By Susane DeGrane
“Trust, but verify” became President Ronald Reagan’s signature phrase in the mid-1980s when referring to U.S.-Russia relations. A spinoff from a Russian proverb, the phrase suggests that even when working with seemingly trustworthy and reliable parties, one should always check things out.
Decades later, following the advice of our nation’s 40th president would have helped his hometown of Dixon, Ill. In the spring of 2012 the tiny rural community with just three paid municipal administrators and 15,000 inhabitants found itself embroiled in the largest municipal embezzlement scheme in recent history — $53 million siphoned from city coffers over a period of 20 years by comptroller Rita Crundwell.
Looking Out for Fraud
To prevent municipal fraud, Gill suggests accessing resources on the ACFE website — www.acfe.com — and provides the following tips:
- Look for red flags — missing sequences in checks and multiple transactions just below amounts requiring approval.
- Make sure there’s a separation of duty among those writing checks and reviewing bank statements.
- Examine backup documentation for authenticity. (Crundwell created 177 bogus letters and reports when Clifton Gunderson asked for further detail about financial figures.)
- Pay attention if a city employee delays providing documentation or acts strangely in response to requests.
- Realize that management oversight on the part of a mayor, city manager, CEO or
president helps prevents fraud.
- Rotate accounting firms to maintain professional detachment and impartiality.
- Educate employees about fraud
- Provide employees with a hotline or other objective means of reporting signs of fraud.
- Enlist the services of a fraud examiner when signs of fraud are confirmed.
A U.S. Department of Justice press release announcing Crundwell’s arrest on April 12, 2012, said that seizure warrants had been issued at multiple locations, including Crundwell’s home, office and thoroughbred horse farms in Dixon and Beloit, Wis. Seized items included seven trucks and trailers, three pickup trucks, a $2.1 million motor home and a Ford Thunderbird convertible.
Federal agents would eventually discover that Crundwell owned 400 thoroughbred horses — one valued at $750,000 — considerable land and farms, expensive jewelry, designer clothes, furs and countless other trappings of wealth far exceeding her $80,000 salary.
The Dixon embezzlement case provides many lessons for municipal administrators, accounting firms and fraud investigators. It’s impressive due to its duration and size, but it’s also fascinating because of how it occurred — right under people’s noses.
Rita Crundwell grew up in the Dixon community and was well-liked, according to numerous news accounts. To anyone who asked, she explained evidence of her outsized wealth as the fruits of her success raising thoroughbred houses and winning numerous competitions. She also managed to make herself appear honest by docking her own pay for non-paid vacation time spent at horse competitions.
“In this case, the element of trust was taken way too far,” says John D. Gill, vice president of education for the Association of Certified Fraud Examiners, a 75,000-member national organization started in 1988 by an accountant turned FBI agent Joseph T. Wells. “Reagan’s advice, ‘Trust, but verify,’ absolutely would apply in this case. You can’t worry about offending anyone. You can be a nice person, but you still have to do your job. I grew up in a small town and I understand the mindset that goes against this when people know each other.”
Despite the controls that now exist to prevent fraud, trusting too much is the biggest factor to set the stage for future fraud scenarios, Dill says. “This is because people have an irrational tendency to trust one another — especially after they’ve known someone a long time.”
Dennis Czurylo, a special agent for the criminal investigation division of the Internal Revenue Service for 25 years and the owner of a forensic accounting firm in Palos Heights, agrees. He also points out that some of Dixon’s problems stemmed from Crundwell having served as comptroller since the 1980s. She opened bogus bank accounts, one bearing the generic name of “treasurer,” prior to the Patriot Act, which implemented anti-terrorism security measures after 9/11 and changed the landscape of banking for good.
“Rita Crundwell was able to open accounts when banks were not required to know their depositors,” Czurylo says. “After 9/11 she would have needed to provide an originating document (from the City of Dixon) empowering her to set up any account related to city business.”
Czurylo and Gill both point out that the City of Dixon exerted lax internal controls. “The bank statements were going to the same person who wrote the checks,” Czurylo says. “The statements weren’t even being mailed. They were being picked up by Rita Crundwell’s brother!”
This odd arrangement constituted a lack of “segregation of duty,” which would otherwise protect a municipality or company from fraud. In this case, another individual besides Crundwell would have reviewed the bank records and seen just where the money was flowing.
The coverup of the money flow went on for years and only came to the fore when Crundwell took time off for a horse competition. Kathe Swanson, the city clerk, opened a bank statement and discovered a bogus account.
Another factor setting the stage for fraud was that the same accounting firm — Clifton Gunderson — had handled audits of Dixon’s financial records for decades. “This is a battle we’ve been fighting for years,” says Gill of the ACFE. “Auditors get into a check-list mentality. They just weren’t checking thoroughly enough and kept doing things the same way.”
By rotating accounting firms — a practice now required for publicly held companies by the Sarbanes-Oxley Act of 2002 — Dixon would have come under more stringent scrutiny. “Accounting firms handling a first-time audit typically call this mindset “first-time through,” Czurylo says. “They often go to great lengths to understand what’s going on and to understand how the business or organization works.”
Sarbanes-Oxley provisions were not originally intended to apply to municipalities, but municipal administrators would benefit from looking to them to inform best practices, particularly with regard to rotation of auditors and impartiality of firms conducting audits, says Gill.
Clifton Gunderson shared an unusually close relationship with Crundwell. She played on their company softball team and met employees after work for meals and drinks, according to media accounts. Clifton Gunderson also handled the preparation of her personal tax returns, says Bruce.
The closeness might begin to suggest culpability on the part of the accounting firm in Dixon’s embezzlement scheme, but the FBI never charged anyone but Crundwell with wire fraud, says Devon Bruce of Powers Rogers & Smith, P.C., a Chicago law firm. The City of Dixon hired Bruce, a civil attorney, to recoup losses.
“With rare exceptions, embezzlers never have any money left,” says Bruce. “They (embezzlers) normally spend what they steal.” Crundwell was no exception, which explains why Bruce managed to restore the lion’s share of money she stole from the City of Dixon not by going after her but by charging the accounting firm of Clifton Gunderson with negligence. The company settled out of court, coughing up nearly $40 million, according to Bruce. Since then, the Denver-based company has merged with LarsonAllen of Minneapolis and now bears the name CliftonLarsonAllen LLP.
Bruce’s success at going after the accounting firm causes many people to assume that the role of auditors is to catch fraud, but that’s not the case, according to Gill and Czurylo.
Auditors expect financial records and information they receive to make sense. “If something seems off, they ask for additional information,” says Czurylo. “They may ask for samples of records, but often these don’t reveal the problem. It would be impossible to check every figure.”
A mom-and-pop accounting firm that contracted for years with Clifton Gunderson also paid the City of Dixon $1 million. Fifth Third Bank restored $3.5 million to Dixon’s coffers, and auctioneers managed to yield around $10 million for the city by liquidating Crundwell’s assets.
Bruce says the Crundwell case has yielded more speaking engagements than any other case he’s handled in his 22 years of practicing civil law. That may be because it’s rich in information about circumstances to avoid.
The City of Dixon definitely learned several lessons. The 2014 Independent Auditor’s Report prepared by a new accounting firm, WIPFLi CPAs and consultants indicates compliance with auditing standards issued by the comptroller general of the United States. The report also suggests the City of Dixon has implemented a 10-point transparency checklist suggested by the Illinois Policy Institute.
That checklist suggests that municipalities must maintain online searchable information that includes: contact information for public officials as well as compensation for employees; calendars posting advance notices of public meeting dates; five years of financial reports; third-party expenditures; current budgets; instructions for open-bid processes; contracts over $25,000; responsibilities and pay for lobbyists; and tax rates.
Dixon also opted to adopt a managerial form of government over the old commission model that’s become a rarity in Illinois and across the nation. The new government enabled Dixon to hire professionals trained at managing municipal operations and finances at competitive salaries. Today, David Nord serves as city manager and Paula Meyer serves as finance director.