The horses take a nasty fall, Part 2 of 2

As the comptroller for the small town of Dixon, Ill., since 1983, Rita Crundwell managed all financial aspects of the city funds, including transferring money between accounts, writing checks and authorizing payments. Her salary was $80,000 per year, but she enjoyed a lavish lifestyle and was a nationally known horse breeder. After a city clerk found a problem in the city's accounts, the mayor contacted the FBI. Six months later, agents arrested Crundwell. She has pleaded not guilty to misappropriating $53 million in city funds.

On April 23, 2012, the members of the Dixon (Ill.) City Council voted unanimously to fire Rita Crundwell, 59, the city's comptroller. Crundwell had tried to resign over the weekend but the mayor rebuffed her. He and the council wanted to ensure that she wouldn't receive any pension benefits for her time.

The FBI arrested Crundwell on April 17 on one count of wire fraud, in the amount of $175,000, with the stipulation that more charges could be coming as the investigation unfolds. She was released on a $4,500 recognizance bond. Wire fraud carries a maximum penalty of 20 years in prison and a $250,000 fine.

Crundwell, 59, who served as comptroller since 1983 and handled all of the city's finances, was released on her own recognizance on April 18. She was arraigned May 7 in U.S. District Court in Rockford, Ill. She plead not guilty to the charge of wire fraud. [Update: Crundwell has now pled guilty to fraud, according to the Nov. 14, 2012, New York Times article, "Former Official Pleads Guilty to Defrauding Illinois Town of $53 Million." - ed.]

Since the initial arraignment, the investigation has been expanded to cover the 2006 - 2012 period. Crundwell allegedly embezzled an estimated $34 million during that time.

The investigation was expanded again — to 1990 – 2012 — when actual dates were obtained for Crundwell's 1990 opening of the non-City of Dixon bank account with Fifth Third Bank in Ohio. The estimated total now is more than $53 million. The period of the alleged fraud spanned more than two decades.

The Department of Justice says as part of the fraud scheme, Rita allegedly created fictitious invoices purported to be from the State of Illinois to show the city's auditors that the funds she was fraudulently depositing into the RSCDA account were being used for a legitimate purpose.

The indictment seeks criminal forfeiture of two residences and the horse farm in Dixon, a home in Englewood, Fla., a $2.1 million luxury motor home, more than a dozen trucks, trailers and other motorized farm vehicles, a 2007 H2 Hummer, a 2005 Ford Thunderbird convertible, a 1967 Chevrolet Corvette roadster, a pontoon boat, approximately $224,898 in cash from two bank accounts and other assets allegedly purchased with fraud proceeds. Many of these assets were seized when Rita was arrested, and the government requested on May 2 a restraining order on the real estate that is allegedly subject to criminal forfeiture.

The government also filed a civil lawsuit alleging that the quarter horses owned by Rita are subject to civil forfeiture because she purchased and/or maintained them with criminal fraud proceeds. On June 15, a federal judge in Rockford, Ill., ruled that the U.S. Marshals Service could move forward with selling as many as 400 quarter horses belonging to Crundwell.

"The government is pursuing both criminal and civil forfeiture proceedings to ensure that every available tool is being used to recover proceeds of the alleged fraud in order to recoup as much money as possible for the City of Dixon, its residents and taxpayers," said Patrick J. Fitzgerald, U.S. Attorney for the Northern District of Illinois. The investigation is continuing, he added.

On the same day as her arrest, FBI agents obtained seizure warrants for her home property, Rita's Ranch, Meri-J Ranch and her city hall office. They seized personal financial documents, computer hard drives, general ledgers and statements relating to her business and ranches, bills and receipts relating to her horse business as well as her position as comptroller, trophies and buckles, AQHA recognition plaques, documents relating to her horses (registration papers, veterinary documents, records of sales and purchases, transfer documents and horse embryo spreadsheets) and insurance policy documents. The FBI also froze the contents of two bank accounts that she controlled.

The seized evidence indicates that Crundwell made personal loans to at least two city employees and one other individual. The records show she made a $2,000 loan to Donald Wolber. His relationship to Crundwell hasn't been determined. She also made loans to Tim Shipman, the Dixon fire chief and Shawn Ortgiesen. The documents don't show the amounts or terms of the loans, but Shipman said he had a short-term loan with a 1 percent interest rate. Ortgiesen said he was making payments on a 10-year loan with a 4 percent interest rate.

Shipman and Ortgiesen said they felt comfortable going to Crundwell when they were struggling because she'd been known to help people out, and they both considered her a friend. After council meetings, the group often would often go out or over to Crundwell's house.

Shipman did some work on her house six to eight years ago, and he had known her family for a long time. In fact, he would sometimes drive her trailers back home from horse shows. Shipman and Ortgiesen said they didn't realize the money Crundwell lent them was part of misappropriated city funds; they said they thought the money was from Crundwell's horse business. Neither Shipman or Ortgiesen is suspected of being an accomplice to the fraud scheme, and the mayor said that neither violated city policies by obtaining the loans.

Dixon, a city of about 16,000 people where President Ronald Reagan grew up, was shocked by the scandal. The mayor says he audits the financials every year and never saw anything out of the ordinary. He blamed the city's financial shortcomings on the weak economy and late state payments. Some have called for his resignation.

Of course, many citizens are wondering how this fraud went on for so long; the city only has an annual budget of about $20 million. The city has hired an accounting firm and organized a team of city officials to recommend better internal controls.

As of press time, Crundwell awaits trial. On Sept. 11 and 12, the U.S. Marshals Service sold 80 horses on 18 of the farms throughout the country for $1,641,200 — the most succcessful online equine auction ever, according to Jason Wojdylo, CFE, the chief inspector of the U.S. Marshals Service Asset Forfeiture Division.

On Sept. 20, Lee County State's Attorney Henry Dixon announced Crundwell was indicted on 60 counts of felony theft, according to "State Charges Dixon's former comptroller over missing millions," by Melissa Jenco, in the Chicago Tribune.

If she's convicted, much of the proceeds will revert back to the City of Dixon coffers, according to officials. Meanwhile the city has hired Crundwell's replacement. (See coverage by WQAD Television, The Chicago Tribune and mystateline.com.)

LESSONS LEARNED

The mayor, city council and City of Dixon employees have a lot to learn from this preposterous fraud. Of course, a major red flag was the discrepancies between Rita's lifestyle and income. While still earning an annual $80,000 salary, her lifestyle changed from modest to lavish. Most assumed she was able to increase her expenditures because her horse business was flourishing. However, if they had looked closely they would have realized that she couldn't be making enough from shows and breeding activities to cover expenses.

The standard rule of segregation of duties and internal controls (often touted, seldom followed) are absolutely necessary to ensure that one person doesn't have significant authority over every aspect of the finances. In this case, apparently there was little to no segregation of duties; Crundwell was able to authorize and open accounts, make payments, write checks, move money between accounts and provide narratives to the mayor and members of the city council explaining why the account balances were negative or didn't balance.

Dixon's budget grew from $9 million to $20 million in two decades while Crundwell was the comptroller. A city with such a low budget should have realized that her excuses didn't compensate for the missing money. She claimed that the State of Illinois continually owed the city money, and the council members accepted her explanation as valid. No one made a call to the state's auditor general to verify Crundwell's claims.

For some strange reason, Crundwell eventually was responsible for picking up and distributing mail within city hall, which gave her the perfect opportunity to intercept bank statements from the secret account she had opened with Fifth Third Bank in Ohio. The city hadn't appointed anybody else to perform this simple but sensitive duty. Big mistake.

The mayor and council members learned the hard way that trusting someone too much can cloud their judgments about evaluating that person's actions and effectiveness. Evaluations of performances should be based on effectiveness — not friendship. Because Crundwell was everybody's friend, socialized with her and trusted her, they accepted her excuses for the discrepancies in statements and didn't check her work or processes. So, Crundwell got away with this massive fraud for nearly two decades. It seems so obvious, but you should never neglect internal controls simply because you trust someone. So many entities make this basic mistake and pay for it dearly.

Janis Card Associates, an external CPA firm based in Sterling, Ill., annually audited the financial statements of the City of Dixon as required by law. (On June 11, the city filed a lawsuit against the firm. The suit accused Janis Card Associates of professional negligence and negligent misrepresentation for overlooking the huge thefts.)

The external auditor, in the Sept. 21, 2011, Independent Auditor's Report to the Mayor and Commissioners of the City of Dixon, stated, "The City of Dixon … has not presented the management's discussion and analysis as required by accounting principles generally accepted in the United States of America." As we wrote in part 1 of this article, Government Accounting Standards Board (GASB) 34 requires that the Management's Discussion and Analysis section be included in an audit report; that requirement had been in effect for at least six years by the time the fraud was discovered, yet the City of Dixon had omitted it each year. Officials should have asked Crundwell why the section was consistently omitted.

The city learned that it needs to separate duties. Case in point: Crundwell was able to open the 9530 bank account in the city's name with her name as a joint holder and independently authorize all transactions run through the account. If another employee had been responsible for reconciling Dixon's bank accounts, and someone other than Crundwell had collected and delivered the mail (it was a small city, but why was the comptroller responsible for the mail?), her personal account with Firth Third Bank would have been discovered sooner.

RECOMMENDATIONS TO PREVENT FUTURE FRAUDS

• Segregate duties throughout the structure of Dixon. The city is reviewing possible actions. Crundwell had total control over many functions that she used to commit fraud with no checks in place to remove her opportunities. Here are a few examples of possible actions: 
  • A Certified Fraud Examiner (CFE) should be added to the staff of the city. 
  • The external auditor should be a CPA who's also a CFE.
  • The mayor and all council members should approve new bank accounts. 
  • Two responsible members of management (possibly the mayor and a council member) should review and approve all invoices. 
  • All payments exceeding a set amount based on operational budget should have two signatures for approval. 
  • The city council should review and approve all transfers of funds between accounts, including wire transfers.
   
• The mayor and council members review and engage in detailed discussions of periodic financial reports and annual audits.
• The mayor and/or council should provide initial anti-fraud orientations to new employees and mandatory annual anti-fraud reorientations, which would include: 
  • The city's fraud prevention policies. 
  • A statement of zero tolerance of fraudulent activities.
  • A discussion of red flags that employees have to report and how to report them. 
  • These three previous items have to be included in the annually updated employee handbook. 
   
• Establish an anonymous fraud hotline. 
• Implement mandatory job rotation so another employee will perform the duties that someone else previously had and could uncover fraud. 
• Fully explain the vacation policy, which includes mandatory vacations. Mandatory vacations serve the same purpose as job rotations: they will allow another individual to perform someone else's duties and potentially uncover fraud. This is how the Crundwell fraud eventually was uncovered. Also tell employees that leave without pay only can be authorized with their manager's permission.
• A designated official — mayor or council member — would initiate surprise audits by internal auditors or audit teams to review all or select transactions, accounts and financial statements. 

FRAUD TRIANGLE, NOW OBVIOUS

In hindsight, the three legs of the classic fraud triangle were always there. Crundwell had plenty of opportunities from the time she joined the city staff as a student worker. As a very intelligent and hard worker, she gained the respect and trust of managers and council members. Their trust grew, and she learned the city's financial operations. After several years as the comptroller, she knew the system's weaknesses and how to use them to her advantage.

She decided not to go to college, but she still wanted to do well in life and make her family proud, so she began working in the horse-raising industry. After she won three regional horse competition events, she felt the urge to compete at the national level. She felt the pressure to buy horses and have good facilities to house them.

So, she used her rich opportunities to embezzle tremendous amounts from the city through the years. Much of her rationalization came from the need to bring great recognition to her family members, who had raised and showed horses in earlier days.

As in most fraud schemes, red flags had been flying, but those who trusted her ignored them instead of asking pointed questions. They never wondered if she was living beyond her means; they just figured she was supporting her business with horse-show winnings. The city financial records never seemed to balance, but city officials always accepted her reports.

Thankfully, because of Crundwell's extended vacation, a curious substitute clerk tried to reconcile the bank accounts.

Though the monetary losses were astronomical, the case was classic fraud. Hopefully, the embarrassed city officials, who are licking their wounds, have learned some lessons. And, more importantly, maybe the whole mess has shocked other municipalities to act. That's the only good thing about exposed fraud.

Sidebar: ACFE's Anti-Fraud Education Partnership sows good seeds at Otterbein University and around the globe

What happens when more than 400 enthusiastic higher-education instructors teach the ACFE's free Fraud Examination 101 course to students who want to fight fraud? Magic!

ACFE founder and Chairman, Dr. Joseph T. Wells, CFE, CPA, formally introduced the ACFE's Anti-Fraud Education Partnership at the 12th Annual ACFE Fraud Conference & Exhibition in 2001, and it's still going strong. The ACFE, through the partnership, provides free course syllabi, videos, workbooks and other resources to qualifying instructors and professors.

Thousands of accounting, business and law enforcement students worldwide have received solid fraud examination training that they now use in their jobs. Many have become Certified Fraud Examiners.

Henry C. Smith, III, Ph.D., CFE, CMA, CCS, who co-wrote the previous article on Rita Crundwell with several of his students at Otterbein University, was one of the first to join the partnership when he agreed to teach the ACFE's Fraud Examination 101 at Texas A&M International University.

When he later joined the faculty of Otterbein, the school asked him if he could offer the same ACFE course in the MBA program. He then developed a four-course Fraud Concentration that began in the fall semester of 2011.

"All of the courses in the Fraud Concentration are taught using a team learning-based method stressing a hands-on approach," Smith said. "This method of teaching is especially helpful because the students learn the material by doing rather than being lectured at and then taking tests."

For example, Smith said that the students who co-wrote the Crundwell article collectively formulated a hypothesis and then conducted their investigation via online resources plus court records, audit reports and financial statements.

"The ACFE's Anti-Fraud Education Partnership has been extremely helpful in my professional development," Smith said. "It has provided the opportunity to attend numerous training sessions and obtain materials for use in classes at either no cost or discounted costs. I have been able to offer, enroll and see the successful completion of approximately 30 of my students in the ACFE CFE Exam Prep Course, using the independent study course criteria at Otterbein University."

Henry C. Smith, III, Ph.D., CFE, CMA, CCS, is an associate professor of accountancy at Otterbein University in Westerville, Ohio, in teaching managerial and advanced managerial accounting, and a four-course fraud concentration at both the graduate and undergraduate levels. Smith has more than 16 years teaching fraud-related courses, is a member of the ACFE Anti-Fraud Education Partnership, a past member of the Board of Directors of the Central Ohio Chapter of the ACFE and serves as the chapter training director. henrycsmith3@gmail.com

Members of the Forensic Accounting Class, Spring Semester 2012, Otterbein University:

Vincent Alger is a junior working toward a Bachelor of Arts in Accounting.

Kevin Genter graduated in May with a Bachelor of Arts in Accounting.

Nichole Lawhorn is working toward a Master's of Business Administration in Business major and enrolled in the Fraud Concentration. She's an Associate Member of the ACFE.

Melissa Lee, CPFO, is working toward a Master of Business Administration in Business major and enrolled in the Fraud Concentration. She's an Associate Member of the ACFE and is a Certified Public Finance Officer.

Heidi Mitchell graduated in May with a Bachelor of Arts in Accounting. She's an Associate Member of the ACFE and has completed the CFE Exam Prep Course. She'll take the CFE Exam after graduation.

Kevin Murphy graduated in May with a Bachelor of Arts in Accounting. He's preparing to take the CFE Exam Prep Course and is an Associate Member of the ACFE.

Jared White graduated in May with a Bachelor of Arts in Accounting. He's an Associate Member of the ACFE and has completed the CFE Exam Prep Course. He'll take the CFE Exam after graduation.

Bibliography

Brittany Bevis, "Crundwell Seizure Warrant Made Public," The Equine Chronicle Online, April 25, 2012 

Brittany Bevis, "Crundwell Seizure Warrant Made Public," The Equine Chronicle Online, update April 25, 2012 

City of Dixon, Ill., website, current financial statements 

Crimesider staff, "Rita Crundwell, Dixon Ill. Comptroller, stole $30M from city, authorities say," CBS News, Crimesider, April 19, 2012

David Giuliani, " 'A good time was had by all,' Crundwell's birthday was a 'premier' industry event," Saukvalley.com, April 20,2012 

David Giuliani, "Comptroller worked horse shows round her city job," Saukvalley.com, April 24, 2012 

David Schaper, "Alleged $30M Theft By Comptroller Stuns Ill. City," NPR online

Kurt Liske, "FBI Documents Show Rita Crundwell Loaning Money to City Employees," WQAD 8 HD News, April 25, 2012 

Lunnanne Nquyen, "Dixon Works to Strengthen Financial Security," KWQC.Com, updated April 23, 2012 

Melissa Jenco, "Dixon CFO fired following misconduct scandal," Chicago Tribune, April 23, 2012 

Miguel Llanos, "City's finance chief accused of looting $30 million; lifestyle included $2.1 million motorhome," MSNBC.com, April 18, 2012 

Oren Dorell, "Rita Crundwell charged with embezzling $30 million," USA Today, April 20, 2012 

Jenco, Melissa, "Dixon sues auditors in $53 million embezzlement case," Chicago Tribune, June 11, 2012 

Jenco, Melissa, "Judge: Feds can start selling former Dixon comptroller's 400 horses," Chicago Tribune, June 15, 2012 

Susanna Kim, "How Comptroller of Small Illinois City Stole $30 Million Over 6 Years," ABC News, April 18, 2012 

Tara Becker and Emily Coleman, "Feds release fruit of Crundwell search warrants," Saukvalley.com, updated April 25, 2012 

The Associated Press, "Dixon, Illinois Comptroller Steals $30M from Tiny Town," April 18, 2012 

The Associated Press, "Dixon fires CFO after arrest on $30M theft charge," Rockford Register Star, rrstar.com, April 23, 2012 

United States District Court, Northern District of Illinois, Western Division, various Search Warrants and Seizure Warrants, April 2012 

The Association of Certified Fraud Examiners assumes sole copyright of any article published on www.Fraud-Magazine.com or ACFE.com. Permission of the publisher is required before an article can be copied or reproduced.