Fake invoices, missed signals from Crundwell

New details of former comptroller’s schemes revealed in lawsuit against auditors

Published: Saturday, Jan. 12, 2013 1:15 a.m. CDT • Updated: Saturday, Jan. 12, 2013 11:37 a.m. CDT
Caption
(Alex T. Paschal/apaschal@saukvalley.com)
Flanked by her attorneys, former Dixon Comptroller Rita Crundwell arrives at Federal Courthouse in Rockford for a hearing in November in her federal wire fraud case.

DIXON – An amended lawsuit filed late last month against three auditing firms reveals new details of the schemes that former Dixon Comptroller Rita Crundwell used to steal nearly $54 million in city funds since the 1990s.

One of those schemes was to write nearly 200 fake invoices between 2002 and 2012 – to the tune of $44 million – that Crundwell claimed were from a state agency for capital improvement projects, according to court documents.

The invoices lacked key information, such as the agency’s emblem or logo and a contact name and number of an employee who could be reached for questions.

While those and other examples should have raised suspicion, no evaluation or investigation was made of the phony documents by one of the two firms that have conducted the annual audits for the past 21 years, the city government says in its lawsuit.

Further, CliftonLarsonAllen LLP, one of the largest accounting firms in the United States, continued to do the audits from fiscal year 2005 until Crundwell’s April 17, 2012, arrest, even though federal statute prevented them from doing so, according to the lawsuit. However, there is no indication criminal charges will be filed against the firm.

The suit, filed in June and amended last month, accuses CliftonLarsonAllen, Janis Card Company and Samuel S. Card, CPA, P.C., of gross negligence for failing to detect the theft of nearly $54 million.

The city is asking for damages in excess of $53 million.

There was a case management hearing on the suit Friday at the Lee County Courthouse. Another hearing is scheduled for March 15, as attorneys representing the city have asked to include Todd Etheridge and Ron Blaine of CliftonLarsonAllen to the suit. Attorneys from both sides declined comment Friday.

The suit claims CliftonLarsonAllen was guilty of breach of contract, fraud and intentional misrepresentation, voluntary undertaking to identify fraud, professional negligence and negligent misrepresentation, stating the firm “owed a duty and responsibility to the city to identify misstatement, fraud or theft.”

Both Card firms, located at 501 E. Fourth St. in Sterling, are accused of professional negligence and negligent misrepresentation. 

According to the lawsuit:

In 1990, Crundwell opened a bank account titled RSCDA at First Bank South, now known as Fifth Third Bank.

Crundwell deposited nearly $54 million in city money from various funds into the account, which she used to fund her horse operations and lavish lifestyle.

Between April 30, 2002, and April 30, 2012, Crundwell stole more than $44 million by creating more than 179 fraudulent invoices purportedly from the Illinois Department of Transportation to the city.

The invoices did not include IDOT’s emblem or logo at the top, omitted a contact name and contact number for an IDOT employee, were written with a different font than regular IDOT letters, and misspelled the word “section.”

Many of the invoices were made out for even amounts for thousands of dollars, which is a red flag for fraud or misstatements in the field of auditing.

All of the checks made out to pay these fraudulent invoices were typed by Crundwell and signed only by her, despite the custom and practice at the city.

That custom for bill payment process required the following: each invoice received approval by a city department head in charge and/or commissioner; a requisition would be created for each invoice; the aforesaid paperwork would be sent to Clifton for entry into the city’s ledger that was kept on the computer system at Clifton; that Clifton would print a check to pay the invoice, which would then be signed by a secured signature machine with three signatures.

Crundwell then used the purported checks made payable to “treasurer” from the Capital Development Fund and deposited them into the RSCDA account.

Between April 30, 1997, and April 30, 2005, Crundwell stole more than $4 million from the city by payments from the Capital Development Fund purportedly to pay invoices from the city’s water department or “water fund.”

Payments to those funds were deposited into the RSCDA account.

CliftonLarsonAllen, then Clifton Gunderson, did the annual audit from January 1990 until April 20, 2005. At no time were any of the city’s employees or officers charged with the responsibility of performing an audit, trained in fraud detection or theft, or certified public accountants.

The dates, check numbers, and amounts of the checks written by Crundwell were documented by the firm’s employees into the city’s ledger and kept on the computer system at their offices.

At no time did the firm inspect the phony invoices or speak with the city engineer, city council, or employees from the water department, nor did they verify approval in the Dixon City Council minutes or examine any bid, diagram, sketch or other contract-related document for any of the fictitious projects.

The firm did not ask or inspect any of the fraudulent capital projects for which Crundwell submitted the false invoices.

Between January 1990 and April 2012, the firm also prepared the personal income tax returns for Crundwell, as well as the returns for her horse company, RC Quarter Horses LLC.

The partners preparing those tax returns were the same ones who worked on the city’s audits.

The firm had “actual knowledge” that based on her personal tax returns, Crundwell was spending beyond her means.

That is a recognized indication of potential fraud or misstatement in the field of auditing.

Crundwell’s spending exceeded her income by more than $300,000 in 2005, and by $400,000 in 2006.

At no time during the period the firm prepared Crundwell’s personal tax returns did she provide them with any documentation to substantiate any claim of gross receipts.

One of the auditors who signed her tax returns inquired internally at the firm “as to where Rita was getting the money she was spending,” yet it led to no disclosure of her theft.

In 2005, the firm determined it was not “independent” according to nationally recognized accounting standards, which prevented it from performing the audit by federal statute.

The firm reached out to Janis Card Co., which only had two certified public accountants, little or no experience in performing municipal audits, and lacked the resources to perform the city’s audits.

A partner in the firm told Janis Card Co. that in return for signing the audit for the city, CliftonLarsonAllen would conduct and prepare the audit.

Further, CliftonLarsonAllen told the city it was doing only a compilation, meaning it provided financial statements for the audit, yet referred to their work as an “audit” in several emails to city supervisors.

In fiscal years 2010 through 2012, the firm billed the city $33,500, $34,750, and $37,000, respectively, for its work.

Janis Card Co. billed the city a total of $40,000 between 2006 and 2011. It did not do the field work or test fixed assets for the audit, according to the suit.

Crundwell, who turned 60 on Thursday, pleaded guilty in November to federal wire fraud and faces up to 20 years in prison at her Feb. 14 sentencing.

She also was ordered to pay full restitution, some of which has been raised through the sale of many of her assets, including her herd of more than 400 quarter horses.

Officials have said, though, that it is unlikely that the full $54 million will be returned to the city.

Document

Click here to read the amended lawsuit

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