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:
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
1991 & 1992
1993&1994
•City of Dixon posts a deficit of nearly 415K makes budget cuts
totaling 195K
•Dixon cuts more than $150,000 from budget.
1995 & 1996
•Dixon reports a deficit of $322,214 and slashes the budget by more
than $185,000
•unkwn
1997 & 1998
1999& 2000
2001 &2002
2003 & 2004
•The city reports a deficit of $370,674 before making tens of
thousands in budget cuts
•The city reports a deficit of $730,576 before another round of
budget cuts.
•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
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.
Summarized from:
http://www.cpa2biz.com/Co
ntent/media/PRODUCER_CO
NTENT/Newsletters/Articles
_2013/ForensicValuation/54
-million-dollar-fraud.jsp
•The city reports deficits as high as $232,600 and makes more than
$100,000 in budget cuts
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 CliftonLarsonAllen,
 $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 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.
http://www.cpa2biz.com/Content/media/PRODUCER_CONTENT/Newsletters/Articles_20
13/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-tofederal-charge/
http://www.acfe.com/rttn/docs/2014-report-to-nations.pdf