nsaa/nsac joint middle management conference fraud – an iowa case study presented by david vaudt...

NSAA/NSAC Joint Middle Management Conference

Fraud – An Iowa Case Study

Presented by

David Vaudt Tami Kusian

Auditor of State Deputy – Performance Investigation Division

April 16, 2007

22

Presentation Objectives

Fraud – Webster’s definition A stroll down “memory lane” CIETC – one of Iowa’s most publicized frauds A historical look at government fraud in Iowa Interesting Iowa government fraud cases Today’s fraud environment Question and answer session

33

Webster’s Dictionary

Fraud: deceit; trickery; cheating (law – intentional deception to cause a person to give up property or some lawful right) something said or done to deceive; trick; artifice a person who deceives or who is not he or she pretends to be; imposter; cheat

44

Webster’s Dictionary

Deceive: to make (a person) believe what is not true;

mislead implies deliberate misrepresentation of facts by

words, actions, etc., generally to further one’s

ends

55

There are two significant types of financial fraud . . .

Misappropriation of assets (aka employee fraud)

— higher number of cases

— lower dollar impact

Fraudulent financial reporting (aka management fraud)

— lower number of cases

— higher dollar impact

66

For decades, members of

the CPA profession labored

in boring anonymity . . .

77

Then, in 2001, everything

changed, and we became . . .

famous.

Well, sort of . . .

88

Most of the recent high-profile

cases have been management

fraud cases . . .

99

Let’s take a quick

stroll down recent

memory lane . . .

1010

[12/5/01][12/5/01]

After Enron, New After Enron, New Doubts About AuditorsDoubts About Auditors

1111

[12/5/01][12/5/01]

Trust and DiscretionTrust and Discretion “ “CPAs must never forget that the 'P' in CPAs must never forget that the 'P' in

'CPA' stands for public -- serving the 'CPA' stands for public -- serving the public and maintaining their trust,” public and maintaining their trust,” former SEC chief accountant Turner former SEC chief accountant Turner

said.said.

1212

Andrew Fastow, (former) Enron CFO

1313

Ben Glisan, Jr., (former) Enron Treasurer

1414

Scott Sullivan, (former) WorldCom CFO

1515

David Meyers, (former) WorldCom Controller

1818

[3/16/02][3/16/02]

1919

Then the local media focus changed to our own backyard – one of Iowa’s most publicized frauds in many years . . .

Central Iowa Employment & Training Consortium (CIETC) became a household name across Iowa . . .

Within hours of the release of our report on March 31, 2006 the media had labeled it the “CIETC Salary Scandal”

2323

Central Iowa Employment andTraining Consortium (CIETC)

What led to the special investigation?

— Iowa Workforce Development (IWD) employee concerned about year-end $300,000 award to CIETC (“messenger” was employee’s supervisor)

— Three months later, additional concerns identified by same employee – CIETC salaries and IWD management override

Obstacles faced:

— IWD Deputy Director interference with investigation — Inconsistent signatures on CIETC documents— Whistle-blower’s “messenger”

2424

Central Iowa Employment and

Training Consortium (CIETC)(Continued) Approach used:

— Review of IWD award process

— Review of CIETC allocation of costs to Federal grants

— Compilation of CIETC management salaries and supplemental payments

Time period covered:

— 2 years, 6 months

— Records for previous periods not readily available

2525


Training Consortium (CIETC)(Continued) Findings:

— Improper allocation of administrative salaries and supplemental payments

— “Less than arm’s length transactions”

— Excessive compensation:

• CEO - $795,000

• COO - $768,000

• CFO - $292,000

2626


Training Consortium (CIETC)(Continued) Results:

— Government Oversight Committee hearings - media frenzy— U.S. Attorney (with FBI, AOS, and others assisting) takes over investigation— CIETC CEO, CFO, and Board Chair each indicted on 19 to 27 counts— IWD Deputy Director indicted on 2 counts - conspiracy and obstruction— CIETC COO pleads guilty to 2 counts and agrees to repay up to $400,000 and serve up to 4 years in prison

2727

CIETC Wave Crashes: 4 CIETC Wave Crashes: 4 IndictedIndicted

2828

Ex-CIETC exec pleads guilty of fraud

2929

Des Moines Register HeadlineMarch 27, 2007

3030

The “CIETC Salary Scandal” caused us to reflect on AOS’s more recent fraud investigations . . .

Yes, regretfully other fraud exists even here in Iowa – the Heartland of America

3131

Fraud Investigation Reports Issued By Firm Fraud Investigation Reports Issued By Firm Fiscal Years 1996 through 2007*Fiscal Years 1996 through 2007*

0

10

20

30

40

50

60

70

80

AOS CPA Firm I nternal Audit

77

7

22

*2007 – first 9 months

3232

Fraud Investigation Reports Issued by Fiscal Fraud Investigation Reports Issued by Fiscal YearYear

Fiscal Years 1996 through 2007*Fiscal Years 1996 through 2007*

0

5

10

15

20

9 Mos.-

2007

2006 2005 2004 2003 2002 2001 2000 1999-96

11

16

20

1011

6

11

14

7


3333

Fraud Investigation Reports Issued by Entity TypeFraud Investigation Reports Issued by Entity TypeFiscal Years 1996 through 2007*Fiscal Years 1996 through 2007*

0

5

10

15

20

25

30

35

40

School County City 28E

Organizations

State Agencies Non-Profi t Other

22

26

37

8 8

3 2


3434

Fraud Investigation Reports Issued by Dollar Fraud Investigation Reports Issued by Dollar AmountAmount

Fiscal Years 1996 through 2007*Fiscal Years 1996 through 2007*

0

5

10

15

20

25

30

35

40

500-999 250-499 100-249 75-99 50-74 25-49 10-24 0-9

Dollars in thousands

3 4

10

6

1013

23

37


3535

Methods Used to Carryout Frauds

57% - undeposited collections

38% - improper purchases with vendors

28% - payroll/extra pay

17% - improper travel reimbursements

17% - improper credit card payments or purchases

3636

Other Fraud Related Observations

7 issued reports had gambling as a factor

Of 37 reports issued on Cities – 3 were Police Departments

Of 26 reports issued on Counties – 5 were Sheriff Offices and 4 were Mental Health Departments

3737

Cedar County Economic Development Commission

(CCEDCO) What led to the special investigation?

— Telephone call from bank regarding a dishonored check on CCEDCO’s account

— After review of bank statement, requested AOS conduct an investigation

Obstacles faced:

— Lack of supporting documentation

— Additional records and support obtained from vendors and by subpoena

3838

Cedar County Economic Development Commission (CCEDCO)

(Continued)

Approach used:

— Reviewed all activity in CCEDCO’s bank accounts

— Reviewed disbursements for support and approval

— Examined purchases made with CCEDCO’s credit card



— Time period Office Assistant was employed

3939

Cedar County Economic Development Commission

(CCEDCO) (Continued) Findings:

— $72,400 of improper disbursements including

• Over $20,000 in extra payroll payments

• $23,000 in improper reimbursements

• $15,000 in improper charges on CCEDCO credit card

— $300 cash withheld from deposit Results:

— Sentenced to 10 years— Ordered to pay restitution of $67,000

4040

City of Garnavillo


— Required financial audit, once every four years— CPA testwork identified $5,000 variance in City Clerk’s financial report

Obstacles faced:

— City Clerk asked to return, while placed on leave, to prepare payroll; subsequently, discovered various computer files deleted and several boxes of records missing — Inadequate utility and receipts records— Payees per accounting records not same as cancelled checks

4141

City of Garnavillo(Continued)

Approach used:

— Review of City’s unauthorized credit card statements

— Review of City’s cancelled checks:• payments on City Clerk’s personal credit cards• purchases of unauthorized office supplies

— Subpoena of personal credit card statements



— City Clerk employed almost 20 years; not cost beneficial to investigate previous 15 years

4242

City of Garnavillo(Continued)

Findings:

— Unauthorized City credit cards:• 131 cash advances totaling $51,000 (at or near gaming facilities)• 143 purchases for non-City items totaling $12,000

— $16,000 of payments on personal credit cards— $3,000 of unauthorized purchases of office supplies and other items

Results:

— City Clerk sentenced to 10 years— City Clerk ordered to pay restitution of $13,000 (amount not covered by insurance)

4343

City of Pleasant Plain


— Nearby City Clerk received bank statements in error

— Notified Pleasant Plain City Council

Obstacles faced:

— Lack of supporting documentation

— Additional records obtained by search warrant, vendors and subpoena

4444

City of Pleasant Plain(Continued)

Approach used:

— Reviewed all activity in City bank accounts— Obtained invoices or other support from selected vendors— Examined waste management billings and collection records


— 2 years, 5 months— Time period City Clerk was employed

4545

City of Pleasant Plain(Continued)

Findings:

— $60,300 of improper disbursements

— Included $42,000 of checks to City Clerk and $7,300 in checks payable to cash

— $4,560 of undeposited collections

Results:

— Charges filed by County Attorney— Pending trial

4646

City of Hastings


— Vendor inquiry to Mayor regarding payment for maintenance of City streets— Mayor contacted bank and found cash balance significantly less than City Treasurer recently reported

Obstacles faced:

— No reconciliations of City records to bank balances— Insufficient records for utility billings and receipts— Insufficient records for earlier years of City Treasurer’s employment

4747

City of Hastings(Continued)

Approach used:

— County Sheriff seized records through search warrant of City Treasurer’s home

— Confirmation of payments to City by Stateand County

— Review of City’s bank statements, cancelled checks, money orders, etc.


— 5 years

— Not possible to investigate previous 10 years; inadequate records

4848

City of Hastings(Continued)

Findings:

— $32,000 of undeposited receipts – 75 instances

— $84,000 of cash withdrawals and money orders – 134 instances

Results:

— Sentenced to 10 years— Served 5 months, placed on 5 years probation

4949

City of Sergeant Bluff


— Assistant City Clerk identified undeposited collections for utilities

— Mayor contacted AOS and DCI

Obstacles faced:

— Some records not available

— City Clerk was able to override controls

— Financial auditors told reconciliations were not performed

5050

City of Sergeant Bluff(Continued)

Approach used:

— Compared utility deposits per bank to monthly reconciliations and customer accounts


— 3 years, plus 1 year of partial records

— City Clerk for 21 years, prior records not available

5151

City of Sergeant Bluff(Continued)

Findings:

— Over $231,000 withheld from City’s deposits of utility collections for a 3 year period

— An additional $67, 000 of undeposited collections estimated for a previous year — Auditors were told reconciliations were not performed

Results:

— Sentenced to 10 years — Ordered to pay restitution of $25,000

5252

Dallas County Sheriff’s Office


— Interstate traffic stop for tinted windows violation

— Hidden compartments in vehicle with $900,000 cash

— $120,000 cash allegedly “disappeared”

Obstacles faced:

— Office atmosphere

— Missing case files

— Difficult evidence trail

5353


(Continued)

Approach used:

— Inventory of Property and Evidence Room

— Evidence log sheets and case files review

— Subpoena of personal bank information


— April 2006 inventory

— Inventoried evidence involved cases generated over 4 years, 6 months

5454


(Continued) Findings:

— $61,000 unaccounted for cash— Missing seized weapons, jewelry, and other property— Controlled substances variations— Unusual personal cash deposits and cash purchases— “Disclaimed” property seizure

Results:— Attorney General initiated elected official removal from office process— Sheriff subsequently resigned— Trial scheduled for 2007 for alledged $120,000 cash disappearance

5555

Linn County Facilities Management Department


— County Auditor was alerted to concerns by anonymous phone call

— DCI investigated allegations

— County requested AOS to perform investigation

Obstacles faced:

— Collusion between Facilities Manager and Vendor

— Records available for 3 most recent fiscal years only

— Additional records not available from vendor

5656


(Continued) Approach used:

— Compared actual expenditures to budget

— Verified existence of vendors receiving payments from Department

— Examined disbursements to certain vendors to determine if goods and services were received.

— Examined copies of redeemed warrants

— Interviewed staff about work done by vendors


— Approximately 3 years, 7 months

5757



— Over $183,000 of improper disbursements

— Majority of these disbursements were to one vendor for goods and services the County did not receive

— Construction supplies recovered from Facilities Manager’s home – home remodel

Results:— Facility Manager sentenced to 10 years for theft and 5 years for misconduct – granted parole— Contractor pled guilty, sentenced to 5 years probation— $20,000 restitution each (insurance deductible and audit costs)

5858

Cass County Sheriff


— County officials concerns about Sheriff’s office

• Cash accounts• Vehicle purchases and sales• Weapon purchase

Obstacles faced:

— Office atmosphere— Lack of records— Newspaper special investigation series on “ticket fixing,” Cass County implicated

5959

Cass County Sheriff(Continued)

Approach used:

— Confirmation of State payments and County Clerk of Court payments to Sheriff’s Office

— Cash accounts disbursement vouching

— Review of court orders and case records on restitutions and/or donations



— Sheriff for 22 years; not cost beneficial to investigate prior years

6060

Cass County Sheriff(Continued)

Findings:— $11,000 improper and unsupported disbursements— $3,000 undeposited collections— County Attorney reissued citations for lesser offense – in return for donations to Sheriff’s Office— County Attorney had Sheriff’s Office vehicle and several weapons

Results:— Citizens filed petition for elected officials’ removal from office – bond posted by citizens— County Sheriff and County Attorney removed from office by District Court

6161

Lee County Protective Payee Program


— Concerns with endorsements identified during our annual audit of County

— Conducted investigation, with assistance from DCI

Obstacles faced:

— Some bank statements and redeemed checks not available, some obtained from bank through subpoena

— Supporting documentation for disbursements from client accounts not available

6262

Lee County Protective Payee Program(Continued)

Approach used:

— Examined selected bank activity for Client accounts, identified unusual activity

— Examined client files and check registers

— Examined personal bank statements and credit card statements for former Payee Clerk



— Consisted of time period Payee Clerk was employed in this position

6363

Lee County Protective Payee Program(Continued)

Findings:

— $60,500 of improper disbursements, including:

• Over $28,000 in checks to cash, bank and clients• Over $26,000 in payments to personal

credit cards

— $1,800 of cash withheld from deposits

Results:

— Sentenced to 10 years — Ordered to pay restitution of $76,000

6464

Mills County Treasurer’s Office What led to the special investigation?

— Deputy Treasurer assisted the Auto Department with payment collections— Cash deposit at end of day unreasonable versus cash activity processed by Deputy Treasurer

Obstacles faced:

— Tax exempt coding input for taxable vehicle transactions — Computer user profile used by more than one County employee— Insufficient records to investigate previous years

6565

Mills County Treasurer’s Office(Continued)

Approach used:

— Review of State’s computerized information for same vehicle title transactions

— Review of supporting documentation obtained from auto dealers initiating vehicle transactions

— Subpoena of personal bank statements of County employee


— 2 years; 1 month — Not possible to investigate previous 9 years; inadequate records

6666

Mills County Treasurer's Office(Continued)

Findings:

— $118,000 for 114 undeposited vehicle title transactions

— County employee had: • $111,000 of cash deposits to personal

bank accounts• $4,600 of cash payments on personal loans

Results:

— Sentenced to 42 years (all suspended) — Ordered to pay restitution of $130,000

6767

Taylor County Sanitarian’s Office


— Copy of a claim was faxed to the County Auditor by Banker

— Determined to be a fraudulent claim

— County officials requested AOS conduct an investigation

Obstacles faced:

— Insufficient records for collections

— Little oversight of County Sanitarian

— Determination of actual hours worked and travel incurred by the County Sanitarian

6868

Taylor County Sanitarian’s Office(Continued)

Approach used:

— Examined disbursements, including payroll and travel reimbursements

— Verified collections were deposited— Reviewed personal bank activity of County Sanitarian. — Reviewed gaming records from player card subpoenaed from gambling facilities


— 1 year, 5 months— Time period County Sanitarian was employed

6969

Taylor County Sanitarian’s Office(Continued)

Findings:

— $15,700 of undeposited collections - $11,600 from the State

— Over $4,000 of improper and unsupported disbursements, including salary and reimbursements

— Reimbursements included meetings which did not occur or she did not attend.

— Work time at gaming facilities

Results:

— Sentenced to 5 years probation and 250 hours of community service— Ordered to pay restitution of $27,000

7070

Boone Community School District


— Business manager terminated for inappropriate use of District computer equipment

— Discovered folder of check stubs to questionable payees

Obstacles faced:

— Improper manual checks not recorded in accounting system

— Check payee did not match accounting records

— Insufficient bank and other supporting documents on certain checks

7171

Boone Community School District(Continued)

Approach used:

— Review of check images obtained from bank

— Subpoena of Business Manager’s personal bank account statements

— Confirmation of payments to District by State and County



— No improper disbursements concerns in first 4 years of Business Manager’s employment

7272

Boone Community School District(Continued)

Findings:

— 46 improper checks to the Business Manager for $140,000

— 76 improper checks to District’s bank, all redeemed for cash totaling $40,000

— 51 improper checks to the District, all redeemed for cash totaling $27,000

Results:

— Sentenced to 10 years— Ordered to pay restitution of $3,000

7373

Grundy Center Community School District What led to the special investigation?

— Business Manager suspended amid concerns with job performance

— Subsequently identified concerns with disbursements

— District officials requested AOS to conduct investigation

Obstacles faced:

— Insufficient records for collections

— Additional records obtained from vendors and subpoenas to banks

— Payee per listing provided to Board not same as cancelled checks

7474

Grundy Center Community School District(Continued)

Approach used:

— Examined selected disbursements for approval and support

— Reviewed activity on District charge accounts and bank statements

— Reviewed payments on personal credit cards of Business Manager



— Time period Business Manger was employed

7575

Grundy Center Community School District(Continued)

Findings:

— $60,000 of improper and unsupported disbursements including

• Checks to Business Manager of over $15,000

• Payments on personal credit cards of $24,000

• Unauthorized purchases on District credit card of $12,000

Results:

— Sentenced to 10 years, suspended to 2-5 years — Ordered to pay restitution of $26,000

7676

Before and After School Services (BASS)


— Anonymous letter to County Attorney

— City Police Department representative reviewed records and identified payments for personal expenses

Obstacles faced:

— Dual regulations – Department of Human Services and Internal Revenue Code

— Insufficient records

7777

Before and After School Services (BASS)(Continued)

Approach used:

— Checking account disbursements vouching

— Confirmation of payments to BASS by the State

— Subpoena of personal bank account and credit card statements



7878

Before and After School Services (BASS)(Continued)

Findings:

— 3 family members comprise Board of Directors— $420,000 improper/unsupported disbursements

• “Ownership draws” - $160,000• Personal credit card payments - $78,000• Chevy Avalanche - $30,000• Mother’s grant writing - $30,000• “Benefit,” Cancun vacation with 15 family members - $24,000• “Loan” repayments to family members – $39,000

Results:— Charges filed, trial pending

7979

Department of Human Services (DHS)


— An employee identified a payment for child care services to a family member of an Accounting Tech

— Claim was not authorized and had a fraudulent invoice

Obstacles faced:

— None, necessary records available

— Personal bank information obtained by subpoena

8080


(Continued) Approach used:

— Reviewed procedures performed by DHS

— Reviewed child care assistance payments

— Compared payments to approved providers


— Approximately 10 months

8181



— $18,750 of improper disbursements for child care services not performed

• 5 payments were made from fraudulent invoices

• Payee was family member of employee, services in 5 different counties

Results:

— Employee placed on administrative leave, then resigned

— DHS recovered over $17,300 from IPERS, last salary payment and vacation pay out

8282

Iowa State University (ISU)


— Alert ISU employee reviewing vendor invoices

Obstacles faced:

— None, vendor voluntarily provided requested payroll records

— Additional records obtained by search warrant

8383

Iowa State University (ISU)(Continued)

Approach used:

— Complete review of vendor’s invoices

— ISU internal audit compiled information

— Attorney General requested AOS involvement



— Not cost beneficial to investigate previous 3-year contract period

8484

Iowa State University (ISU)(Continued)

Findings:

— $403,000 (15,700 hours) over-billings paid

— Additional $29,000 (1,100 hours) over- billings not yet paid

Results:

— Suspended sentence of 25 years and 5 years probation

— Ordered to pay restitution of $297,000

8585

Fraud Environment Today

Number of issues/concerns on the rise

— Nationally – from Enron of 2001 to the SEC stock option cases today

— In Iowa: • 11 reports issued in first 9 months of 2007• 24 investigations in progress or pending• FY2007 - 75% increase over previous high of 20 in 2005

Why? The “CIETC Salary Scandal” impact

Challenges? — Resources to investigate timely— Funding

8686

Bottom Line on Fraud

Fraud exists – yes, even in your own

organizationor the organizations you audit.

Without a doubt, virtually every organization

experiences fraud and abuse of some type – it

can range from minor employee misuse of office

supplies to significant fraudulent financial

reporting.

8787

The Most Frequently Asked Question Since The “CIETC

Salary Scandal”

How do we prevent something like

CIETC from ever happening again?

8888

Responses to Fraud

Nationally by the profession – SAS 99

Locally by AOS:

— to help prevent fraud – re-examine audit requirements

— to better detect fraud in audits: • SAS 99 training• effective interviews• red flag alerts

8989

Biggest Fraud Inhibitors

Effective internal controls:— cost/benefit relationship— integrity of employees

Appropriate governing board oversight:— Absolutely critical in small organizations— Equally effective in large organizations when they ask the tough questions

Trust . . ., but verify!

In God we trust,everyone else we audit!

9090

Questions

nsaa/nsac joint middle management conference fraud – an iowa case study presented by david vaudt...

Documents

indicted slide

guilty of fraud slide

available slide

prison slide

enron cfo slide

cietc salary scandal

worldcom cfo slide

enron treasurer slide