that very day. As he examined me, a poem from my childhood, “Oh, I Wish I’d Looked After Me Teeth” ran through my head. Fortunately, this time around, I get to keep my teeth. My dentist was a great guy who doesn’t believe in causing pain and suffering and NEVER says to me, “be strong”. I did, however, have to go through a series of appointments to repair the damage that had accumulated over the years that I had avoided the dentist, dentist I could have avoided. I have not missed an appointment since, although I get nervous when the machine turns on, even just to polish my teeth.

Like my teeth, a business needs regular checkups to maintain its financial health. Yes, a lot of companies review their financials on a monthly or quarterly basis, but how many are assessing their control systems and taking steps to update and analyze how they prevent and detect fraud? The fact that the median length of a fraud is 18 months before it is detected and that many frauds can last many years as in the cases of Bernie Madoff and Rita Crundwell, to name a few high profile cases, implies that these steps are not taken often and rigorously enough. No one really thinks that it will happen to them and some people think that their finance department, accountant or auditor will keep them safe from fraud. This is because they do not fully understand the roles and duties of their auditors and accountants. Other people don’t want to spend the money on fraud prevention and detection. However, when you start thinking that Rita Crundwell stole over $54 million and a quick search of the internet brings up many other recent cases of embezzlement of millions of dollars that have been discovered. There are many more that either have not been recorded or are of lesser amounts.

Think about this:

  • Fraud goes on for an average of 18 months but many go on for much longer.
  • Usually fraudsters start out stealing a little money but as times goes on and they are not caught, the amounts stolen grow and grow and grow
  • The knowledge that a company has allowed theft to go on under its nose for years can negatively affect its reputation, leading people to believe that it may not be a safe and ethical place to do business

These are just a few things to think about when it comes to detecting and preventing fraud in your company. It only makes sense to get a qualified Forensic Accountant, Certified in Financial Forensics to assess and evaluate your companies systems in order to beef up your fraud prevention programs and also, perhaps to detect possible fraud? Now, I learnt a very painful lesson before I started to take care of my teeth. Do you want to learn a hard, and possibly expensive, lesson before you take proper care of your business?

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Break It Up!

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I often write about internal control systems and how important good internal controls are when it comes to preventing and detecting fraud and error. A big part of this is the separation of duties. I refer to this often but it struck me the other day that I have perhaps not been terribly clear about what exactly the concept of separation of duties is all about. How does one figure out how to separate duties effectively and what purpose does this separation serve?

In a business, if there is one person responsible for a financial process from beginning to end, there is a great risk of both fraud and error. Without another party to check, review or authorize a person’s work, any errors or fraudulent activity could very easily go undetected. Recently, I heard of a woman who worked at a not-for-profit, receiving and depositing donations. A donor called the not-for-profit to inquire about a check donation that she had sent in. The check, she said, had not yet been presented for payment. Upon investigation, it turned out that the employee at the not-for-profit had been feeling so overwhelmed by her duties that, instead of processing and depositing donations, she had been taking these donations home. Checks were found piled in her home. Had the not-for-profit instituted proper separation of duties, where another party was aware and had a record of checks that had been received at the not-for-profit, it would have become apparently, very quickly, that checks were not being deposited. In such circumstances, for example, one party would record checks as they arrived at the not-for-profit, pass a copy of the check on to one person who would record the received funds in the books and then give the original check to another person who would make the deposit. Now there would be three people who knew that funds had come into the entity and the person responsible for making the deposit would not be the person recording the deposit in the financial records.

When only one person is involved in a financial process, only that one person has to be convinced to commit fraud. However, if two or more people are involved in that process, the parties then have to agree to collude to commit a crime. Those two will have to be sure that one will not sell the other out, should something go wrong. That becomes risky as, with more than one person involved in a process, there is always another person who can speak up about errors or possible unscrupulous activity. The majority of frauds are reported by a whistleblower; the proper separation of duties can go a long way towards creating potential whistleblowers.

When thinking about separation of duties in an internal control system, you should think about splitting every transaction into three functions and assigning a different person to each function. These three functions are:

  1. Authorization, which is the approval process
  2. Execution which is the accounting and reconciling of the transaction
  3. Custody of the asset involved in the transaction.

For example, in the case of Rita Crundwell, she AUTHORIZED payments and transfers made by the city of Dixon. She also EXECUTED the transactions recording them in the books and reconciling the bank statements. She also had CUSTODY of the bank accounts, holding the checks, and making the transfers out of city bank accounts and into her own personal accounts. No one else was involved in these processes so no one else could ask questions about what was going on and why.

It is vital, when setting up an internal control system with the proper separation of duties, that this system is set up by a qualified accountant who has knowledge of processes, their weaknesses and where, in those processes, the authorization, execution and custody functions lie. The accountant should be able to explain how and why duties should be assigned to different people. The accountant should be able to work with a company’s complexities and staff restrictions to come up with the best ways to safeguard the assets of that company.

It may seem tedious and overly cautious but it is far smarter to have a finance system that discourages potential fraud, than to scramble around trying to recover assets after they have been stolen. Separation of duties goes a long way toward reducing the opportunities for fraud and creating greater possibilities that fraud and error will be detected. You want a system where an employee, under pressure to commit fraud, sees that others are checking on the process and that there is a well-organized system. You want that person to decide that trying to exploit the system and steal from the entity is too complicated. You want a system where, should someone actually decide to steal, they will be discovered through the various checks and balances built into the system. So, break it up!

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Way Outside The Box

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Shock Absorber

I studied economics in college and in class we learned a lot of theories about things like supply & demand, consumption, and maximizing utility. Those lessons came with graphs and diagrams that were all very logical and pretty to look at. To know that there was an explanation for everything was both exciting and comforting. Learning that a change in the money supply would result in a provable response from the market was a powerful lesson. Everything worked just so, and followed the lines of the diagrams. The power of economics was amazing – all very logical, like a math problem (I also studied math and statistics, so I enjoyed how everything fell in place). It all made sense!

After college, I spent a few years in Zimbabwe and, during that time, I did a stint at an investment bank. I had studied various aspects of economics including micro- and macroeconomics, econometrics and neoclassical theory and so I was ready to step into my analyst position where I took market information and used it to explain and predict market activity. What I found, however, was that sometimes things worked according to the models that I created and the other times the market went rogue. When that happened I was stumped. What was wrong with the people? Why didn’t they act according to the graphs and predictions? Why weren’t they behaving in a logical manner? I wasn’t sure at times, whether to be upset with the people or with the economic theory that didn’t sufficiently warn me about the propensity of people to do what they are not supposed to do.

I left the bank to work in audit, at Deloitte. Just before I started there, an incident had occurred. A client, who was committing fraud, offered the audit manager a bribe to ignore the fraud and issue a clean audit report. When the manager refused to accept the bribe, the client tried to kill the manager. At work, my fellow employees were puzzled by this behavior – for one thing, it would have made more sense to try to bribe the audit partner, as that was who would sign off on the audit report. Was this client’s plan to kill every manager who took over the audit until he found one who was willing to not only take the bribe but also convince the audit partner that the books were fairly stated? It didn’t make sense.

I have found over the years that, unlike most of my mathematics problems, there are many incidents where human behavior does not make sense. A recent example is Scott London, a former senior KPMG partner who, although he earned a seven-figure salary, gave away insider information to his golfing buddy in exchange for a watch and jewelry that he could have bought himself and for about $50,000, cash that was small change in comparison to what he earned. He risked his career, reputation and, possibly, freedom for no good reason.

Why would he do that? It is a question that comes up just about every time a fraud is exposed. We are shocked by the lengths that people go to in order to defraud businesses and what they are willing to risk in their schemes and it is very likely that the fraudsters bank on our unwillingness to believe that anyone could do what they are doing. Often a fraud goes on for a long time because even when someone suspects that something is amiss, they cannot get their minds to go to the place the fraudster occupies. We have preconceived ideas of what a criminal is and so there are many that we don’t suspect:

  • We can’t believe that someone who has been a longtime, respected member of our community could steal from us.
  • We are stunned to discover that a friendly and fun coworker is defrauding the company.
  • In 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 embezzling money?
  • The person fleecing the company could be the person who wins employee of the year awards because they put in long hours, never take vacation time and are always doing more than is expected of them.

At times, in order to see fraudulent behavior, we have to first shrug off our preconceived notions of what kind of person will commit these actions. In this way, we won’t shrug off any red flags or odd moments. Many times after a fraud is uncovered we hear people say things like:

  • He would say things sometimes and I would think maybe I heard him incorrectly;
  • I just assumed she had inherited money from a relative who had passed away;
  • When he started explaining things, he made it sound so complicated that I decided maybe I thought something was wrong because it was too difficult for me to understand.

Humans are odd creatures. We have the power of choice and sometimes that means that a person will make a choice that is absolutely illogical to you. For instance women will wear shoes that break their bones and disfigure their feet and, not only will they wear these shoes, but they will also play hundreds of dollars, sometimes thousands, for these foot-deforming shoes. For many, there is no good reason to destroy your feet in the name of cute shoes but for many others it makes enough sense for them to do it. I know this as a runner who has seen how wrecked we look at the end of a race – bleeding body parts, hobbling, missing toenails – and yet how absolutely triumphant we are. We often don’t make sense.

At times when things pop up that we don’t make sense, we need to be able to keep from thinking that the error is with us. Instead of creating explanations that make sense to us, at times it is important to step outside our boxes and open our minds to the possibility of the unimaginable. If it appears off, it may well actually be off and not be your imagination. It turns out that no one is too smart, too rich or too nice to commit fraud.

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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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