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ACCOUNTING FRAUD AND EMBEZZLEMENT: CASE STUDIES FROM
THE TRENCHES
Allison M. McLeod,
LL.M., CPA
Professor McLeod is currently a full-time Senior Lecturer at the University of North Texas
in Denton, Texas. Her courses include Ethics, Financial Accounting and a variety of tax
classes. She received Bachelor of Business Administration and Juris Doctor degrees
from Baylor University, and a Master of Legal Letters (LL.M.) degree specializing in
Taxation from the Southern Methodist University School of Law.
Prior to joining the UNT faculty in 2010, Professor McLeod held the position of Director of
Tax Planning and IRS Audits for Lehigh Hanson North America, a major manufacturer of
cement, aggregates and other building materials. Her practice included both federal
and international tax planning as well as tax controversy. Professor McLeod also spent
thirteen years specializing in Tax Planning with the JCPenney Corporation, Inc., and two
years with Deloitte & Touche in Dallas. She has served as an expert witness in multi-
million dollar cases involving tax litigation and accounting malpractice. Professor
McLeod is a current member of the Professional Ethics Committee of the Texas Society
of CPAs.
Professor McLeod is licensed to practice law by the State Bar of Texas since 1992 and
has been a Certified Public Accountant since 1993. She has been privileged to present
live ethics seminars across the nation for CPAs for the past several years as well as
online through her website cpaethicsonline.com.
ALLISON MCLEOD, LL.M., CPA
Accountingnegligence.com Cpaethicsonline.com
Allison M. McLeod, LL.M., CPA
214-403-8622
CPAethicsonline.com
Accountingnegligence.com
LEARNING OBJECTIVES
Understand the factors unique to governmental entities that create an environment for fraud to easily occur.
Identify areas where there could be an inadvertent failure to separate duties.
Ascertain the proper role of an external auditor and identify areas where independence can be compromised.
WHY ARE SOME ENTITIES SO EXPOSED TO FRAUD?
An inherent higher level of trust:Many employees have long tenures.
They are mission driven and assume everyone is as well.
Entity has limited resources and expertise.
Limited or ignored internal controls. Poor verification of who has access to resources or system
Creation of “Trusted Insiders”
Most common is “occupational fraud” where an employee uses their position to commit fraud.
DEFINITION OF TRUSTED INSIDERS
Usually a longtime employee or volunteer, business advisor, or board member
Examples:
Sandy Jenkins, former Controller of Collin Street Bakery, stole in excess of $16 million over an 8 year period.
Rita Crunwell, Controller/Treasurer of the City of Dixon, IL, stole $54 million over a 20 year period.
AICPA CODE OF PROFESSIONAL CONDUCT
“ET”or “Code”
Governs a CPA’s ethical and professional conduct.
Should apply the most restrictive provision.
© ALLISON M. MCLEOD, 2017
INTEGRITY AND OBJECTIVITY RULE –ET § 1.100.001.01/2.100.001.01
“In the performance of any professional service, a member shall maintain objectivity and integrity, shall be free of conflicts of interest, and shall not knowingly misrepresent facts or subordinate his or her judgment to others.”
© ALLISON M. MCLEOD, 2017
INTEGRITY“Integrity requires a member to be, among other things, honest and candid within the constraints of client confidentiality. Service and public trust should not be subordinated to personal gain and advantage. Integrity can accommodate the inadvertent error and honest difference of opinion; it cannot accommodate deceit or subordination of principle.”
-- ET § 0.300.40.3
© ALLISON M. MCLEOD, 2017
RESPONSIBILITIES TO CLIENTS OR EMPLOYERS
“The quest for excellence is the essence of due care. Due care requires a member to discharge professional responsibilities with competence and diligence. It imposes the obligation to perform professional services to the best of the member’s ability, with concern for the best interest of those whom the services are performed, and consistent with the profession’s responsibility to the public.”
-- ET § 0.300.060.2
© ALLISON M. MCLEOD, 2017
RESPONSIBILITY TO THE PUBLIC“A distinguishing mark of a profession is acceptance of its responsibilility to the public. The accounting profession’s public consists of clients, credit grantors, governments, employers, investors, the business and financial community, and others who rely on the objectivity and integrity of members to maintain the orderly functioning of commerce. This reliance imposes a public interest responsibility on members.”
-- ET § 0.300.30.2
© ALLISON M. MCLEOD, 2017
THREATS TO INDEPENDENCE - ET § 1.210.010
“Many different relationships or circumstances . . . can create threats to compliance with the ‘Independence Rule’ [1.200.001]. . . Many threats fall into one or more of the following seven broad categories: adverse interest, advocacy, familiarity, management participation, self-interest, self-review, and undue influence.”
© ALLISON M. MCLEOD, 2017
CITY OF DIXON, ILLINOIS Case Study
2012 CITY OF DIXON FRAUD
$54 million embezzled from the City of Dixon.
Largest governmental fraud to date.
Spanned 20 years.
PERPETRATOR RITA CRUNWELL
Worked for City for over 30 years.
Grew up in Dixon.
Was highly competent and organized.
THE SCAM
Aided by no separation of duties.
Set up secret account.
Wrote checks from city accounts to pay for 179 fake invoices from 1991-2011.
Withdrew funds out of secret account to pay for personal expenses.
FAILURES IN THE SYSTEM
Failure of internal controls at the City.
Bank permitted Crunwell to set up account without second signatory.
External audit firm performing internal functions resulting in conflict of interest.
External audit’s failure to flag obviously false invoices and to thoroughly examine internal controls.
COLLIN STREET BAKERY Case Study
© ALLISON M. MCLEOD, 2017
COLLIN STREET BAKERY FRAUD
Controller Sandy Jenkins stole over $16 million over an 8 year period.
Exploited a weakness in internal controls and check writing mechanisms.
Fraud was exposed by a 3rd year accountant looking through documentation.
COLLIN STREET BAKERY FRAUD (CONT’D)
Sentenced of 10 years imposed in 2015.
Jenkins died in prison March, 2019.
Movie starring Will Ferrell and Laura Dern called “Fruitcake” to be released soon.
AMERICAN CANCER SOCIETY OF OHIO Case Study
AMERICAN CANCER SOCIETY OF OHIO
Daniel Wiant stole nearly $8 million from the American Cancer Society of Ohio from 1997-2000.
ACS had failed to do a more extensive background check on Wiant which would have exposed credit card theft and $21,000 embezzlement from a HI food bank.
Internal controls were not followed by ACS and the banks serving them.
Wiant was caught in 2000 and sentenced to 13.5 years in prison.
BAPTIST FOUNDATION OF ARIZONA Case Study
BAPTIST FOUNDATION OF ARIZONA
Organization’s purpose was to serve as an investment manager to ministers, church workers and congregants in the Baptist denomination.
BFA found themselves insolvent in 1990s due to aggressive real estate investments that failed.
Began to hide losses through the use of a related entity and started operating as a Ponzi scheme.
Arthur Andersen had warnings from several sources that BFA was insolvent, but continued to issue clean audit opinions.
BAPTIST FOUNDATION OF ARIZONA (CONT’D)
Over $220 million was collected from investors after Andersen had been warned.
BFA was the largest accounting scandal of any non-profit organization to that point.
Andersen was sued and settled for$200 million in damages, which it never paid.
13,000 retirees lost some or all of their life savings.
WORLD COM Case Study
WORLD COM
CFO Scott Sullivan, under pressure from founder Bernie Ebbers, ordered financial accountants to began hiding losses in 2001 by charging expenses to cookie jar liabilities or capitalizing them.
Resulted in a $3.3 billion understatement.
Fraud was discovered by Worldcom’s internal auditors.
Ebbers was sentenced to 25 years, Sullivan to 5 years, and the controller and lower level accountants to sentences of 6 months to 1 year.
DR. DEATH: THE STORY OF CHRISTOPHER DUNST
Case Study
DR. DEATH – CHRISTOPHER DUNTSCH
Ohio neurosurgeon specializing in back surgery is hired to join a practice in the Dallas area.
Former colleague knew of red flags but did not submit negative recommendation due to fears of libel suit.
Duntsch reportedly took illegal drugs, drank alcohol and did not sleep prior to surgeries.
Colleagues reported him to the Medical Board, which did not act.
DR. DEATH – CHRISTOPHER DUNTSCH
Hospitals were slow to pull Duntsch’s privileges.
Malpractice civil suits resulted in confidential settlements, so the public was not informed.
Duntsch was finally stopped when a Dallas Assistant DA charged him with grossly negligent homicide.
Convicted and received life sentence in 2017
PROTECTING YOUR ORGANIZATION
LOOK FOR RED FLAGS
Processes involving money or data that are completely owned by one individual.
Extremely territorial behavior and/or information hoarding.
Frequent complaints about working conditions from the individual.
Situational stressors that could become triggers.
LOOK FOR RED FLAGS (CONT’D)
Weak or unenforced internal controls.
Employee’s lifestyle inconsistent with income.
TIPS IN UNCOVERING AND COMBATING FRAUD
Evaluate staff regularly including after promotions.
Pay attention to non-verbal cues and messages. Is the organization honest? Do they cut corners?
Implement effective and efficient internal controls and follow them – see them as a necessary protection and not a nuisance.
Have someone “own” each internal control.
TIPS IN UNCOVERING AND COMBATING FRAUD (CONT’D)
Ensure that external auditor’s scope of work does not create a conflict of interest.
Maintain professional skepticism. Banish “trusted employee” status.
Implement an ethics and compliance program.
Be willing to speak up immediately upon discovery of material wrong doing.
“Trust is not an
internal control”
Thank You!
© ALLISON M. MCLEOD, 2017
CONTACT US!
Allison M. McLeod, LL.M., CPA
A Professional Limited Liability Company
Email: [email protected]
Phone: 214-403-8622
www.CPAethicsonline.com
www.AccountingNegligence.com
© ALLISON M. MCLEOD, 2017
