Thursday, April 19, 2012

Where were the Auditors Redux: Think Fraud Only Happens in Big Cities?

The small city of Dixon, Illinois woke up to the headline that their top financial official embezzled $30 million over a 6 year period. The treasurer and comptroller explained City financial problems by pointing to the weak economy and late state payments while she shuffled around millions in city funds through multiple city accounts. Annual outside audits found nothing out of the ordinary.

Most auditors will recognize the classic profile here: 

  1. The comptroller was a long time (30 years) trustworthy employee
  2. An extravagant lifestyle, that included two horse farms, several pickup trucks, horse trailers and hundreds of thousands of dollars worth of jewelry. Her biggest single luxury, allegedly paid for with Dixon taxpayer funds: a $2.1 million motor home.
  3. Fraud was uncovered when she was away and a clerk discovered a city account no one knew about with millions of dollars missing
  4. Released on a recognizance bond
What can small local governments learn from this:

Annual audits by external auditors are not designed to detect fraud
Trust is OK but you need to verify 
If something looks and smells fishy it desires a second look.
The largest frauds start with a single undetected act and may continue unchecked over an extended period of time
Implement a system of management internal controls so that one person does not control a process without review by others - in this case the city board or council should have been exercising  fiscal due diligence.

Here is a link to the story:

From AuditNet: Audit News that's Fit to Print

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