The chief was a thief

What tears at the fabric of a small town? Theft, betrayal and a loss of confidence in the very institutions that make the town a great place to live. This is the story of how a small gap became a gaping hole in oversight, management and internal controls, which resulted in a theft of more than $250,000.

Farmington, New Hampshire, is a quiet community nestled between the Lakes Region and the seacoast. It's a small, blue-collar New England town with a population of nearly 6,800. The average household income is $51,382. Its claim to fame is being the hometown of President Ulysses S. Grant's vice president, Henry Wilson.

Like many small towns in America, Farmington relies heavily on volunteer fire fighters and emergency medical technicians (EMTs). But a quirk in the town's governance — and apparent lack of sufficient oversight by the public and town leaders — enabled the fire chief to commit a long-running embezzlement scheme.

The scheme, essentially a combination of corrupt diversion of funds and a fraudulent expense reimbursement scheme, cost Farmington more than $270,000, caused turmoil within the town and the fire department ranks, and was a huge public embarrassment. In the end, the chief went to prison, and the town is still reeling from his betrayal of trust.

This case study highlights the importance of public-private oversight, nonprofit internal controls and governance, and how to properly monitor financial affairs in an organization. The sad part is that both paid and volunteer fire departments across the nation seem to encounter fraud frequently. A Google news search for "fire department theft" turns up 5.3 million hits. As fraud examiners, we can learn a lot from this case.

The thief

To all outward appearances, Richard Fowler Jr. was the consummate public-safety professional. He was a well-regarded leader in the small and close-knit fire-fighting community. He saved lives. But there was another side to Fowler, one that wasn't as well known. According to an admission made to investigators, Fowler confessed to having a drug addiction and a gambling habit, which fueled his need for money. (See Former Skowhegan fire chief sentenced to NH state prison, centralmaine.com, by Doug Harlow, July 2, 2015.)

Fowler blamed his drug addiction — in the words of Dr. Donald Cressey, his "vocabulary of adjustment" or his rationalization to excuse away illegal behavior ("Other People's Money: A study in the social psychology of embezzlement," by Cressey, Montclair: Patterson Smith, 1973) — from a bout with depression and post-traumatic stress disorder following a traffic accident that injured him. But neither problem did anything to stop his compulsion to gamble and his hunger for success. It was his downfall.

The town

An elected board of selectmen leads Farmington and appoints the town administrator who oversees the day-to-day operations of the town government, which includes the department heads, the town finance official and public works. Full-time chiefs lead the police and fire departments, and on-call volunteer fire fighters and EMTs work for the Farmington Fire Department. (See chart 1 below.)

Figure 1: EMS bundled billing arrangement

A benevolent association called the Farmington Firefighters Relief Association (FFRA) was formed in October 1976 to help promote the civic duty of volunteer fire fighting; to raise funds to cover costs associated with training, certification and equipment; and to assist its members. The FFRA also helped fund the restoration of an antique fire engine for parades and other special occasions.

Fowler was the first full-time fire chief, hired from the volunteer ranks in June 2006. (He'd previously been the volunteer chief since 2004.) He was also a member of the FFRA, even after becoming the full-time chief. According to a town referendum, Farmington also took over control and funding of the fire department when it hired Fowler.

The clue and the agreement

In mid-2014, Fowler left Farmington to work for a larger fire department in Maine. Shortly after Fowler's departure, problems arose. On July 30, 2014, the acting town chief of police and the deputy chief of the fire department met with the county criminal prosecutor. They'd identified financial discrepancies following Fowler's move; the deputy fire chief discovered the possible fraud when attempting to reconcile the department's financial records.

In January 2008, the town had made an agreement with Frisbie Memorial Hospital, a local hospital in the next-largest city. They'd agreed to an expense reimbursement arrangement and Fowler, as fire chief, managed it. Town officials later denied knowing much about the agreement, even though the board of selectmen had approved it, and Frisbie Hospital had deposited funds into town accounts. The agreement noted that the funds would be paid to the "municipal fire department." It's unclear from the investigation exactly how (or if) the town tracked the deposits and it didn't track these funds more closely.

Farmington agreed to bill for ambulance transportation provided by the fire department whereby Frisbie Hospital would provide a "set-fee" reimbursement if a patient transported by the fire department utilized one of the hospital's paramedics. Called "bundled billing" (see chart 2 below), the arrangement would provide a valuable source of revenue for the town. It also would be a complementary income stream; in cases that didn't involve a Frisbie Hospital paramedic, the fire department (through its contractor COMSTAR) would direct bill their patients or their insurance providers.

Figure 2: Farmington fire/EMS arrangements

Frisbie sent the first funds Aug. 26, 2008, in a check it made out to the fire department directly. The prosecutor's investigator wrote that "most of the early checks were deposited" into the town's tax collection account. For about a year, from November 2009 until October 2010, only some of the Frisbie checks were deposited into town accounts either by Fowler or the fire department. Beginning in November 2009, Fowler began diverting those funds from the town's bank account by directing Frisbie Hospital to make all of the checks payable to the FFRA account.

Around July 2008, Fowler apparently concocted a scheme to obtain more money than his $65,000 town salary. He asked the FFRA's treasurer for checks that would enable him to obtain expense reimbursements. From July 2008 until June 2014, Fowler received 74 payments from the FFRA for various travel, gear or other purported reasons. The FFRA treasurer later told investigators that Fowler received the checks at his own request, not from authorized disbursements, which had to be voted on by FFRA membership. The investigative report summarized her testimony:

[Fowler] would contact her [the FFRA treasurer] and direct her to give him signed blank checks. To her knowledge, the chief would then fill in the amount of the check and the payee. … Later she would see the statements and/or cancelled checks and thus learn to whom and for what the checks were written. At some point she began to see checks written out to Chief Fowler. She was somewhat concerned but she thought he was reimbursing himself.

Investigators traced 74 "expense reimbursements" Fowler received from FFRA, revealing that he cashed all but five of the checks. They later determined that many of the expenses Fowler claimed were either bogus or couldn't provide substantiating receipts. The value of the checks from Frisbie Hospital to the FFRA was $377,533; the town should've received all of this money. Fowler received nearly $161,000 from FFRA.

A little digging

Before I received the investigative file from the prosecutor's office through a public records request, I wondered what I could discern from other public records. A search of documents and my analysis of the town's annual reports led to concerning revelations about the lack of leadership and management oversight in this case. It also highlighted some valuable lessons for fraud examiners, investigators and auditors.

Chart 3 below is a compilation of information I extracted from the town's annual reports for 2008 through 2014. Of course, a city's annual report is an important device for informing the public. But it's also a good way to manage a local municipality by standardizing the financial and operational metrics included in the report. However, Farmington's annual reports were anything but consistent.

Figure 3: Compilation of information from town's annual reports

For example, a key performance metric for the department was the number of total emergency calls. Because they provided both fire suppression and emergency medical services, the number of EMS calls would also be an important number to review. But Fowler — either intentionally or through carelessness — failed to include the total EMS calls for 2010 and 2012. Even worse, in only three years did he include collection percentages for accounts payable by its EMS billing contractor COMSTAR: 2009, 2010 and 2012. It's impossible to determine the performance of the department's billing and collections process and the fire department contractor without these.

Fowler routinely included language in the operational reports that thanked the "Farmington Firemen's Association," a non-existent organization, for its donations to the department. Fowler thanked this entity for contributions in 2010, 2011, 2012 and 2013. In 2011, he even noted that the association paid for items that "did not get purchased due to [the town's] operating budget." This raises further concerns, because (at least in New Hampshire), there's a state law that restricts a municipality or government from accepting gifts unless approved by the town council or other body (RSA 31:19).

The law is designed to ensure that the public good is served by gifts and donations that assist the overall community and not to simply advance a private interest. By accepting gifts from the "Firemen's Association" (even if it was the FFRA) without the proper public notification, documentation or board of selectmen approvals, Fowler maneuvered around the public budgeting and oversight process. He took advantage of the gaps in Farmington's budget approval, donation disclosure and general management practices.

The financials

A review of the town's financials included in the annual report reveals additional concerns about the oversight of the fire department. As chart 3 indicates, from 2008 until 2014, the department averaged more than $173,000 in receipts for EMS calls. It's not clear if these are billed receipts or actual funds received. The revenue statement also includes a line item for "accounts receivable-ambulance income" that only began appearing in 2012. The gross accounts receivable (whether collected or outstanding) amounts of nearly $270,000 for 2012 and $350,000 for 2013 aren't even discussed in the remainder of the operational reports or other town documents.

The lack of consistent data and mismatched data points demonstrate the scarcity of disclosure and transparency in the annual reports. It shows how little the town leadership and management knew about the operations and financial capacity of the fire department. Whether this was the result of poor management practices or intentionally designed to obscure the information, it raises significant red flags. It also shows how important data can be to identifying potential fraud and addressing fiscal issues before they get out of hand.

The investigation

Following the July 30, 2014, meeting with the Farmington police and fire officials, the prosecutor and his chief investigator embarked on a routine fraud investigation. They collected documents, interviewed witnesses, analyzed bank records and checks, and pieced together a comprehensive account of what Fowler had done. Interestingly, they also did a number of unique investigative steps, including the use of a consensual phone call.

A consensual phone call is an investigative technique that can be fraught with trouble; new investigators shouldn't attempt it. Though the investigator had decades of police experience, he consulted the New Hampshire Attorney General's office beforehand because of the potential legal issues.

The phone call was a monitored conversation between the current deputy chief of the fire department and Fowler, who'd become the fire chief in another community. The conversation between the deputy and Fowler elicited admissions from Fowler including that he knew the funds from the Frisbie Hospital agreement actually belonged to the town, not the FFRA, and that he was responsible for re-directing the funds from the town accounts to the FFRA accounts.

In a later interview with the investigator, Fowler made further admissions about his conduct and how he knowingly diverted the funds from the town to the FFRA. When confronted with his check-cashing activity, multiple ATM withdrawals at or near casinos, and his inability to substantiate most of the "expense reimbursements" requests, Fowler knew the game was up. Eventually, he pleaded guilty to the theft and was sentenced to three to six years in state prison and $216,000 in restitution. (See Former Farmington fire chief sentenced for stealing $216,000 from town, Seacoastonline.com, by Brian Early, July 2, 2015.)

Lessons learned

Following are a few tips that fraud examiners can use when dealing with audits or examinations of small fire departments, nonprofits or associations.

1. Fowler cultivated a commanding presence and expected his expenses to be paid with no questions asked. He exercised full control over the fire department and, in a conflict of interest, the FFRA. Membership in professional or related associations should always be addressed in an employment contract. Fraud examiners should be cognizant of the management style and leadership authorities, particularly when it comes to financial and business affairs of a government agency, nonprofit or association.
2. Investigators interviewed several members of the FFRA who said they believed Fowler had a gambling problem. Reviewing debit card records clearly showed questionable expenses being paid at several New England casinos. As fraud examiners, if we simply ask, many times people will tell us about potential issues like excessive drinking, gambling or other lifestyle issues that might reveal financial pressures or motivations to commit theft.
3. Reviewing open source and public records from town officials can show weaknesses in internal controls or even basic reporting standards, which could also indicate a lack of transparency or an attempt to gloss over or cover up an embezzlement. In Farmington, a year-to-year annual report comparison should've been a clue that something wasn't right because the correlation between receipts for the ambulance, the collection contract costs and other information didn't add up.
4. Anti-fraud professionals, fraud examiners and public officials need to focus on special, non-tax revenue accounts, such as ambulance billing. These are inherently high-risk accounts because they might not be monitored as closely as tax accounts and become susceptible to theft or embezzlement. But Farmington isn't the first town or fire agency that's had problems with their accounting and internal controls. The New York State Comptroller's office, which supervises thousands of volunteer fire companies, has issued multiple reports each year that document fraud, theft, internal control and management failures in these small volunteer agencies. (See Office of the New York State Comptroller.) The main audit findings generally revolve around the non-tax revenue streams, such EMS income, rental fees, bingo games and other fundraisers.
5. Finally, oversight and proper management is key. Monitoring operational and financial performance are important oversight functions for any organization: public, private or independent. Breakdowns in this function allow controls to be circumvented, corrupt relationships to form and massive problems to ensue. Management of an all-volunteer group is especially sensitive; it can be a challenge for all players in a small town where everyone knows each other's business. To mitigate these threats, those in charge must manage these smaller entities in a professional manner that's consistent with the legal obligations and good business practices.

The nonprofit tension

Benevolent associations and community not-for-profit groups often disagree on missions for service and appropriate controls, oversight and governance. Many groups are comprised of impassioned staff and volunteers who strongly believe in the same core values: service, selfless dedication to a cause and a belief in helping others. But that "good neighbor" quality that we often value in our friends and associates doesn't always translate into the best stewardship of an organization or the most thorough administrator.

Entities such as volunteer fire departments, religious groups, community engagement associations and others often are more focused on "doing good" and can be oblivious to the necessary controls that a responsible business might employ to prevent defalcation or fraud. The consequences can be devastating. Trust is destroyed — or at least greatly diminished — so the group can't focus on its core mission.

A Certified Fraud Examiner can provide periodic updates to the membership and board on recent fraud cases involving nonprofits or on fraud-related trends of which they should be aware. A CFE also can provide an assessment of the group's internal controls or policies and procedures and consult on financial analysis issues.

Ultimately, the group itself must establish, endorse and strive to achieve its mission of public service. All the help in the world might not stop a fraudster from achieving their scheme, but a group's attitude and atmosphere will dictate how successful it will be in deterring, detecting and responding to fraud or theft among their own.

Governments often allow benevolent groups and public service groups tax-exempt statuses for their good deeds, but with those come with a huge responsibility to the communities they serve. And failing to properly safeguard these assets or to oversee their appropriate use could subject organizations to bad press, regulatory intervention or litigation.

Colin May, CFE, is a forensic auditor and is an adjunct instructor in Stevenson University’s Forensic Studies program. The views in this article are his own. His email address is: cmay3231@stevenson.edu.

Illustrations by Becky Plante.