A Case Study approach to Fraud and its

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

$53. 7 million

§What: 2013) largest (known)municipal fraud in U. S. history (as of

Where:

: n illio . 6 m $5 tea ls cler k is o open acc n vaca s the m : A D oun tio ixo ma t an n, d ail wh n cit is yor il y , w d imm cover e Cru ho t ed n s t hen iate he R dwell ly con ale SCD tac rts t A ts t he F he BI. ell s 200 9 ndw 201 1 Cru und we ll mil lion 5. 8 als $ ste : Cr und we als $ ll 121 , 36 7 200 8 ste 199 2 198 3 Dix as C on na om mes ptr Cru olle r/T ndwel rea sur l er 3, 6 64 5 0: ste $45 als $1 her 0, 000. 9 mill Cru a d home to re ion an ndw ten eficit o in Di mode d spe ell s of xon l an nds f $ 3 tho 70. Th d e x , e usa 674 ci pan nds be ty r d in fore epo bud r get makin ts cut g s 200 ste hor als ne : Cr $12 se na arly $1 und 5, 0 med. 1 m we 00. Ca ll n’t illion Foo and l Pa bu tty ys a for ell und w : Cr 199 9 $10 als ste 199 0 ope of t ns a b sign he cit ank a - C or. y of cco run Dix unt dw on, in t ell she he is t nam he onl e y 1990 - 2011

Dixon’s general fund budget for FY ending 2007. Source: http: //www. discoverdixon. org/citizensinformation-center/budgets. html

1991 & 1992 • $181, 000 • $121, 367 1993&1994 • $225, 287 • $117, 281 1995 & 1996 • $103, 664 • Unkwn 1997 & 1998 • $328, 622 • $767, 487 1999 & 2000 • $1. 1 million • $1. 9 million 2001 & 2002 • $2. 6 million • $2. 9 million 2003 & 2004 • $3 million • $3. 5 million 2005 & 2006 • $4. 6 million • $4. 4 million 2005 & 2006 2007 & 2008 • $4. 75 million • $5. 8 million 2007 & 2008 2009 & 2010 • $5. 6 million • Over 5 million 2009 & 2010 Approximate figures Summarized from: http: //www. cpa 2 biz. com/Co ntent/media/PRODUCER_CO NTENT/Newsletters/Articles _2013/Forensic. Valuation/54 -million-dollar-fraud. jsp 1991 & 1992 • City of Dixon posts a deficit of nearly 415 K makes budget cuts totaling 195 K 1993&1994 • Dixon cuts more than $150, 000 from budget. • Dixon reports a deficit of $322, 214 and slashes the budget by more than $185, 000 1995 & 1996 • unkwn • The city reports deficits as high as $232, 600 and makes more than 1997 & 1998 $100, 000 in budget cuts • The city reports a deficit of $370, 674 before making tens of 1999& 2000 thousands in budget cuts • The city reports a deficit of $730, 576 before another round of budget cuts. 2001 &2002 • The city of Dixon institutes a hiring freeze due to budget deficits. • The city reports a deficit of nearly $1. 3 million blamed in large part 2003 & 2004 on state funding cuts. • The city reports a deficit of $1. 7 million and announces a budget freeze plus $700, 000 in cuts from the capital equipment budget. • The city reports a deficit of more than $1. 1 million.

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

§ 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/administr ative penalties § Negative publicity and damage to reputation § Loss of students and faculty members

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

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. 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. ””

§ Independence? § SAS 99 - Consideration of Fraud § Settlement: § $35. 15 million from accounting firm Clifton. Larson. Allen, § $3. 85 million from Fifth Third Bank § $1 million from the accounting firm of Janis Card Associates and owner Samuel Card

§ Good Controls are: • Focused • Integrated • Accurate • Simple • Accepted • Cost Effective What was missing here?

19 Source: ACFE Report to the Nations, 2014

Source: ACFE Report to the Nations, 2014

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.

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.

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.

§ 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 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.

§ 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 years 2. His spouse, Mrs. Smith works in the AP department as an approver 3. Mr. Smith has a close relationship to a favorite supplier 4. 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

§ This was an actual fraud case where the husband 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.

http: //www. cpa 2 biz. com/Content/media/PRODUCER_CONTENT/Newsletters/Articles_20 13/Forensic. Valuation/54 -million-dollar-fraud. jsp 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-tofederal-charge/ http: //www. acfe. com/rttn/docs/2014 -report-to-nations. pdf