Winter Conference February 2, 2010

Dealing with the Ugly Face of Fraud Holly Frook Graham, CPA, CFE Arizona Office of the Auditor General

 In regards to potential fraud, participants will: ◦ Be able to protect their district ◦ Know what actions to take when fraud is suspected ◦ Understand fraud role of Auditor General

 School districts  Counties & elected offices  State agencies  Fire districts  Community college districts  Universities  Justice courts  Other entities

 School district case range of losses ◦ $2,322 - $11,725,425  School district case culprits ◦ Student activities secretary ◦ Department director ◦ Assoc. superintendent ◦ Governing board member ◦ Business manager ◦ Superintendent

Proactive against fraudReactive after fraud  Create culture of integrity  Communicate expectations regularly  Hire quality people  Have strong internal controls  Maintain culture of integrity  Seek assistance  Support prosecution  Take remedial action

You Husband Husband’s father. Husband’s sister & her husband Mother & Grandmother Daughter & Grandson Half-brother & his wife Step-son

Managerial problems Internal audit concerns External audit issues Other circumstances

 Money or property missing  Money loaned or gifted  Credit cards misused  Conflicts of interest  Undisclosed information  Abuse of authority

 Check and cash deposits made late  Unauthorized payments to individuals  Administrators’ trips to Vegas  Credit card MIA

 External auditors-improve controls over cards  District called card company ◦ 12 cards with activity ◦ 4 of 12 cards can’t be found ◦ $2,100 gas purchases ◦ July – December 2007

 December 2007 ◦ Performs internal investigation  February 2008 ◦ Employee placed on leave (terminated July 2008)  March 2008 ◦ District contacts police department ◦ PD = several suspects, no charges  January 2009 ◦ Audit Report = alleged misuse  April 2009 ◦ Auditor General informed of misuse through audit report

Stealing more than $1,700 worth of gas

School District  $2,100 stolen for gas  Six month period  Employee terminated  No legal consequences  Money not repaid County  $1,700 of gas stolen  Two year period  Employee arrested  Employee terminated  Plead guilty to theft  Restitution ordered

Sometimes, fraud is something that just doesn’t look good Fraud doesn’t need a smoking gun

 Complaints to GB about superintendent: ◦ Wife’s employment ◦ Personally paid with IGA money ◦ Unauthorized performance pay  GB contracts with investigative attorney  Attorney recommends: ◦ Suspend superintendent ◦ Review former employment file ◦ Hire forensic CPA

 Separation agreement with prior district required superintendent to: ◦ Resign ◦ Repay $9,300 of personal purchases ◦ Pay investigation costs of $36,000  No legal action  Two weeks later applied for AZ superintendent position

 District pays $15,369 for attorney investigation  District pays $54,977 to superintendent  Superintendent resigns  Forensic CPA not hired  Auditor General not contacted  Legal action not taken

Office of the Auditor General:  Reviews external audit report  Sees findings of financial misconduct  Reviews pertinent documents  Conducts investigation  Submits report to Attorney General

Superintendent (former):  Pleads guilty to felony charges ◦ Theft ◦ Misuse of public money  Agrees to pay $84,981restitution  Forfeits certificates: ◦ K-12 ◦ Principal ◦ Superintendent

CriminalCivil  Theft  Fraudulent Schemes  Misuse of Public Money  Conflict of Interest et al  False Filing – Forgery &  Procurement &  Antitrust &  Tampering &.22

Do This First  Go up the ladder  Restrict access  Conduct preliminary interview  Document everything  Seek assistance

 Determine Who, What, Where, When and Why ◦ Review documents first ◦ Ask questions later  Document everything ◦ Analysis ◦ Timelines ◦ Interviews, discussions  Be specific ◦ Names and titles ◦ Dates and times ◦ Amounts and locations

Special Investigative Unit o Assesses potential fraud situations o Investigates fraud o Prepares confidential report for law enforcement o Assists in prosecution o Prepares summary report for entity, legislature, public o Conducts trainings

 Arizona Auditor General azauditor.gov  Arizona State Legislature – statutes azleg.gov/ArizonaRevisedStatutes  Association of Certified Fraud Examiners acfe.com

Questions?