Stories from the Field – How Internal Control Breakdowns Can Lead to Disaster GFOAz May 9, 2008 Presented By Scott W. Ki

1. Stories from the Field – How Internal Control Breakdowns Can Lead to DisasterGFOAzMay 9, 2008Presented By Scott W. Kies, CPA

2. Fraud Overview

3. The Wells Report - 2006 • Study of 1,134 occupational fraud cases reported between 2004 -2006 • Median loss is $159,000 • Median length is 18 months from start to detection • Over 90% of cases involved asset misappropriation

4. The Wells Report - 2006 • Government, public administration, and education accounted for 17% of all fraud cases • Organizations that had an anonymous fraud hotline suffered significantly less losses than those who didn’t

5. ReportConclusions • Smaller organizations are at greater risk • Direct correlation between position and amount of loss • Most perpetrators are first-time offenders • Most fraud is not discovered in a routine audit • Most cases are exposed by whistleblowers

6. Stories From the FieldThe Fraud • School District employees used at least $11.2 million of school funds for personal benefit • Private mortgages and loans - $1.1 million of district funds were used to make payments on private mortgages and loans to the superintendent, business manager, and district account clerk. • Businesses established by district officials – payments of over $1 million were made to businesses created by district officials, family members and friends.

7. Stories From the FieldThe Fraud • Unauthorized salaries – $549,000 in excessive salaries were paid to certain district officials. • Home Depot purchases - $609,000 in purchases were made to Home Depot for goods that were not used at the district. • Financing of private automobiles - $206,798 was used to purchase or lease automobiles for the superintendent, the assistant superintendent and her daughter including a BMW and Jaguar. This was in addition to their vehicle allowance of $8,000 a year which was later increased to $17,200.

8. Stories From the FieldThe Fraud • Payments for personal insurance policies - $160,000 as paid by the district for various personal life, homeowners, car and boat policies. • Unauthorized travel - $133,000 was paid for travel not related to school business for various officials and non-school district employees, including travel to Las Vegas, San Francisco, Bermuda, and London on the supersonic Concorde. • Superintendent’s parking - $42,000 was paid for parking • Food - $549,000 was spent for food unrelated to any district activity • Fitness club membership, cable service, dry cleaning, student loans, pool cleaner, Rolex watches, hair and nail salons

9. Stories From the FieldWhy Did it Happen • Complete breakdown in internal controls; superintendent and assistant superintendent could override the system and process payments outside of the normal flow of transactions. • Two employees who could have identified misappropriations did not do their job. • The Board failed to oversee and monitor the financial activities • The district’s independent auditor had conflicts of interest and performed work so flawed and so below professional standards that it failed to identify the millions that were stolen.

10. Stories From the FieldThe Fraud • Fire Chief steals $62,000 over a six year period • Money stolen from the Fire Department Flower Fund • Flower Fund setup to buy flowers when deaths occurred in firefighters’ families • Wrote checks to credit card companies and to “cash” • Small increments

11. Stories From the FieldWhy Did it Happen • Bypassed the process of approval • No oversight • Complete control • Personal problems

12. Stories From the FieldThe Fraud • Almost $880,000 of school district monies was misused by school district officials • Misuse of credit card privileges at various retail outlets • Improper cash advances • Improper employment contract payouts • Violation of procurement laws • Improper travel • Happened over a 1 year span • Business Manager, Superintendent, and Board President involved

13. Stories From the FieldWhy Did it Happen • Inadequate system of internal controls • High ranking officials where able to instruct employees to issue payments without additional approval • No credit card use policies • No code of conduct

14. Stories From the FieldThe Fraud • Public Fiduciary embezzled at least $16,757 of public monies over 18 months • 93 checks falsely claimed were for legitimate expenses • Intercepted checks and turned them into gift cards • Used for personal debts, household items, automobile expenses and restaurants

15. Stories From the FieldWhy Did it Happen • Insufficient segregation of duties • Unclear policies • Weak control environment

16. Stories From the FieldThe Fraud • Janitor and business manager collected over $200,000 in unauthorized salaries. • Janitor and business manager were secretly married. • Overtime was added to the janitor’s timesheet every week regardless of time worked. • Janitor had two contracts both requiring 8 hours a day time commitment.

17. Stories From the FieldWhy Did it Happen • Tone at the top • Small entity with limited resources and controls • Total control and entitlement mentality

18. Thank you Scott W. Kies, CPA602.277.9449 ext. 308scottk@heinfeldmeech.com