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NSAA/NSAC Joint Middle Management Conference Fraud – An Iowa Case Study Presented by David Vaudt Tami Kusian Auditor of State Deputy – Performance Investigation.

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Presentation on theme: "NSAA/NSAC Joint Middle Management Conference Fraud – An Iowa Case Study Presented by David Vaudt Tami Kusian Auditor of State Deputy – Performance Investigation."— Presentation transcript:

1 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

2 2 Presentation Objectives Fraud – Websters definition A stroll down memory lane CIETC – one of Iowas most publicized frauds A historical look at government fraud in Iowa Interesting Iowa government fraud cases Todays fraud environment Question and answer session

3 3 Websters 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

4 4 Websters Dictionary Deceive: to make (a person) believe what is not true; mislead implies deliberate misrepresentation of facts by words, actions, etc., generally to further ones ends

5 5 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

6 6 For decades, members of the CPA profession labored in boring anonymity...

7 7 Then, in 2001, everything changed, and we became... famous. Well, sort of...

8 8 Most of the recent high-profile cases have been management fraud cases...

9 9 Lets take a quick stroll down recent memory lane...

10 10 [12/5/01] After Enron, New Doubts About Auditors After Enron, New Doubts About Auditors

11 11 [12/5/01] Trust and Discretion Trust and Discretion CPAs must never forget that the 'P' in 'CPA' stands for public -- serving the public and maintaining their trust, former SEC chief accountant Turner said. CPAs must never forget that the 'P' in 'CPA' stands for public -- serving the public and maintaining their trust, former SEC chief accountant Turner said.

12 12 Andrew Fastow, (former) Enron CFO

13 13 Ben Glisan, Jr., (former) Enron Treasurer

14 14 Scott Sullivan, (former) WorldCom CFO

15 15 David Meyers, (former) WorldCom Controller

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17 17

18 18 [3/16/02]

19 19 Then the local media focus changed to our own backyard – one of Iowas 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

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23 23 Central Iowa Employment and Training Consortium (CIETC) What led to the special investigation? Iowa Workforce Development (IWD) employee concerned about year-end $300,000 award to CIETC (messenger was employees 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-blowers messenger

24 24 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

25 25 Central Iowa Employment and Training Consortium (CIETC) (Continued) Findings: Improper allocation of administrative salaries and supplemental payments Less than arms length transactions Excessive compensation: CEO - $795,000 COO - $768,000 CFO - $292,000

26 26 Central Iowa Employment and 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

27 27 CIETC Wave Crashes: 4 Indicted

28 28 Ex-CIETC exec pleads guilty of fraud

29 29 Des Moines Register Headline March 27, 2007

30 30 The CIETC Salary Scandal caused us to reflect on AOSs more recent fraud investigations... Yes, regretfully other fraud exists even here in Iowa – the Heartland of America

31 31 Fraud Investigation Reports Issued By Firm Fiscal Years 1996 through 2007* *2007 – first 9 months

32 32 Fraud Investigation Reports Issued by Fiscal Year Fiscal Years 1996 through 2007* *2007 – first 9 months

33 33 Fraud Investigation Reports Issued by Entity Type Fiscal Years 1996 through 2007* *2007 – first 9 months

34 34 Fraud Investigation Reports Issued by Dollar Amount Fiscal Years 1996 through 2007* *2007 – first 9 months

35 35 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

36 36 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

37 37 Cedar County Economic Development Commission (CCEDCO) What led to the special investigation? Telephone call from bank regarding a dishonored check on CCEDCOs 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

38 38 Cedar County Economic Development Commission (CCEDCO) (Continued) Approach used: Reviewed all activity in CCEDCOs bank accounts Reviewed disbursements for support and approval Examined purchases made with CCEDCOs credit card Time period covered: 5 years, 2 months Time period Office Assistant was employed

39 39 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

40 40 City of Garnavillo What led to the special investigation? Required financial audit, once every four years CPA testwork identified $5,000 variance in City Clerks 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

41 41 City of Garnavillo (Continued) Approach used: Review of Citys unauthorized credit card statements Review of Citys cancelled checks: payments on City Clerks personal credit cards purchases of unauthorized office supplies Subpoena of personal credit card statements Time period covered: 4 years, 6 months City Clerk employed almost 20 years; not cost beneficial to investigate previous 15 years

42 42 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)

43 43 City of Pleasant Plain What led to the special investigation? 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

44 44 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 Time period covered: 2 years, 5 months Time period City Clerk was employed

45 45 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

46 46 City of Hastings What led to the special investigation? 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 Treasurers employment

47 47 City of Hastings (Continued) Approach used: County Sheriff seized records through search warrant of City Treasurers home Confirmation of payments to City by State and County Review of Citys bank statements, cancelled checks, money orders, etc. Time period covered: 5 years Not possible to investigate previous 10 years; inadequate records

48 48 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

49 49 City of Sergeant Bluff What led to the special investigation? 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

50 50 City of Sergeant Bluff (Continued) Approach used: Compared utility deposits per bank to monthly reconciliations and customer accounts Time period covered: 3 years, plus 1 year of partial records City Clerk for 21 years, prior records not available

51 51 City of Sergeant Bluff (Continued) Findings: Over $231,000 withheld from Citys 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

52 52 Dallas County Sheriffs Office What led to the special investigation? 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

53 53 Dallas County Sheriffs Office (Continued) Approach used: Inventory of Property and Evidence Room Evidence log sheets and case files review Subpoena of personal bank information Time period covered: April 2006 inventory Inventoried evidence involved cases generated over 4 years, 6 months

54 54 Dallas County Sheriffs Office (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

55 55 Linn County Facilities Management Department What led to the special investigation? 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

56 56 Linn County Facilities Management Department (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 Time period covered: Approximately 3 years, 7 months

57 57 Linn County Facilities Management Department (Continued) Findings: 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 Managers 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)

58 58 Cass County Sheriff What led to the special investigation? County officials concerns about Sheriffs 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

59 59 Cass County Sheriff (Continued) Approach used: Confirmation of State payments and County Clerk of Court payments to Sheriffs Office Cash accounts disbursement vouching Review of court orders and case records on restitutions and/or donations Time period covered: 2 years, 8 months Sheriff for 22 years; not cost beneficial to investigate prior years

60 60 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 Sheriffs Office County Attorney had Sheriffs 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

61 61 Lee County Protective Payee Program What led to the special investigation? 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

62 62 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 Time period covered: 3 years, 5 months Consisted of time period Payee Clerk was employed in this position

63 63 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

64 64 Mills County Treasurers 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

65 65 Mills County Treasurers Office (Continued) Approach used: Review of States 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 Time period covered: 2 years; 1 month Not possible to investigate previous 9 years; inadequate records

66 66 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

67 67 Taylor County Sanitarians Office What led to the special investigation? 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

68 68 Taylor County Sanitarians 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 Time period covered: 1 year, 5 months Time period County Sanitarian was employed

69 69 Taylor County Sanitarians 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

70 70 Boone Community School District What led to the special investigation? 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

71 71 Boone Community School District (Continued) Approach used: Review of check images obtained from bank Subpoena of Business Managers personal bank account statements Confirmation of payments to District by State and County Time period covered: 4 years, 5 months No improper disbursements concerns in first 4 years of Business Managers employment

72 72 Boone Community School District (Continued) Findings: 46 improper checks to the Business Manager for $140, improper checks to Districts bank, all redeemed for cash totaling $40, improper checks to the District, all redeemed for cash totaling $27,000 Results: Sentenced to 10 years Ordered to pay restitution of $3,000

73 73 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

74 74 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 covered: 3 years, 3 months Time period Business Manger was employed

75 75 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

76 76 Before and After School Services (BASS) What led to the special investigation? 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

77 77 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 Time period covered: 4 years, 6 months

78 78 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 Mothers 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

79 79 Department of Human Services (DHS) What led to the special investigation? 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

80 80 Department of Human Services (DHS) (Continued) Approach used: Reviewed procedures performed by DHS Reviewed child care assistance payments Compared payments to approved providers Time period covered: Approximately 10 months

81 81 Department of Human Services (DHS) (Continued) Findings: $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

82 82 Iowa State University (ISU) What led to the special investigation? Alert ISU employee reviewing vendor invoices Obstacles faced: None, vendor voluntarily provided requested payroll records Additional records obtained by search warrant

83 83 Iowa State University (ISU) (Continued) Approach used: Complete review of vendors invoices ISU internal audit compiled information Attorney General requested AOS involvement Time period covered: 2 years, 9 months Not cost beneficial to investigate previous 3-year contract period

84 84 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

85 85 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 investigations in progress or pending FY % increase over previous high of 20 in 2005 Why? The CIETC Salary Scandal impact Challenges? Resources to investigate timely Funding

86 86 Bottom Line on Fraud Fraud exists – yes, even in your own organization or 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.

87 87 The Most Frequently Asked Question Since The CIETC Salary Scandal How do we prevent something like CIETC from ever happening again?

88 88 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

89 89 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!

90 90 Questions


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