City Manager Pockets Cash from the Sale of Excess Property

Day 30 of 30 Days of Fraud

The Theft

Is it possible to convert large pieces of excess property to cash–all without anyone knowing? Apparently yes.

Two men, Alfred Ketzler (the city manager) and Alfred Fabian, were found guilty of wire fraud and theft from the city of Tanana, Alaska.

Illegal sales of government property

Picture is courtesy of AdobeStock.com

Department of Justice Indictment Press Release

So what happened?

First, the Department of Justice stated “Ketzler would acquire surplus federal property that was stored at several different locations without notifying the mayor of Tanana or the city council for the city of Tanana of the federal excess and surplus property obtained on behalf of the city of Tanana.”

The Department of Justice went on to say “that Fabian, for his part, would transport federal excess and surplus property obtained on behalf of the city of Tanana to storage locations in and around Fairbanks, Alaska, including his own residence.”

Finally, the indictment stated that once the excess property was received, Ketzler would sell the equipment to individuals and businesses, telling them the property belonged to the City of Tanana. He asked that the checks be made out to him personally. The indictment continued by saying Ketzler would deposit the checks in his personal account and make payments to Fabian.

The indictment stated that the men received approximately $122,000 in illegal funds.

The property sold included:

  • Trucks
  • Fork Lifts
  • Bulldozers
  • Other industrial equipment

Department of Justice Sentencing Press Release

A June 2014 Department of Justice press release stated:

Anchorage, Alaska – U.S. Attorney Karen L. Loeffler announced today that two Fairbanks men were sentenced on Friday, June 6, 2014, in federal court in Fairbanks after being found guilty of wire fraud and theft from a local government receiving federal funds.

Alfred Richard Ketzler, Jr., also known as “Bear” Ketzler, 57, of Fairbanks, Alaska, was sentenced to 16 months in prison to be followed by two years of supervised release by Chief U.S. District Court Judge Ralph R. Beistline. Ketzler pled guilty in March 2014. Ketzler has already paid restitution to the City of Tanana in the amount of $116,500.

Alfred McQuestion Fabian, 62, of Fairbanks, Alaska, was sentenced to six months in prison to be followed by two years of supervised release by Chief U.S. District Court Judge Ralph R. Beistline. Fabian pled guilty in March 2014.

The Weakness

The city may have had appropriate inventory controls (the DOJ press releases did not say). Most noteworthy, this case appears to reflect a circumvention of controls. The city manager had the power and ability to consummate transactions that were (apparently) not recorded on the city’s records. The indictment states that Ketzler did not provide the city with appropriate notice of the receipt and sale of the excess property. Also the payments received were not recorded on the city’s books.

The Fix

Organizations should do all they can in the hiring process to bring people in that are honest. How? Background checks and the calling of references are critical.

It is imperative that all property be included in inventory—as soon as title transfers to the city. And, obviously, all payments should be made to the city (in this case) and not to individuals. A receipt should be issued to the payor that details the reason for the payment, the amount, and who made it.

How a Tax Commissioner Walks Away with $800,000

Day 29 of 30 Days of Fraud

The Theft

Some twenty years ago, I was working on an audit of a county tax commissioner’s office. We were noticing differences in the receipts and the cash collections.

Theft of cash

Picture is courtesy of AdobeStock.com

So one day I walk into the Tax Commissioner’s office. As I step in, I see several thousand dollars of cash laying on her desk. So, I remarked to her, “Haven’t made a deposit lately?” She laughed and said, “No, I’ve been too busy lately.”

I thought to myself, “Strange. She knows we’re here for the annual audit, and she has all this undeposited cash in open view. It’s as though she has no fear.”

The next day a gentleman comes into the room where we (the auditors) were working and whispers to me, “The Commissioner has a cocaine habit.” I did not know the fellow, so I wondered if the assertion had any merit. Regardless, this was shaping up to be an interesting audit.

Our audit disclosed unaccounted-for funds of over $300,000 in the year one. Year two, the differences continued and exceeded $500,000. After three years, the unaccounted-for amount was in the $800,000 range.

Why was she not removed? Tax Commissioners are elected in Georgia, so the only person that could remove her was the governor. The local county commissioners could not dismiss her.

Finally, the FBI was brought in. But even they could not prove who was stealing the money. Why? The tax office had two cash drawers and eight clerks. All eight worked out of both drawers. So when cash went missing, you could not pin the differences on any one person.

In addition, the books were a disaster, postings were willy-nilly. There was no rhyme or reason–what I call “designed smoke.”

The tax commissioner eventually went to prison for tax evasion. She made the mistake of depositing some of the stolen cash into her personal bank account, and the Feds were able to prove she had not reported the income.

The Weakness

The primary weakness was the lack of design in the collection process. Two or more people should never work from one cash drawer. Deposits were not timely made (and in many cases, not made at all). And then the books (mainly the tax digest) was not appropriately posted as collections were received.

The Fix

The primary fix was to remove the tax commissioner.

Next, each cash drawer should be assigned to only one person at a time.

Cash receipts should be written and the tax digest should be posted as tax payments are received.

Finally, deposits should be made daily.

How a College Aid Official Stole $4.1 Million

Day 28 of 30 Days of Fraud

The Theft

When I was a student at the University of Georgia, I needed every dollar I could find. I ate my share of cheap hamburgers and peanut butter sandwiches. In the summers, I scouted peanuts and cotton to make ends meet. So when I see a college aid official stealing student money, I wince.

Picture is courtesy of AdobeStock.com

Picture is courtesy of AdobeStock.com

A New York college aid administrator used a simple scheme to steal $4.1 million of student aid funds. How? She made out financial aid checks to nonexistent students and then endorsed them over to the name of an alias. The administrator set up a bank account in the name of the alias and deposited the checks into the bank account, allowing her to convert the checks to cash.

How long did the theft go on? Over ten years.

How many fraudulent checks did she issue? Over 1,000, each to a different student.

The Weakness

No one was comparing the checks written to student admission files. Legitimate students have admission and other information that can be used to verify the students’ existence.

The Fix

A person other than the financial aid administrator should compare the student name on the check to student files to verify the existence of the student. If this control can’t be performed for each disbursement, it should be performed on a sample basis, and the persons creating and signing the checks should know their work is being monitored.

This test could be performed by someone in the financial aid office or by an external professional such as a CPA or a Certified Fraud Examiner.

The college can request from the bank the endorsement side of the cleared checks. If the back side of the checks are obtained, then the endorsements could be examined for appropriateness.

Nonprofit Embezzlers Sell Donated Goods for Millions

Day 27 of 30 Days of Fraud

The Theft

Several workers at a California Goodwill pled guilty to taking over $15 million. Their scheme involved the selling of donated goods by the barrelful to private dealers who sometimes wheeled tractor trailers up to the rear of Goodwill stores.

Thrift store theft

Picture is courtesy of AdobeStock.com

The dealers sold most of the goods in Mexico. The thefts–involving seven primary culprits, four of whom were sisters–occurred over a twenty-year period that started in the mid-70s.

So how were the fraudsters caught?

One culprit went through a bitter divorce, and the husband disclosed the scheme to authorities.

The Weakness

The article describing this case did not provide details of the store operations, but it appears–at the time–inventories of donated goods were not properly documented. When assets, of whatever form, are not inventoried, they are more likely to disappear.

The Fix

Account for all inventories. Also, clothing that is sold in bulk should be documented. So each time a truck backs up to a store, the activity should be recorded—who picked up the goods, the sales price, who approved the sale, why the goods were sold in bulk. The store should have a policy that cash is not to be received for such sales.

Also, install a security camera that records all loading dock activity.

Note–This case was adjudicated in the 1990s, and Goodwill has, since that time, made significant improvements to its controls.

Do (Some) Librarians Actually Steal?

Day 26 of 30 Days of Fraud

I remember my childhood librarian, Ms. Adams. She was a lady of rectitude, dignity and uprightness. Never one to harm or take from her patrons—or from the library. Theft by her?—unthinkable. That image colors, in a positive way, my view of librarians.

Recently, I spoke to about 50 librarians about fraud prevention and was shocked by their stories of thefts from libraries. It appears library fraud is alive and well in the United States. No place is immune. The following is a story of one such librarian, Bob Jones (I have altered the name).

Do librarians steal?

This picture is courtesy of AdobeStock.com

The Theft

How did he steal?

Mr. Jones, former public library director, apparently had the ability to approve purchases by issuing requisitions and purchase orders. The library paper work would reflect the purchase of dictionaries, for example, but the actual transaction was for exotic goods such as an elephant tusk sculpture.

Jones also purchased items that appeared to be for the library such as computer software, but he would–after receiving the goods–sell them on EBay. Then, with the cash, he would purchase items for his home and personal use.

Lastly, in some instances, he requested reimbursements for items he never received. Those reimbursement checks were cashed and placed in his personal bank account.

How Jones Used the Funds

Mr. Jones used the stolen funds to purchase items including:

  • A model of the Star Trek’s Starship Enterprise
  • A replica Tommy Sub-machine gun
  • Robo-Pets
  • A vacuum
  • A Leica camera
  • Star Wars collectibles
  • Rolex watch
  • An ice cream making machine
  • An elephant tusk sculpture
  • Other home decor items

His total theft is estimated at $236,000.

The Weakness

The weakness entailed no one comparing the purchase orders with the payments made and to cleared checks. It also appears that Mr. Jones could issue purchase orders and sign checks.

The Fix

To prevent this type of theft, the person authorizing payment (e.g., issuing purchase orders) should not also be able to make the payment. Supporting documentation (e.g., purchase requisition, purchase order, bids) should be provided to a second person that reviews it and issues the check.

Limit the number of check signers to those persons who do not have the ability to issue purchase orders. For instance, board members could sign the checks, while operating personnel could request the purchase.

When possible, have a central receiving department. Goods received should be recorded upon receipt. Such a procedure makes it more difficult for someone to buy goods and then sell them on sites such as EBay.

Nonprofit Fraud: Bid-Rigging, Kickbacks and Faulty Payments

Day 25 of 30 Days of Fraud

The Nonprofit Theft

We think of nonprofits as nice places where only noble things happen. But sometimes the leaders tasked with accomplishing the nonprofit’s mission prey on the organization itself, harming the very people the organization is designed to help.

One such nonprofit leader was charged with bid-rigging, receiving kickbacks, and making fraudulent payments to vendors.

Nonprofit fraud

Picture is courtesy of AdobeStock.com

The Department of Justice charged a “former director of operations at…a Manhattan substance abuse treatment center, with bid rigging, conspiracy to defraud, and income tax evasion, in connection with a conspiracy to embezzle approximately $2.34 million from the organization over an eight-year period.”

The Department of Justice stated the charges stemmed from the director “conspiring with several outside vendors to rig bids and allocate contracts awarded by”  the nonprofit “for the supply of food, meat, health and beauty supplies, baby supplies, office supplies, printed materials, janitorial supplies, and medical supplies from 1990 until at least April 1998. According to the charge, the director steered nearly $10 million in contracts to those vendors.”

The director was charged with taking kickbacks totaling at least $364,000 in cash or goods and services from vendors to ensure receipt of contracts.

The Department of Justice went on to say, the director “and seven unidentified vendors embezzled at least $2.342 million” from  the nonprofit “by issuing false and fraudulent purchase orders to each of the seven vendors, who in turn issued corresponding invoices for goods and services that were never delivered or provided.”

The Weaknesses

The first weakness is having a leader who was concerned more about his own personal wealth than the people he serves. Auditors often refer to this as the tone at the top–it’s the ethical makeup of those in charge. Without a positive, honest culture, fraud is more likely to occur.

The second weakness is the bidding process never really happened. There’s a reason for bidding: To keep everyone honest, and to ensure the lowest price for the organization.

The third weakness is a lack of accounts payable controls (or the circumvention of such policies, if they existed). Collusion between an organization’s leaders and vendors can wreak havoc. In such cases, the vendors send invoices, but no service or product is provided. Since someone in the nonprofit is approving the invoice (with knowledge the invoice is fictitious), there is no gatekeeper, no one to prevent the theft. Actually, the person approving the invoices is aiding in the fraud.

The Fixes

First, fire leaders who are unethical. An organization–especially a nonprofit–can’t afford the damage that such people do.

Second, solicit real bids. Sealed bids should be received and opened in a public meeting.

Third, ask board members to review and vet the nonprofit’s vendor list, especially those vendors receiving payments over a certain threshold (e.g., $50,000). Possibly, ask your external auditor to verify the existence and work of key outside vendors.

Yellow Book Independence Documentation is Important

Failure to document Yellow Book independence results in a nonconforming engagement (during peer review)

I just received the June 2016 AICPA Reviewer Alert (a monthly newsletter for peer reviewers). It provides the following Yellow Book independence documentation guidance:

Yellow Book contains specific requirements for documentation related to independence which may be in addition to the documentation that auditors have previously maintained. The 2011 Yellow Book Chapter 3 emphasizes that documentation is required for the evaluation of each of the elements of independence, which consists of:

  1. Management’s ability to oversee the nonaudit services, including whether management has skills, knowledge, and experience
  2. Significant threats that require the application of safeguards along with the safeguards applied
  3. Understanding established with the audited entity regarding the nonaudit services to be performed

Failure to document one or more of these elements is considered a departure from professional standards that causes the engagement to be deemed nonconforming. The reviewed firm and reviewer should be aware that verbal explanation and vague completion of a checklist does not provide for a thoughtful evaluation and documentation of management’s abilities related to each nonaudit service and will be unlikely sufficient to comply with the standards.

Yellow Book Independence

Yellow Book Independence Forms

All firms that perform Yellow Book engagements need to make sure their system of quality control provides guidance for documentation of the three items listed above. Consider using the AICPA’s 2011 Yellow Book Independence form. The electronically fill-able version is $28 for AICPA members and can be found here. The free PDF version can be found here.

For information about determining if your client’s skill, knowledge, and experience are sufficient, click here.

How $16 Million was Stolen from a Bakery

Day 24 of 30 Days of Fraud

The Theft

Is it possible to steal over $16 million from a bakery?

Well, yes. Sandy Jenkins, controller of Collin Street Bakery in Corsicana, Texas, did just that, making off with more than just the fruitcakes.

$16 million stolen from a bakery

The picture is courtesy of AdobeStock.com

How was the money used?

  • $11 million on a Black American Express card
  • $1.2 million at Neiman Marcus in Dallas
  • 532 luxury items, including 41 bracelets, 15 pairs of cufflinks, 21 pairs of earrings, 16 furs, 61 handbags, 45 necklaces, 9 sets of pearls, 55 rings, and 98 watches (having an approximate value of $3.5 million)
  • Wine collection (having an approximate value of $50,000)
  • Steinway electronic piano (having a value of $58,500)
  • 223 trips on private jets (primarily Santa Fe, New Mexico; Aspen, Colorado; and Napa, California, among other places), with a total cost that exceeded $3.3 million
  • 38 vehicles, including many Lexus automobiles, a Mercedes Benz, a Bentley, and a Porsche
  • And more…

How the money was stolen

Jenkins would print a check to his personal credit card company, for example, but would void the check in the accounting system. Then, he would generate a second check for the same amount to a legitimate vendor, but he would not mail the second check. Jenkins would mail the first check to his credit card company. The result: Jenkins’ personal credit card was paid, but the general ledger reflected a payment to an appropriate vendor.

The Weakness

No one was comparing the cleared check payees to the accounting system.

The Fix

Someone other than those who create checks should reconcile the bank statements to the general ledger. As they do so, they should compare the cleared check payees to the vendor name in the accounting system.

Is Your Cash Receipts Supervisor on the Take?

Day 23 of 30 Days of Fraud

The Theft

Is your cash receipts supervisor stealing? I once worked on a case where this person took over $300,000.

Cash collections supervisor

The picture is courtesy of AdobeStock.com

Cash Receipts Supervisor

Many businesses funnel cash receipts to a supervisor who counts the money from each cash drawer and compares the funds to the daily receipts. The purpose of this step is to ensure no front-desk clerks are stealing.

The cash collections supervisor has usually worked a cash drawer in the past. So she knows all about how the receipts enter the system and how they are deposited.

Typical Deposit Cycle

The collections process often works as follows:

  1. Money is collected at the front cash-collection desks and placed in the cash drawers that are assigned to each individual clerk; receipts are written for each payment
  2. These clerks tally their collections at the end of each day and reconcile the monies in their cash drawers to the receipts written
  3. The daily reconciliation for each cash drawer goes to the cash receipts supervisor who recounts the funds received and reconciles collections to the receipts written (performing the same reconciliation as the front desk clerks)
  4. The cash receipts supervisor creates a deposit slip for all funds collected (if there are seven cash drawers, then the deposit slip represents the total collections for all seven cash drawers)
  5. The cash receipts supervisor gives the checks and cash and deposit slip to a courier to take to the bank
  6. The courier receives a bank deposit receipt from the bank
  7. The courier provides the bank deposit receipt to the cash receipts supervisor (so she can compare the bank deposit receipt with the copy of the deposit slip–to ensure the courier did not steal any funds in transit)

The Cash Receipts Supervisor Steals

So how can the cash receipts supervisor steal funds in the above scenario?

In the case I worked on, the supervisor also reconciled the bank statement. After step 3., but before step 4., she would steal the cash and then lessen the deposit slip accordingly. So, if she took $2,200, the deposit slip would reflect the total daily collections less $2,200.

You’re thinking, “But then the bank account would not reconcile since the computers have recognized the front-desk collections?” You are correct—unless someone monkeys with the bank reconciliation. And that’s exactly what she did. The supervisor adjusted the reconciling items–on the bank reconciliation–to cover up the funds stolen. The scheme worked until the annual audit.

When the auditors tested the outstanding items on the bank reconciliation, they could not tie substantial amounts to the subsequent bank statement. Generally, outstanding reconciling items clear the subsequent month’s bank statement—but large amounts on the year-end bank reconciliation could not be accounted for (because they were fictitious).

When confronted, the clerk confessed to her theft and method.

The Weakness

The weakness was the cash receipts supervisor who had custody of assets (cash) also performed the reconciliation of the related bank account.

The Fix

Someone not involved in the collection process should reconcile the bank statement.

Would Andy Griffith Steal?

Day 22 of 30 Days of Fraud

The Theft

If you’ve watched Andy Griffith as much as I have, you may find it hard to believe a (small town) officer would steal–but it happens.

A friend of mine (we’ll call him John) audits a small Georgia city. One year he was reviewing the planning analytics for the audit. He had five years of comparative data. In scanning the comparisons, he noticed the police fines had fallen off significantly. So John naturally asked the police chief why the fines were down.

The police chief (we’ll call him Robert) responded, “I took it.”

The picture is courtesy of AdobeStock.com

The picture is courtesy of AdobeStock.com

John laughed and said, “I’m serious, why do you think the fine revenue dropped?”

“I took it, I said.”

John was stunned. It was hard for him to absorb what he was hearing. After all, fraudsters don’t generally confess on the spot–but this one did. And the chief was well-known and well-liked, a man known for his integrity.

The discussion continued as John inquired about how the chief took the money. Here’s the deal.

Robert had two receipt books, one for cash and one for checks. When checks were received, he would write a receipt from the checks receipt book–those funds were turned over to the city clerk. When cash was received, he wrote receipts from the cash receipts book–those monies went into his pocket. Simple, but effective, as he stole over $50,000.

The Weakness

No one was controlling the issuance of the city receipt books. Also, the city clerk should have noticed the lack of cash payments being received for fines.

The Fix

When governments use physical receipt books, assign the duty of purchasing and issuing receipt books to a particular person. He or she should maintain a log of the receipt books and who has each one.