Category Archives for "Asset Misappropriation"

Thefts of Cash From Local Governments

By Charles Hall | Asset Misappropriation , Local Governments

Thefts of cash from local governments is common.

How many times have you seen a local newspaper article like the following?

Johnson County’s longtime court clerk admitted today to stealing $120,000 of court funds from 2019 through 2021. Becky Cook, 62, faces up to 10 years in federal prison after pleading guilty to federal tax evasion and theft.

Thefts of Cash from Local Governments

Usually, the causes of such cash thefts are (1) decentralized collection points and (2) a lack of accounting controls.

1. Decentralized Collection Points

First, consider that governments commonly have several collection points.

Examples include:

• Recreation department
• Police department
• Development authority
• Water and sewer department
• Airport authority
• Landfill
• Building and code enforcement
• Courts

Many governments have over a dozen receipting locations. With cash flowing in so many places, it’s no wonder that thefts of cash are common. Each cash receipt area may have different accounting procedures – some with physical receipt books, some with computerized receipting, and some with no receipting system at all. 

A more centralized receipting system reduces the possibility of theft, but many governments may not be able to centralize the receipting function. Why? Here are three reasons:

1. Elected officials, such as tax commissioners, often determine how monies are collected without input from the final receiving government (e.g., county commissioners or school). Consequently, each elected official may decide to use a different receipting system.
2. Customer convenience (e.g., recreation centers and senior citizen centers) may drive the receipting location decision.
3. Other locations, such as landfills, are purposely placed on the outer boundary of the government’s geographic area.

What’s the result? Widely differing receipting systems. Since these numerous receipting locations have varying controls, the risk of theft is higher. 

2. Lack of Accounting Controls

Second, consider that many governments lack sufficient accounting controls for cash.

It’s more likely cash will be stolen if cash collections are not receipted. If the transaction is recorded, then the receipt record must be altered, destroyed or hidden to cover up the theft. That’s why it’s critical to capture the transaction as early as possible. Doing so makes theft more difficult.

Additional steps that will enhance your cash controls include the following:

1. If possible, provide the government’s administrative office (e.g., county commissioners’ finance department) with electronic viewing rights for the decentralized receipting locations (e.g., landfill).
2. Require the transfer of money on a daily basis; the government’s administrative office (e.g., county commissioners’ finance department) should provide a receipt to each transferring location (e.g., landfill).
3. Limit the number of bank accounts.
4. Deposit funds daily.
5. Periodically perform surprise audits of outlying receipting areas.
6. Use a centralized receipting location (and eliminate the decentralized cash collection points).
7. Persons creating deposit slips and handling cash should not key those receipts into the accounting system.
8. The person reconciling the bank statements should not also handle cash collections.
9. Don’t allow the person billing customers to handle cash collections.

If segregation of duties is not possible (such as 7., 8. and 9. above), consider having a second person review the activity (either an employee of the government or maybe an outside consultant).

Final Thoughts About Fraud Prevention for Cash

When possible, use an experienced fraud prevention specialist to review your cash collection procedures. Can’t afford to? Think again. The average incidence of governmental fraud results in a loss of approximately $100,000.

Finally, make sure your government has sufficient fidelity bonding. If all else fails, you can recover your losses through insurance.

For more fraud prevention guidance, check out my book on Amazon: The Little Book of Local Government Fraud Prevention. Additionally, here’s a post telling you how to audit cash.

Collin Street Bakery Fraud: $16 Million

By Charles Hall | Asset Misappropriation

Sandy Jenkins, a controller, stole $16 million from the Collin Street Bakery. You read that right. A bakery.

Today I show you how large sums of money can be taken from a small business with one simple fraud scheme.

The Collin Street Bakery Fraud

Sandy Jenkins, the controller of Collin Street Bakery in Corsicana, Texas, made off with more than just fruitcakes. He took over $16 million, so says the FBI. And what did Mr. Jenkins do with the money?

He used the funds in the following ways:

• $11 million on a Black American Express card
• $1.2 million at Neiman Marcus in Dallas
• 532 luxury items, including 41 bracelets, 15 pairs of cufflinks, 21 pairs of earrings, 16 furs, 61 handbags, 45 necklaces, 9 sets of pearls, 55 rings, and 98 watches (having an approximate value of $3.5 million)
• Wine collection (having an approximate value of $50,000)
• Steinway electronic piano (having a value of $58,500)
• 223 trips on private jets (primarily Santa Fe, New Mexico; Aspen, Colorado; and Napa, California, among other places), with a total cost that exceeded $3.3 million
• 38 vehicles, including many Lexus automobiles, a Mercedes Benz, a Bentley, and a Porsche
• And more…

How the money was stolen from Collin Street Bakery

You might think that stealing $16 million would require an elaborate scheme. But did it? 

Here’s an example of his method: Jenkins would print a check to his personal credit card company, but he would void the check in the accounting system. (He still had the printed check.) Then, he would generate a second check for the same amount to a legitimate vendor, but the second check was never mailed. Next, Jenkins would send the first check to his credit card company.

The result: Jenkins’ credit card was paid, but the general ledger reflected a payment to an appropriate vendor.

The Weakness that Led to the Collin Street Bakery Theft

No one was comparing the cleared check payees to the general ledger. (The Collin Street Bakery is not the only business that has suffered from this type of fraud; see my previous article titled Fraudsters Writing Checks to Themselves.)

The Fix that Will Detect the Theft

Someone other than those who create checks should reconcile the bank statements to the general ledger. As they do, they should compare the cleared check payees to the vendor name in the accounting system. Some businesses have hundreds (or even thousands of checks) clearing monthly. Therefore, they may not desire to examine every cleared check. 

Alternatively, the business could periodically sample the cleared checks, comparing the cleared checks to the vendor payments in the general ledger. The persons creating checks should know that this test work will be performed. Doing so creates the camera effect. When people know their actions (in this case, the creation of checks) will be examined, they act differently–they are much less likely to steal.

If you desire a preventive control, require a second-person review of canceled checks.

Additionally, someone should be reviewing the profit margins of the company, comparing the ratios with prior periods.

Lastly, when segregation of duties is not possible, have the bank statements mailed to someone outside the accounting department such as an owner. That person should review the cleared checks before providing them to the accounting department. Alternatively, provide online access to the reviewing person. The reviewer should examine the cleared checks and provide documentation of his or her examination to the accounting department.

What Happened to Sandy Jenkins?

Sandy Jenkins was sentenced by U.S. District Judge Ed Kinkeade to serve a total of 120 months in federal prison. His wife, Kay Jenkins also pleaded guilty to one count of conspiracy to commit money laundering. Ms. Jenkins was sentenced to five years of probation.

In March 2019, Sandy Jenkins passed away in a federal prison.

Fruitecake Movie

You may be familiar with the movie Catch Me If You Can which chronicled the exploits of Frank Abagnale, one of the most brilliant cons of all time. Now, there is a new movie about another: Sandy Jenkins. 

https://youtu.be/D_0f0O814co

 

Fictitious Vendor Fraud: How to Prevent It

By Charles Hall | Asset Misappropriation , Fraud , Local Governments

Expense Fraud: An Honest Theft

By Charles Hall | Asset Misappropriation

Honest people steal. Nice, innocent looking people take money that’s not theirs. How? One way is expense fraud.

The Honest Person’s Fraud

Expense fraud is one of the most common frauds. While the damage is usually low, this theft is pervasive in most businesses.

I teach a college Bible study, and in it, I sometimes talk about “acceptable sins,” things like gossip, impatience, anger. My point is they are all issues and not acceptable, but we like to pawn them off as being okay–especially when it’s me that’s angry.

Likewise, expense report fraud is often viewed as acceptable, at least when it’s within bounds. But we all know fraud is fraud. The taking of something that does not belong to us is theft. But, I must say, it is so human to fudge on expense reports. We think things like: If I drove 355 miles, isn’t it okay to round up to 375? After all, I forgot to turn on my distance gauge until I was at least three miles out of town. Such rationalizations are easy to come by.

It always amazes me that executives–making six figures–are willing to jeopardize their positions for a few measly dollars. But C-suite employees commit expense report fraud just like new-hires. You might remember the Health and Human Services Secretary once resigned over questions about travel. While the Secretary was not accused of expense report fraud, it’s an example of how powerful people can abuse the use of travel privileges and, in this case, cost his employer (the federal government) money.

So how do people inflate their expense reports?

• Inflating mileage
• Filing the same receipt multiple times
• Asking for advances and then requesting a second payment after returning from the trip
• Submitting receipts of a nonemployee (e.g., spouse)
• Submitting hotel reservation printouts (with projected cost) but not spending the night there

The Control Weakness

Usually, the weakness is that no one is properly reviewing the expense reports. Also, the company may not appropriately communicate the penalties (what happens when fraud is detected) for false reporting.

Correcting the Control Weakness

Create a written expense report policy that all employees sign, acknowledging their agreement to abide by the guidance.

The person reviewing the expense reports should be trained. He needs to know what is acceptable–and what is not. And most importantly, the person reviewing expense reports must be supported by the leadership of the entity–he has to know that the CEO or board chair has his back. (It’s difficult to stand up to high-level employees unless the reviewer knows the leader supports him.)

See a list of my other fraud-related articles.

Rita Crundwell Story: Why Some Ranches Stink

By Charles Hall | Asset Misappropriation

Is it possible for one person to steal over $53 million from a city with an annual budget of less than $10 million? Yes. The Rita Crundwell story provides a cautionary tale for small businesses, governments, and nonprofits.

The Rita Crundwell Theft

Rita Crundwell, comptroller, and treasurer of Dixon, Illinois stole $53 million over a twenty-year period. The city of 16,000 residents held Crundwell in high esteem. One friend described her as “sweet as pie.” Another said: “You could not find a nicer person.”

So why did she steal? It appears Rita just enjoyed the good life. She used the money to fund one of the top quarter horse ranches in the country, and she did it with style: Some of the funds were used to purchase over $300,000 of jewelry and a $2.1 million motor coach vehicle.

Her annual salary? $80,000.

The city’s annual budget? $6 to $8 million

Were yearly audits performed? Yes.

Were budgets approved? Yes.

But even with budgets and audits, the Dixon, Illinois scandal happened. 

Too Much Trust

So how did this happen? Rita Crundwell won the trust of those around her—especially that of mayor and council. In April 2011, finance commissioner and veteran council member, Roy Bridgeman, praised Crundwell calling her “a big asset to the city as she looks after every tax dollar as if it were her own.” Too much trust in a bookkeeper can lead to huge problems. 

It was a disturbing moment when Dixon Mayor James Burke presented the FBI with evidence of Crundwell’s fraud. Burke later recalled his emotions and words: “I literally became sick to my stomach, and I told him that I hoped my suspicions were all wrong.” Such a response is understandable given that Crundwell had worked for the city for decades. She had fooled everyone.

Secret Bank Account

According to the mayor, the city’s annual audits raised no red flags, and the city’s primary bank never reported anything suspicious. So how did she steal the money? In 1990, Crundwell opened a secret bank account in the name of the city (titled the RSDCA account: the initials stood for reserve sewer development construction account). Crundwell was the only authorized check signer for the account, and the RSDCA bank account was never set up on the city’s general ledger. The City’s records reflected none of the RSDCA deposits or disbursements.

Crundwell would write and sign manual checks from a legitimate city capital project fund checking account, completing the check payee line with “Treasurer.” (Yes, Crundwell had the authority to issue checks with just her signature—even for legitimate city bank accounts.) She would then deposit the check into her secret account. From the bank’s perspective, a transfer had been made from one city bank account to another (from the capital projects fund to the reserve sewer development construction fund).

Accounting Cover-up

While the capital project fund disbursement was recorded on the city’s books, the RSDCA deposit was not. A capital project fund journal entry was made for each check debiting capital outlay expense and crediting cash. But no entry was made to the city’s records for the deposit to the RSDCA account. Once the money was in the RSDCA account, Crundwell wrote checks for personal expenses—and she did so for over twenty years.

To complete her deceit, Crundwell provided auditors with fictitious invoices from the Illinois Department of Transportation; these invoices included the following notation: Please make checks payable to Treasurer, State of Illinois. (So the canceled checks made out to Treasurer agreed with directions on the invoice, but the words “State of Illinois” were conveniently left off the check payee line.) Remember Crundwell was the treasurer of Dixon. 

Those invoices and the related checks were often for round dollar amounts (e.g., $250,000) and most were for more than $100,000. In one year alone, Crundwell embezzled over $5 million.

Vacation Leads to Arrest

So how was she caught? While Rita was on an extended vacation for horse shows, the city hired a replacement for her. For some reason, Crundwell’s substitute requested all bank account statements from the city’s bank. As the bank statements were reviewed, the secret bank account was discovered. And soon after that, the mayor contacted the FBI.

The Control Weakness

Why was Rita Crundwell able to steal $53 million? Wait for it. A lack of segregation of duties.

Rita could:

• Write checks
• Approve payments
• Create and monitor the budget
• Enter transactions into the accounting system
• Reconcile the bank statements

The Accounting Fix

Multiple people should perform accounting duties, not just one.

Moreover, accounting employees should annually take a one-week vacation (or longer). And while they are gone, someone else should perform the vacant person’s duties. The vacation itself is not the key to this control. The performance of the absent accountant’s duties is. Why? Doing so allows the replacement person to understand the work of the vacant employee. But, more importantly, the substitute can note any unusual or fraudulent activity.

Here’s another action to take: Periodically contact your organization’s bank and ask for a list of all bank accounts. Then compare the list to the bank accounts in your general ledger. If a bank account is not on the general ledger, see why. And request a copy of the related signature card from the bank.

What Happened to Rita Crundwell?

So, what happened to Rita? She was sentenced to 19.5 years in prison. Here are pictures from the Chicago Tribune that shed light on the fraud.

All the Queens Horses

Kelly Richmond Pope has masterfully captured the Rita Crundwell tale in the movie All the Queen’s Horses, available on Amazon. Think auditing is boring? Then watch the movie. It does a better job of explaining the psychological and financial damage of fraud than any textbook.