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Signs of embezzlement

As a forensic accountant, I’ve seen egregious fraud committed over the years. After discovering they’re victims of embezzlement, business owners and board members invariably make two observations:

1. The violation of trust hurts more than the monetary loss.

2. Looking back, there were plenty of signs that something was amiss.

What are those signs that seem so obvious in retrospect?

The Association of Certified Fraud Examiners lists several red flags that fraud perpetrators exhibit. The two most common? Living beyond one’s means, and financial difficulties. These two obviously go hand in hand: buying things you can’t afford results in excessive credit card debt, which then leads to financial problems.

Residents of Dixon, Ill. learned of these red flags the hard way. Rita Crundwell allegedly pilfered $53 million from the small town of 16,000 while serving as the city’s treasurer and comptroller. A longtime, trusted public servant who was seen as the “go-to person” in the city’s government, Crundwell stole more than Dixon’s fire department and police budgets combined. Every year for six years.

What were the red flags in Crundwell’s case? Let’s look at her lifestyle—red flag #1. Earning only $80,000 a year from her city job, she bred horses–nearly 400 horses maintained on horse farms across the country. She bought a $2 million luxury motor home and took substantial vacations related to her horse-breeding endeavors. Even people who don’t know much about horse breeding know that it requires huge sums of money, and is therefore a pastime reserved for the wealthy. Yet, as Dixon’s mayor put it, “Most folks just assumed she was a successful businesswoman.”

Aside from her horse breeding, Crundwell’s other indulgences—including $340,000 worth of jewelry—resulted in a $2.5 million balance on her American Express card. Say hello to red flag #2—financial need.

How is it possible that no one noticed such huge sums of money being diverted from a small town’s budget?

To start with, Crundwell was the only person to reconcile the bank statements. For 20 years. Her joint duties as treasurer and comptroller gave her virtually complete control of Dixon’s finances. There are two ways to create checks and balances in financial processes – segregate duties so no one controls a transaction from beginning to end, and provide oversight for all other areas where segregation of duties is not feasible.

To make things even easier for Crundwell, Dixon’s mayor and city council members were “hands off” and provided virtually no oversight. The buck stopped with her on all financial questions. Tip: No one should be irreplaceable. Use the “what if she gets hit by a bus – how will we function?” test when dividing up job duties. The more control an individual has over financial processes, the higher the risk: the more they can steal, and the easier it is to hide.

Even Dixon’s auditors failed to raise any alarms about Crundwell’s records. Granted, the size and number of transactions being transferred from other city accounts to Crundwell’s secret account should have alerted the auditors to at least ask questions. And yes, they are being sued.

But it’s a common misconception that auditors are required to look for fraud. Auditors evaluate the system of internal controls to determine the type of testing they need to do. They should provide recommendations for improving internal controls, and they must report fraud if they see it, but they are not required to look for it.

So how was Crundwell found out? Her substantial time off (six to sixteen weeks a year) proved her undoing. A clerk who decided to reconcile the books while Crundwell was on vacation discovered the fraud when she requested “all” the statements from the bank—and received Crundwell’s secret account along with all the legit ones.

Looking back at the Crundwell case, the inevitable signs of dishonesty are far more apparent than they were at the time. Different people see different signs at different times. The seemingly random signs don’t form a coherent picture until after the fraud has been discovered.

Business owners can spare themselves the “I should have seen it” anguish by building accountability and transparency into financial workflows. While it’s impossible to prevent embezzlement, Crundwell’s alleged crimes could have been detected sooner—with less damage done—given more accountability in financial processes.

Trust. But verify.

Denise McClure, CPA, CFE is a forensic accountant and the owner of Averti Fraud Solutions, LLC in Boise. She is a frequent author, speaker and trainer on preventing and deterring embezzlement and fraud. Her ideas on fraud risk management have helped organizations improve efficiency, profitability and security. For more information, visit www.AvertiFraudSolutions.com or e-mail Denise@AvertiFraudSolutions.com.

 

 

 

 

 

 

About Denise McClure

One comment

  1. And in Ronald Reagan’s hometown, no less!

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