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 Fraudsters Steal with Inflated Invoices

Day 13 of 30 Days of Fraud

The Theft

The school maintenance director, Derek Brown, purchases materials from two local hardware stores; also, the school contracts with a nearby electrical services company. Each of these businesses is owned by relatives of Derek. While the school board knows about the familial relationships, they are accustomed to the use of these vendors. After all, it’s been that way for years.

Vendor fraud

This picture is courtesy of AdobeStock.com

What the board doesn’t know is that Derek often receives inflated invoices from these related parties. For example, if the school orders $30,000 of supplies, it receives an invoice for $45,000. Derek approves the purchase orders, the physical receipt of the goods, and the payment of the invoice. (At times, one of Derek’s assistants counts the physical goods received, but he is party to the fraud as well.) It’s easy for Derek to approve the overpriced bills. About once a month, the related-party vendors pay Derek 50% of the excess billings.

Note–This fraud appears to have actually occurred, but I am not using actual names since the case is still under investigation. It appears the loss may be well over $2 million.

The Weakness

The weakness lies in the lack of segregation of duties. Derek approves:

  • The purchase orders
  • The physical counts of goods or services received
  • The approval of the invoices

A contributing element is the school board going to sleep–these types of relationships should be vetted. If no other vendors are available–often the reason for using such businesses–then additional scrutiny should be brought to bear upon the related activity.

The Fix

Segregate the duties, especially the purchase order approval. A conflict-of-interest policy should be adopted requiring all school officials and key administrative personnel to disclose questionable relationships. If key conflicts are not eliminated, the related activity should be subject to audit by an outside CPA or Certified Fraud Examiner.

Additional Fraud Prevention Assistance

If you work with local governments, you will find my book useful in identifying and preventing fraud. See the book on Amazon by clicking the icon below.

A Fraudster’s Refuge: The Appalachian Trail

Day 10 of 30 Days of Fraud

The Theft

In May 2015 James Hammes was arrested for the theft of $8.7 million from his former employer, G&P Pepsi-Cola Bottlers. After Mr. Hammes was confronted about the theft in February 2009, he sought and found refuge on the Appalachian Trail, which runs from Georgia to Maine. Hammes assumed a hiking name of “Bismarck” and spent several years on the popular trail. Bismarck was known by fellow hikers as affable and fun to be with.

Wanted poster from the FBI

Wanted poster from the FBI

Back in September 2015, a Fox News article included the following:

FBI special agent Pamela Matson stated in an affidavit that G&J funds were deposited into an unauthorized account that played off the name of a vendor. Investigators found that Hammes opened the account in 1998, she said. He repeatedly wrote checks to the sham vendor account, then quickly moved the deposits into his own bank account, according to Matson.

While the article does not explain “played off the name of a vendor,” let me give you an example of how such a scheme works. If the company had a vendor named ABC Consulting Experts, a fraudster sets up a new vendor with the name ABC Consulting, leaving the word Experts off. In addition, the thief opens a bank account in the name of ABC Consulting. Then the fraudster makes payments to ABC Consulting and deposits the checks in the unauthorized bank account. Later, he transfers the money to himself.

The Weakness

The company may not have been performing tests for similar vendor names. See the fix below.

The Fix

Download your vendor list in Excel and sort by vendor name. Then scan the list for similar names. Using this method will allow you to see any two similar vendors names; an excerpt from such as vendor list might appear as follows:

  • Abacus, Inc.
  • Abacurrate Shades LLC
  • ABC Consulting
  • ABC Consulting Experts
  • Absolute Accuracy, Inc.

Seeing the two similar vendor names–ABC Consulting and ABC Consulting Experts–raises a red flag. Now investigate both companies to see if they are legitimate.

Additional Comments

Here are some additional comments.

 

How Can a Fraudster Write Checks to Himself?

Day 9 of 30 Days of Fraud

The Theft

Randy Toms, an accounting clerk, creates a manual check for $5,200 that is made out to himself and signs it with a signature stamp. (The stamp is used when the mayor is out of town.) Randy enters the transaction into the accounting system–using a journal entry–as a payment to Macon Hardware. The result: The general ledger reflects a payment to Macon Hardware, and the check is made out to Randy. In addition, he codes the disbursement to an account with ample remaining budgetary balance. The subterfuge works since the expense accounts reflects appropriate vendor activity (a check to Macon Hardware) and expenses don’t exceed budget. And oh, by the way, Randy performs the monthly bank reconciliation, so he alone sees the cleared checks.

Given Randy’s success with the first check, he continues the fraud for several years.

This is picture is courtesy of AdobeStock.com

This is picture is courtesy of AdobeStock.com

The Weakness

The following provides the perfect environment for this theft:

  1. The existence of the signature stamp
  2. The clerk posts journal entries without a second-person review (approval)
  3. The clerk reconciles the related bank account (ensuring that no one–other than Randy–sees the cleared checks)

You may be thinking, “Wouldn’t the auditors catch this type of fraud?” Probably not. Auditors seldom select cleared checks and compare them to supporting invoices. (If you’re an auditor, you may want to consider this potential theft in your fraud brainstorming sessions.)

The Fix

The fix includes the following:

  1. Get rid of the signature stamp
  2. Require second party approval of all journal entries
  3. Have someone other than the clerk reconcile the bank account (and review cleared checks)

Some governments or businesses have bank statements mailed to someone outside the accounting department such as the city mayor or business owner. This person opens the bank statement and performs a cursory review of the cleared checks–once done, the bank statement is routed to the accounting department. Since cleared checks are viewed by someone else, there is less of a chance that the accounting staff will write checks to themselves.

Trains, Planes, and Automobiles: The Theft of Capital Assets

Day 7 of 30 Days of Fraud

The Theft

A USA Today article began with, “Stolen and sensitive U.S. military equipment, including fighter jet parts wanted by Iran…have been available to the highest bidder on popular Internet sales sites.” The article went on to say that the equipment, “purchased with taxpayer money,” was available for purchase on eBay and Craigslist and included “components from F-14 fighter jets” and “used Nuclear Biological Chemical protective suit.”

Capital asset theft

Picture is courtesy of Adobe pStock.com

Capital assets often go missing because no one is paying attention, and the thief knows it. Such assets can be stolen with the intent to sell and convert to cash or simply for personal use.

The thefts often occur when employees place equipment or other capital assets in their vehicles and drive home. If the employee wants to cover their tracks, they might complete accounting paperwork for disposal of assets (saying the equipment was junked). More often than not, however, the asset is just stolen because the employee knows that no one will notice, or, if someone does, he can say, “I don’t know what happened to that piece of equipment.”

Long-term employees realize that the external auditors seldom audit existing capital assets. Yes, the auditor will examine an invoice, but how many auditors physically inspect plant, property and equipment?

The Weakness

The main enabling factor is usually a lack of accountability. Many companies and small governments do not perform periodic fixed asset inventories. Often equipment is purchased and added to the depreciation schedule, but no one–at a later date–compares this master list of fixed assets to what is (or should be) physically present.

The Fix

First assign each capital asset to a person (usually a department head or a supervisor); let this person know that he or she is personally responsible for the item. Then have someone external to each department perform periodic inventories of departmental assets.

Also, install security cameras to record all activity.

Skimming Cash Payments

Day 2 of 30 days of fraud

The Theft

Your cash clerk is taking cash as it comes across the counter. He does so by:

  1. Not issuing a cash receipt, or
  2. By using a second cash receipts book
Theft of cash collections

Picture is courtesy of AdobeStock.com

In the first instance, the clerk knows which customers expect a receipt and which ones don’t. By not issuing a receipt he (the clerk) can put the cash in his pocket and–at the end of the day–walk out the door. He is careful to write off any related receivable (making an adjustment in the accounting system to reduce the customer’s receivable balance); as a result, the customer receives no bill for nonpayment. The clerk has observed that no one–such as a supervisor–monitors the adjustments to receivable accounts. Also the business has not installed a security camera to record the activity of the clerk.

In the second instance, the clerk has two physical receipt books, one for checks and one for cash (though everyone in the business thinks he has just one receipt book). The checks are deposited by the clerk into the business’ checking account and the cash is stolen (by the clerk). The customer receives a receipt whether he pays by check or cash and is unaware of the two separate receipt books. Again, the collections clerk writes off the customer receivable for the cash amounts stolen.

The Weakness

In the first instance (no receipt is issued), no one is monitoring the adjustments to the receivable accounts. Additionally, no one is tracking the receipt books issued (or being used). Also the business has not installed a security camera to record the theft of funds by the clerk.

In the second instance (use of two receipt books), again, no one is monitoring the adjustments to the customer receivable accounts. And, again, there is no camera to record the use of the second receipt book.

The Fix

Have someone, such as a supervisor in the collections department or the controller outside the department, monitor daily adjustments to customer receivable accounts. The clerk should know that his receivables work (including any adjustments to receivables accounts) is being monitored. If the business is small, the owner should request a daily or weekly printout of all adjustments to the receivable accounts.

Install a camera to record all actions of the collections clerk.

Fictitious Vendor Fraud

Day 1 of 30 Days of Fraud

The Theft

Your accounts payable director (Susie Jones) sets up a fictitious vendor: ABC Project Management. Susie enters the new vendor in the payables system using her sister’s (Joan Albert) personal home address as ABC’s address. (Susie is the only person tasked with reviewing new vendors for appropriateness.) Susie also creates fictitious consulting invoices to support the payments made to ABC Project Management.

Since the checks are signed by the computer, no one reviews the invoice or physically signs a check. And since the vendor file has Joan’s address, the ABC checks are mailed to Susie’s sister. Joan opens a bank account in the name of ABC Project Management, and she is the sole signature on the bank’s signature card. When the ABC Project Management checks are received at Joan’s home, she deposits them into the new bank account. Joan then writes checks from the ABC bank account to herself and to Susie.

The Weakness

Susie is the only person reviewing new vendors for appropriateness. No one outside of the accounts payable department is performing periodic reviews of the vendor files.

The Fix

If possible, have the company’s computer system automatically email Susie and the controller (a person outside of the accounts payable department) each time a new vendor is added; the email should provide the name and address of each new vendor, and the name of the person who approved the addition of the new vendor.

Require the accounts payable department to archive vendor verification documentation such as:

  • Google search for the business
  • Google search using the vendor address (Google often provides a picture of the location)
  • Phone call made by an accounts payable employee to the new vendor
  • Physical visit to the vendor’s business

The company can also compare payroll addresses to vendor addresses using software packages such as IDEA or ACL. (Sometimes an employee will use their personal address in a vendor fraud such as the one above, rather than that of an accomplice such as a sister.)

Use an outside CPA or Certified Fraud Examiner to sample and verify selected vendors. If accounts payable personnel are aware that this procedure is being performed, they will be less likely to steal.

How to Prevent the Theft of Fixed Assets

Why it's so easy to steal equipment and electronic devices

A USA Today article began with, “Stolen and sensitive U.S. military equipment, including fighter jet parts wanted by Iran…have been available to the highest bidder on popular Internet sales sites.” The article went on to say that the equipment, “purchased with taxpayer money,” was available for purchase on eBay and Craigslist and included “components from F-14 fighter jets” and “used Nuclear Biological Chemical protective suit.”

Picture is courtesy of DollarPhotoClub.com

Picture is courtesy of DollarPhotoClub.com

Why do thefts of physical assets occur?

The main culprit is usually a lack of accountabilityMany companies and small governments do not perform periodic fixed asset inventories. (Fixed assets are also referred to as plant, property and equipment in commercial businesses and as capital assets in governments.) Often equipment is purchased and added to the depreciation schedule, but no one–at a later date–compares this master list of fixed assets to what is (or should be) physically present.

Most external auditors audit the additions and reductions of fixed assets in a given year but seldom, if ever, audit existing fixed assets–those that were owned at the beginning of the year. Consequently, theft of fixed assets may go undetected even when annual audits are performed. So what should you do?

Nip It in the Bud

To use the words of the inimitable Barney Fife, “Nip it. Nip it. Nip it in the bud.” But how?

It’s quite simple (though it can be time-consuming).

Have your department heads perform an annual inventory of the assets, comparing the master list of fixed assets purchased with what is physically present; then this annual reconciliation should be reviewed by someone outside the department. You should also, by policy, assign responsibility for each fixed asset to a particular employee (e.g., department head). For example, a city could assign responsibility for all public works equipment to the public works director. Once the director has completed the annual inventory reconciliation, an outside person (e.g., the finance director or an external auditor) should review it. If any of the equipment in that department is not present, then the director is accountable.

Train your personnel to take annual inventories, and let everyone in the organization know about your fixed asset policy. Transparency and accountability are critical; if each asset is not assigned to a particular person, you will make little progress in decreasing theft.

Capitalization Thresholds

Most organizations adopt a threshold for additions to the depreciation schedule (fixed asset inventory). For example, a business might use a $2,000 threshold; all fixed assets purchased for less than this amount are not capitalized (added to the depreciation schedule)–they are expensed (and not added to the depreciation schedule). Using a capitalization threshold is good, but there is a problem: Smaller dollar assets are more likely to be stolen (think iPads), especially if they are not inventoried.

If you adopt a capitalization threshold for your depreciation schedule (e.g., $2,000), consider maintaining a second list of all equipment purchases above a lower dollar level (say $250). Assign the responsibility for these lower value items to someone in each department. Inventorying small dollar items is sometimes critical.

The Wall Street Journal reported that the U.S. Marshals Service had lost a few thousand encrypted communication devices (mainly radios); such devices, in the wrong hands, can allow persons to listen in on policing operations and, as a result, potentially compromise the safety of officers and citizens. And what was the cause of the loss of these devices that ranged in prices between $2,000 to $5,000? A lack of appropriate inventorying software and accounting.

GFOA Capitalization Guidelines

The Government Finance Officers Association (GFOA) recommends that state and local governments consider the following guidelines in establishing capitalization thresholds:

  • Potentially capitalizable items should only be capitalized if they have an estimated useful life of at least two years following the date of acquisition
  • Capitalization thresholds are best applied to individual items rather than to groups of similar items (e.g., desks and tables) unless the effect of doing so would be to eliminate a significant portion of total capital assets (e.g., books of a library district)
  • In no case should a government establish a capitalization threshold of less than $5,000 for any individual item
  • In determining capitalization thresholds, governments that are recipients of federal awards should be aware of federal requirements that prevent the use of capitalization thresholds more than certain specified amounts
  • Governments should exercise control over potentially capitalizable items that fall under the capitalization threshold

Your Capital Asset Procedures

How does your organization lessen the threat of theft?