Category Archives for "Asset Misappropriation"

Rita Crundwell story
Dec 06

The Rita Crundwell Story: Why Some Ranches Have a Bad Smell

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 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.

Rita Crundwell story

The picture is courtesy of AdobeStock.com

Her annual salary? $80,000.

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

Were yearly audits performed? Yes.

Were budgets approved? Yes.

So how could this happen? Ms. Crundwell had 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 is the main cause of white-collar crime.)

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.

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).

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.

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 Weakness

Why was Rita able to steal $53 million? Wait for it…a lack of segregation of duties (getting tired of my saying this?–sorry, but so many thefts are rooted in this weakness).

Rita could do the following:

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

The Fix

Multiple people should perform accounting duties, not just one person.

Accounting employees should be required to take at least a one-week vacation, and while they are gone, someone else should perform their duties. The vacation itself is not the key. The performance of the absent accountant’s duties is. Why? Doing so allows the replacement person to understand the work of the vacant employee. And, more importantly, as the substitute employee works, he or she sees 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 set up on the general ledger. If a bank account is not on the general ledger, see why. Request a copy of the related signature card from the bank.

What Happened to Rita?

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.

steal with company credit cards
Dec 04

How Employees Steal with Company Credit Cards

By Charles Hall | Asset Misappropriation

Employees sometimes steal with company credit cards. Today, we look at a case where one employee was able to steal over $300,000 by misusing college credit cards.

The Theft

Donna Gamble made fraudulent purchases of over $300,000 using Georgia Tech purchase cards (credit cards).

Gamble was employed by Georgia Tech in the Parker H. Petit Institute for Bioengineering and Bioscience. As part of her job, she had access to Georgia Tech credit cards.

Gamble used the purchase cards to buy over 3,800 personal items. How did she hide her theft? She submitted false receipts to her supervisor and made fraudulent accounting entries. The thefts–taken from grant money provided to Georgia Tech by the National Science Foundation–occurred from April 2002 through April 2007. So money designed to advance educational learning was spent on personal items such:

  • A popcorn machine
  • Football tickets
  • A wave runner
  • Video games

Ms. Gamble was sentenced to two years and eight months in federal prison.

The Weakness

The internal control weakness that led to the theft was a lack of appropriate monitoring.

steal with company credit cards

Credit cards provide a simple means to bypass normal purchasing policies. Most purchasing policies require the issuance of a purchase order prior to the purchase. Such purchase orders are provided by a second person–someone other than the purchaser. So, the authorization to purchase is separate from the bookkeeping. In other words, at least two people are involved in the purchase transaction. Having multiple people involved in such transactions strengthens the controls. Why? A single person can’t make purchases alone. Consequently, theft–when such controls are in place–requires collusion. Now, it’s more difficult to steal.

Many organizations don’t require purchase orders for credit card purchases. Therefore, one person can purchase without a second person’s involvement. Even when a second person authorizes purchases, theft can occur if that person doesn’t pay sufficient attention to purchase requests (and the related documentation).

The Fix

What’s the fix? The monitoring of credit card use. Persons using company credit cards must know that someone else sees their purchases. For instance, internal auditors should routinely audit credit card activity. And the users should know that such audits occur.

Theft, like the one above, occurs when the fraudster knows no one is looking–they believe they can steal, and no one will notice.

Here are some ideas to lessen the possibility of credit card fraud:

  • Limit the number of cards issued
  • Assign each card to one person
  • Set low credit limits
  • Keep all cards in a secure location
  • Restrict card usage to particular vendors (which can be done with a purchase card)
  • Require the person to provide support for each purchase
  • If appropriate support is not provided, disallow the use of the card
  • Reconcile monthly credit card statements to supporting documentation
  • Audit personnel (internal or external) should review credit card activity
  • Provide a summary credit card activity report for each employee to the governing body or owners of the company

For more information about white-collar crime, click here.

payroll fraud
Dec 01

Payroll Fraud: I Get By with a Little Help from my Friends

By Charles Hall | Asset Misappropriation

Payroll fraud is quite common. Sometimes the theft occurs as a payroll department employee secretly inflates payments to family and friends.

The Theft

One Friday evening, Jimmy and Rachel are sitting on the back porch drinking a cool lemonade and chatting about how long it’s been since the business gave them a raise–three years and counting. And everyone knows the owners just bought a beautiful cabin in Aspen. The cost: $10 million. Meanwhile, Jimmy and Rachel (cousins) are wiling away their time discussing what they could do to make more money.

payroll fraud

Picture is courtesy of AdobeStock.com

“Don’t you control what people make,” Jimmy starts. Rachel laughs and says, “I may be in payroll, but I can’t give anyone a raise.”

Jimmy pauses and says, “I didn’t ask if you give raises? I mean, can’t you change pay rates, like you could increase mine. You know, quietly.” He grunts, “After all, the owners sure don’t need the money.”

Rachel ponders the request and replies, “I think I could. No one ever reviews what I do. I doubt anyone would ever notice. Come to think of it, I could do the same for myself. With over 300 employees, no one would know. The supervisors never look at the computer payroll files, only the physical personnel files.

The next day Rachel increases her pay rate and Jimmy’s by 10%, just to test the waters. If anyone notices, she’ll say it was a mistake. But no one does. And after six months, she moves the rates even higher–another 30%. Easy money. Even if she’s caught, white collar crime is often lightly punished.

The Weakness

No one is comparing–on a test basis–the pay rates in the payroll master file to the approved rates in the personnel files.

The Fix

Have someone in internal audit or an external CPA or CFE randomly select employees, comparing the master pay rates for each person to the personnel files. Let the payroll and human resources employees know that this test will be performed once a year. The knowledge of the test will be a deterrent to fraudulent increases in the master pay rate file. In particular, pay rates for payroll personnel should be reviewed.

How to Audit Payroll

For a detailed article about how to audit payroll, check out my post here.

expense report fraud
Nov 30

How Honest People Steal

By Charles Hall | Asset Misappropriation

Honest people steal. White collar crime is real. Nice, innocent-looking people take money that’s not theirs.

The Theft

The title of my post–How Honest People Steal–is tongue-in-cheek. Why the title? Well, we’re talking about expense report fraud.

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.

Picture is courtesy of AdobeStock.com

Picture is courtesy of AdobeStock.com

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

The 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.

The Fix

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.)

stealing while dying
Nov 17

Stealing While Dying: The Motive for Fraud Comes in Many Forms

By Charles Hall | Asset Misappropriation

Some fraudsters steal while dying. What’s their motive? Possibly to avoid leaving their family with medical bills. Whatever the reason, it’s a strange thing. Today we visit a fraud that I encountered over twenty years ago.

stealing while dying

The Theft

In one of the stranger frauds I’ve seen, the bookkeeper of a small health department, Susan, stole money. And she did so while she was dying. In the last months of her life, she fought a battle with cancer. In between the chemo treatments, she continued her work. I’m sure she believed she would survive. After all, she was only thirty-six. 

I had provided external audit services to this health department for years and knew Susan well. She sent me thank-you cards–yes, thank-you cards–for my audit work. She was polite and great at her job. If ever I thought there was someone who would not (and could not) steal, it was her.

But external circumstances can make the best of people do the unexpected. The medical treatments resulted in numerous medical bills, many of which she received while still working. She died just before my annual visit for the audit.

Knowing that Susan had passed away, I knew the audit would be challenging, especially since the health department board had not hired anyone to replace her.

Upon my arrival, I requested the bank statements, but the remaining employees could not locate them. I thought maybe she had taken the bank statements home and had not returned with them due to her illness, but that was not the case. After the employees searched for some time with no result, the health department requisitioned the bank statements and cleared checks from the bank.

In reviewing the cleared checks, I quickly noticed round-dollar checks written to Susan. The first one was for $7,000. My first thought was, “Not Susan, I’ve known her too long. No way. ” But then there was another and another…

The Weakness

The weakness was a lack of segregation of duties. Susan did the following:

  • Keyed payables into the general ledger
  • Created checks for signing
  • Had signature authority on the bank account
  • Reconciled the bank statements
  • Created the monthly financial statements

Are you noticing a recurring theme in the 30 Days of Fraud? Yes, a lack of segregation of duties. It’s fundamental. One person should not be allowed to do everything.

The Fix

Segregate the accounting duties. Most importantly, Susan should not have been on the bank’s signature card. Additionally, someone other than Susan should have been reconciling the bank statement and examining cleared checks. For small organizations, have the bank statements mailed to someone outside the accounting department (e.g., a board member). This outside person should open the statements and review the cleared checks—then the statements should be sent to accounting.

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