Winter ConferenceFebruary 2, 2010

Dealing with the Ugly Face of Fraud

Holly Frook Graham, CPA, CFEArizona Office of the Auditor General

In regards to potential fraud, participants will:◦ Be able to protect their district◦ Know what actions to take when fraud is suspected◦ Understand fraud role of Auditor General

School districts Counties & elected offices State agencies Fire districts Community college districts Universities Justice courts Other entities

School district case range of losses◦ $2,322 - $11,725,425

School district case culprits◦ Student activities secretary◦ Department director◦ Assoc. superintendent◦ Governing board member◦ Business manager◦ Superintendent

Proactive against fraud Reactive after fraud

Create culture of integrity

Communicate expectations regularly

Hire quality people

Have strong internal controls

Maintain culture of integrity

Seek assistance

Support prosecution

Take remedial action

You

Husband

Husband’s father.

Husband’s sister & her husband

Mother & Grandmother

Daughter &

Grandson

Half-brother & his wife

Step-son

Managerial problemsInternal audit concernsExternal audit issuesOther circumstances

Money or property missing Money loaned or gifted Credit cards misused Conflicts of interest Undisclosed information Abuse of authority

Check and cash deposits made late

Unauthorized payments to individuals

Administrators’ trips to Vegas

Credit card MIA

External auditors-improve controls over cards

District called card company◦ 12 cards with activity◦ 4 of 12 cards can’t be found◦ $2,100 gas purchases ◦ July – December 2007

December 2007◦ Performs internal investigation

February 2008◦ Employee placed on leave (terminated July 2008)

March 2008◦ District contacts police department◦ PD = several suspects, no charges

January 2009◦ Audit Report = alleged misuse

April 2009◦ Auditor General informed of misuse through audit

report

Stealing more than

$1,700 worth of gas

School District

$2,100 stolen for gas

Six month period

Employee terminated

No legal consequences

Money not repaid

County

$1,700 of gas stolen

Two year period

Employee arrested

Employee terminated

Plead guilty to theft

Restitution ordered

Sometimes, fraud is something that just doesn’t look good

Fraud doesn’t need a smoking gun

Complaints to GB about superintendent:◦ Wife’s employment◦ Personally paid with IGA money◦ Unauthorized performance pay

GB contracts with investigative attorney

Attorney recommends:◦ Suspend superintendent◦ Review former employment file◦ Hire forensic CPA

Separation agreement with prior district required superintendent to:◦ Resign◦ Repay $9,300 of personal purchases◦ Pay investigation costs of $36,000

No legal action

Two weeks later applied for AZ superintendent position

District pays $15,369 for attorney investigation

District pays $54,977 to superintendent

Superintendent resigns

Forensic CPA not hired

Auditor General not contacted

Legal action not taken

Office of the Auditor General:

Reviews external audit report

Sees findings of financial misconduct

Reviews pertinent documents

Conducts investigation

Submits report to Attorney General

Superintendent (former):

Pleads guilty to felony charges◦ Theft ◦ Misuse of public money

Agrees to pay $84,981restitution

Forfeits certificates:◦ K-12◦ Principal◦ Superintendent

Criminal Civil

Theft 13-1802

Fraudulent Schemes13-2311

Misuse of Public Money35-301

Conflict of Interest38-501et al

False Filing – Forgery39-161 & 13-2002

Procurement41-2616 & 15-213

Antitrust34-252 & 44-1402

Tampering41-1279.04 & .22

Do This First

Go up the ladder Restrict access Conduct preliminary interview Document everything Seek assistance

Determine Who, What, Where, When and Why◦ Review documents first◦ Ask questions later

Document everything◦ Analysis◦ Timelines◦ Interviews, discussions

Be specific◦ Names and titles◦ Dates and times◦ Amounts and locations

Special Investigative Unit

o Assesses potential fraud situations

o Investigates fraud

o Prepares confidential report for law enforcement

o Assists in prosecution

o Prepares summary report for entity, legislature, public

o Conducts trainings

Arizona Auditor Generalazauditor.gov

Arizona State Legislature – statutesazleg.gov/ArizonaRevisedStatutes

Association of Certified Fraud Examinersacfe.com