In the News: Fraud in the Government Setting

1. In the News: Fraud in the Government Setting A Case Study approach to Fraud and its relationship to Financial Statements. Presented by Nicole Salazar CPA, CFE Assistant Comptroller, University of Arizona AGA – Tucson Chapter meeting - 2/18/2015

2. $53.7 million

3. What: largest (known)municipal fraud in U.S. history (as of 2013) $53,740,394

4. Where:

5. 1990 - 2011 WHEN:

6. WHO:

7. Background: The Budget Dixon’s general fund budget for FY ending 2007. Source: http://www.discoverdixon.org/citizens-information-center/budgets.html

8. HOW Approximate figures Summarized from: http://www.cpa2biz.com/Content/media/PRODUCER_CONTENT/Newsletters/Articles_2013/ForensicValuation/54-million-dollar-fraud.jsp

9. HOW:

10. http://davehancox.blogspot.com/2013/09/auditors-settle-lawsuit-in-dixon.htmlhttp://davehancox.blogspot.com/2013/09/auditors-settle-lawsuit-in-dixon.html

11. Errors or fraudulent activity • Inaccurate financial statements • Misappropriated assets • Audit findings and cost disallowance • Loss of grants and contracts • Multi-million settlements of lawsuits • Criminal/civil/administrative penalties • Negative publicity and damage to reputation • Loss of students and faculty members Consequences of control failure

12. Where did the Money go?

13. Why?? • The fraud triangle originated from Donald Cressey's hypothesis: • Trusted persons become trust violators when they conceive of themselves as having a financial problem which is non-shareable, are aware this problem can be secretly resolved by violation of the position of financial trust, and are able to apply to their own conduct in that situation verbalizations which enable them to adjust their conceptions of themselves as trusted persons with their conceptions of themselves as users of the entrusted funds or property.1

14. NOW: Forbes reports: “Ms. Crundwell got her chance to talk and sobbed while she said, “I’m truly sorry to the City of Dixon, my family and friends.”  Once Judge Reinhard had his opportunity to weigh in he let Crundwell know, “You have much better passion for your horses than the people of Dixon who you were suppose to represent.”” What people said about Rita: THEN: People asked to describe Crundwell often said things such as: - She was sweet as pie; - You couldn't find a nicer person on the face of the planet to talk to; - She was the nicest person in the world to work for; - If you needed something, she'd give it to you; and - If you thought something needed to be done, she did it.

15. Ok I’m stuck on this…. Was no one looking?

16. Independence? • SAS 99 - Consideration of Fraud • Settlement: • $35.15 million from accounting firm CliftonLarsonAllen, • $3.85 million from Fifth Third Bank • $1 million from the accounting firm of Janis Card Associates and owner Samuel Card Auditors?

17. Good Controls are: • Focused • Integrated • Accurate • Simple • Accepted • Cost Effective Internal Control… What was missing here?

18. What is one of our favorite internal controls, and why might it have failed here?

19. 19 Source: ACFE Report to the Nations, 2014

20. Source: ACFE Report to the Nations, 2014

21. The University of Vermont In July 2012, Celine Bernier, a former administrative assistant with the University of Vermont, was sent to prison after pleading guilty to depositing university checks totaling almost $46,000 into her personal account over a five-year period. According to the Burlington Free Press, the university was tipped off by a letter from Community National Bank that contained a check for $1,425 payable to UVM Extension - the university’s community outreach arm - that had been deposited into Ms. Bernier’s personal account. Fraud Cases are consistent

22. The University of Montana In 2010, Christine Bitterman, who worked in the Residence Life office at the University of Montana, pleaded guilty to embezzling more than $300,000 over a period of seven years, the Missoulian reported. She had been stealing student rent payments that had been made in cash. Fraud Cases are consistent

23. Vassar College In April 2011, Arthur Fisher, a project manager at Vassar College in New York, and his wife Jennifer Fisher, were sent to prison after they created a fictitious construction company and began charging the college for services that had not been performed. The scheme netted $1.9 million over five years. Fraud Cases are consistent

24. Now let’s get down to business. Below I have listed the petty cash system in detail – all key points are highlighted in bold. 1. The average petty cash balance is $5,000. 2. Average monthly expenditure is $1,538 with amounts ranging from $1 to $500.3. Petty cash is kept in a lockable box on a bookcase in the accounts office. 4. Vouchers for expenditure are signed by the person incurring that expenditure to confirm they have received re-imbursement from petty cash.5. Vouchers are recorded in the petty cash book by the accounts clerk; each voucher records the date, reason for the expenditure, amount of expenditure and person incurring that expenditure.6. Petty cash is counted every month by the accounts clerk, who is in charge of the cash. The petty cash balance is then reimbursed using the ‘imprest’ system and the journal entry produced to record expenditure in the general ledger.7. The check to reimburse petty cash is signed by the accountant at the branch at the same time as the journal entry to the general ledger is reviewed. Petty cash scenario

25. Petty cash is too large = 3 months expenditure, roughly! Makes it more likely that the cash will be stolen, or errors will not be identified. Resolve this by reducing the cash amount • Petty cash is being used for some rather large amounts of expenditure, costing up to $500. Resolve this by setting a limit of $50 as a petty cash withdrawal limit. • The petty cash box location is not secure enough. Keep it in a safe or a locked drawer instead. • Only one signature for the petty cash vouchers indicates a lack of authorization control for such expenditure. Resolve this by ensuring all vouchers are signed by an independent official. • Only the accounts clerk counts the petty cash. There is no independent check. Resolve this by ensuring the petty cash count is reviewed by the accountant, to make sure the clerk is not stealing the petty cash. Petty Cash Scenarios – Weaknesses and Resolutions

26. Below are some facts. Review them to uncover the potential fraud and determine what internal control may have mitigated this activity 1. Mr. Smith has been the purchasing manager for 22 years2.His spouse, Mrs. Smith works in the AP department as an approver 3. Mr. Smith has a close relationship to a favorite supplier4. Budget variance have not been investigated.5.Mr. Smith has the authority to receive goods and services as well as approve invoices for those goods and services.6. Over the past 5 years the Smith’s lifestyle appears to be larger than their “means” 7. Mr. Smith’s demeanor in the office has dramatically changed in the past 4 years Fictitious payments

27. This was an actual fraud case where the husband and wife were in collusion with an outside vendor. Invoices were marked for three of an item when only two were shipped. The Smith’s split the payment for the phantom item with the vendor. Resolving controls: • Implement segregation of duties, at a minimum receiving and invoice approval should be handled separately. • Packing receipts should be matched to invoices • Review inter-relationships for potential red-flags or relationships that would result in potential mitigation of controls • Review and investigate possible variances, make comparisons from prior year as well as to budgeted amounts • Strengthen inventory controls so that non-existent items would be noted. Fictitious payments – potential fraud and resolving controls

28. http://www.cpa2biz.com/Content/media/PRODUCER_CONTENT/Newsletters/Articles_2013/ForensicValuation/54-million-dollar-fraud.jsphttp://www.cpa2biz.com/Content/media/PRODUCER_CONTENT/Newsletters/Articles_2013/ForensicValuation/54-million-dollar-fraud.jsp http://davehancox.blogspot.com/ http://davehancox.blogspot.com/2013/09/auditors-settle-lawsuit-in-dixon.html http://chicago.cbslocal.com/2012/11/13/dixon-town-comptroller-to-plead-guilty-to-federal-charge/ http://www.acfe.com/rttn/docs/2014-report-to-nations.pdf Sources