Open public entities’ ledgers for transparency

The 2019 movie, “Bad Education,” chronicles the discovery in 2004 by Rebekah Rombom, an earnest high-school newspaper reporter, of a $250,000 embezzlement that eventually snowballed into the exposure of two senior school district officials who’d perpetrated a $11.2 million fraud scheme. (See Roslyn HS reporter who broke ‘Bad Education’ story speaks out 16 years later, by Rose Weldon, the island now, April 21, 2020.)

The fraudsters, for many years, misused school credit cards and created bogus purchase orders supposedly for school supplies and equipment, but the administrators directed the funds into their pockets.

My favorite scenes in the movie include the actress playing Rombom sharing a purchase order with a chemistry teacher who shakes his head and says, “No, I never received those glass beakers …” and when Rombom ventures into New York City she discovers a school “vendor” is located in the superintendent’s apartment.

Rombom’s efforts to follow up on school vendors and specific purchases were significantly hampered by her inability to gain access to records about how the school was specifically spending money.

The scheme that Rombom uncovered has some basic elements shared by other fraud cases, like Rita Crundwell’s $53.7 million theft over 20 years from the city of Dixon, Illinois [see Former Dixon Comptroller Rita Crundwell Sentenced To Nearly 20 Years In Federal Prison For $53.7 Million Theft From City, Feb. 14, 2013, U.S. Department of Justice (DOJ)]; Harriette Walters’ $48 million theft over 18 years from the Washington, D.C., government (see Leader of D.C. Property Tax Refund Fraud Scheme Sentenced to 17½ Years, June 30, 2009, U.S. Attorney’s Office); or Channing Smack, who stole $370,000 from the Girl Scouts of Greater Los Angeles by facilitating checks to a sham landscaping business he owned that provided no actual services to the charity. (See Westside Man Arrested On Money Laundering Charges Related To Alleged Embezzlement Of Nearly $370,000 From Girl Scouts, Dec. 18, 2013, DOJ.)

The Problem

Governmental units and nonprofits worldwide properly manage the vast amount of public dollars as intended. However, some will always find creative ways to redirect these dollars for personal gain or other improper purposes. While most entities have several layers of oversight to help ensure managers use funds appropriately, one primary and persistent problem exists: Transaction-level spending transparency is often nonexistent. Taxpayers and other stakeholders shouldn’t be burdened by having to determine exactly how their government and nonprofits spend their public dollars.

A Solution

I have a solution! Of course, every governmental and nonprofit entity maintains an internal accounting system that tracks each financial transaction to include the date, payee, amount, fund or program, and other data.

For example, let’s say, on Jan. 1, 2020, a $50,000 bonus was paid to a John Jones, or a $15,000 rent check went to ABC Enterprises. Accounting systems must also have an accompanying system of internal controls to help ensure transactions are legitimate, supported by adequate documentation and are recorded accurately in the ledger.

What if we made more and perhaps all this spending data publicly available? Perhaps as a “Report to the taxpayer” or “Report to our donors”? This information would explain exactly how the government or nonprofits use public funds and donations.

Imagine if citizens, journalists, oversight agencies, and internal and external auditors were able to view this level of detail without having to rely on audits, data collection efforts, Freedom of Information Act requests, lawsuits, subpoenas or site visits. Imagine the power of crowdsourcing all this information.

Imagine that a fraud examiner could quickly determine a school vendor and its superintendent share an address — the first time that superintendent executes a corrupt purchase order not years into the scheme.

And, most of all, imagine the deterrence and prevention effect that would nudge people toward good behavior.

I have a bit of personal experience here — with spending data, not committing fraud! Once a year, I spend a few hours to log on to my bank’s website and download every banking transaction for our checking, savings and credit card accounts. I do a bit of data cleaning, standardization, and cutting and pasting until I have one nice spreadsheet with the date of each transaction, the payee, the amount and the category. (My bank automatically categorizes each transaction based on the vendor, and I’ve found that I rarely need to correct them.)

Now, with that information all in one place, I can do pivot tables and charts and graphs and see what it costs to be “us.” My first insight every year is always, “Holy cow, the cats cost how much?!” After I calm down, I’m amazed at the instantaneous insights I can gain about who we send our money to, the purpose areas and the percentage of overall spending for each type of transaction.

These types of insights are only available with analysis of transaction-level spending details — if I only relied on my monthly bank statements and tax returns, I’d never gain most of these insights. Nonprofit board members, audit-report readers and city council members are at a disadvantage when they rely exclusively on high-level summary analysis without details. Proper due diligence and oversight requires more than just the dollar totals.

I know what you might be thinking: Bad actors will just lie in their accounting records. True, that could and likely is happening at this very moment. But our identification of clear evidence of falsified records, which can only happen with release of all financial information, will only enhance organizations’ and governments’ abilities to remediate issues swiftly and efficiently.

We’d be able to say to suspected fraudsters, “You clearly claimed to have spent the money on X, but, in reality, you did this other thing and intentionally tried to cover your tracks.” Additionally, if a person claims to have sent funds to a vendor, but the hard data shows they kept the funds for themselves, vendors will more readily notice their names were used falsely. A fraudster working at a high school who creates a sham purchase order stating they purchased “chemistry supplies” runs the risk that a chemistry teacher or the chemistry club will flag the transaction and demand answers.

Two Models

For those thinking this would be too cumbersome, complex and generally unfeasible, I offer a model: the U.S. Federal Election Commission (FEC, fec.gov). Campaign finance laws require that the FEC collect, maintain and make publicly available detailed transaction-level data on certain political candidates’ revenues and expenditures.

This data allows anyone to determine those political candidates who prefer Dominos versus Pizza Hut or how much a campaign paid a particular vendor and when. Some states have similar campaign finance disclosure laws and databases.

The U.S. state of Ohio offers another similar model. The Ohio Checkbook, launched in 2014, provides transaction-level spending details for every dollar spent by the Ohio state government, public schools systems and units of local government, including credit card transactions. (See checkbook.ohio.gov.) For example, did you know that on Nov. 27, 2019, the Ohio Board of Cosmetology paid Fusion Technologies East LLC $6,785 for “IT & Network Services”? I have no idea what that means, but I discovered this after about 10 minutes of exploring how the board spent $2.8 million in 2019.

Other states have sunshine and other open-records laws, but I am unaware of any that have this advanced data-sharing system.

The Details

Governments and other organizations, of course, need to work on many details. How would they handle “public availability”? Would entities simply post data to their existing websites? Would a neutral entity or a large tech company create a way to easily host data and perhaps even create simple analysis dashboards? How would they handle salary and other sensitive information?

I propose we start with the presumption that the public deserves to see how every taxpayer dollar and charitable contribution is used and then work out the necessary exceptions.

The Why

The best part of this concept is that it’ll go a long way to fulfill fraud examiners’ highest calling: fraud prevention and deterrence. Would-be fraudsters might refrain from committing crimes if they know their credit card transactions, checks, transfers and contract payments will be shared with the world.

Crundwell was only caught when she took a vacation and a co-worker noticed unusual transactions. Walters was identified when a bank challenged her niece’s attempt to negotiate a six-figure check.

Would Crundwell have been able to do as much damage if the Dixon taxpayers, mayor or city hall employees had earlier access to all her transactions? Could Walters’ scheme have been flagged sooner if Washington, D.C., had a spending data-sharing program? What if they’d each stopped their schemes at the $45 million mark? Would their thefts have ever been identified? Could someone have flagged Smack before he collected his 23rd unearned check?

Disclosure of transaction-level spending details by all publicly funded and nonprofit entities could usher in a new era of accountability and transparency. To see how every fire department, school, town hall, homeowners’ association, animal shelter and economic development authority spends the people’s money would serve to make them more effective and accountable.

It would allow stakeholders to provide technical assistance to those entities that are failing to make spending data available, and it would allow the public to understand exactly what their governments are spending their tax money on and what they’re doing to find cost-savings strategies.

We all want to see the hundreds of billions in annual charity and public dollars used to help make life better for everyone — not just a handful of fraudsters. We have a right to see how governments and nonprofit organizations are spending our money. Readily accessible transaction-level spending transparency would help.

Ken Dieffenbach, CFE, is the special agent in charge of the U.S. Department of Justice Office of the Inspector General Investigations Division Fraud Detection Office and is deputy director of the DOJ OIG’s Office of Data Analytics. He’s had a 23-year federal law enforcement career in fighting fraud.(His opinions in this column are his own.) Contact him at kenneth.r.dieffenbach@usdoj.gov.