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Sterling accountant was 'rubber stamp' for audit

Clifton denies claims; experts say Dixon left vulnerable to theft

DIXON — Sam Card says that CliftonLarsonAllen continued to do an audit for the city, despite guidelines that said they should not.

In an October deposition statement, Card said that he and his mother’s small Sterling accounting office, which became Dixon’s contracted auditor after 2005, did not do its own audit work. It only reviewed and signed off on audit work done by Clifton, which allowed one of the nation’s largest firms to keep its account.

Clifton denies Card’s claim.

If Card’s claim is true, a Northern Illinois University legal expert said, both firms’ licenses are in jeopardy.

Card was one of five persons who were interviewed by the city’s attorney, Devon Bruce, in connection with Dixon’s lawsuit against the firms that audited the city’s finances.

Click here to read depositions in the city's lawsuit.

The city is suing Clifton; Janis Card Co., LLC; Samuel S. Card, CPA, P.C.; and adding Clifton partners Ron Blaine and Todd Etheridge to the suit, saying the auditors should have detected former Comptroller Rita Crundwell’s theft of nearly $54 million from city funds.

Clifton, which had audited the city’s finances since before 1990, when Crundwell started stealing funds, indicated in 2005 it could no longer perform the audit becasue of a change in federal guidelines. The city received enough federal funds, Clifton said, requiring it to have an independent audit.

Since Clifton handled payroll and bookkeeping services for the city, it was not considered independent. In other words, if it conducted the audit, it would be reviewing its own financial statements.

It was then that Karl Appelquist of Clifton called the Cards, asking them to take on the audit. At that point, the small office of six, with three certified public accountants, had completed audits for only the village of Chadwick and city of Lanark, both with a population less than 2,000.

“[My mother and I] discussed that our staffing was not appropriate for a big client, but if it was a small client, we could assist them,” Card said in the deposition. “But she wanted to talk to them and find out the particulars.”

Appelquist told the Cards that Clifton’s staff would do the work papers and give them to the Cards for a review and signature, according to Card’s deposition. Card said he had not heard of any other such circumstance, where one firm would sign off on another firm’s work, in his 20 years as an accountant, yet he and his mother agreed to it. He said there is no documentation of that agreement.

Asked why Clifton would offer such a plan, Card said: “In my opinion they did not want to lose the client. ... If they would have hired, say, a larger firm, the larger firm would have ... could have come in and taken over some of the duties that Clifton was doing. Doing the audits. So they would ... Clifton would have lost control of the audit and lost that revenue stream.”

Clifton, however, said it was merely performing compilation services for the city. A compilation is taking financial information from the city and putting it into the proper format. In each year from 2005 until 2011, Clifton provided a compilation report for the city, while Card presented the audit report.

“It is a matter of public record that CliftonLarsonAllen was retained to provide audit services through 2005 and compilation services in the following years,” said Jennifer Dirks, a spokeswoman at Clifton’s headquarters in Milwaukee. “It is important to know our role changed after 2005, and consequently, so did the services we provided.”

Card said in the deposition that Clifton had notified a representative from the city of their agreement.

If Card’s assertion proves to be true, the result would be damning for one of the nation’s largest auditing firms, according to Dave Sinason, an accounting professor at Northern Illinois University, who specializes in forensic auditing.

“That’s a major violation of ethical principles of what an audit is supposed to be,” Sinason said, adding that Clifton’s lack of independence would jeopardize the audit’s credibility.

Tammy Waymire, a Northern Illinois University legal expert in accounting, said the amount of federal funds that Dixon received should not have changed the city’s requirement for an independent audit.

“Dixon should have always required an independent audit,” Waymire said.

She added: “If the allegations are true, then both firms bear some responsibility in that. I don’t know from a civil versus criminal perspective, but it certainly would be in violation of their licenses.”

The city has since fired both firms and hired Wipfli in Dixon to conduct the city’s current audit. Bookkeeping and payroll have been moved in-house.

The city’s lawsuit pointed out that in fiscal years 2010 through 2012, Clifton 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.

“That seems to be backward,” Sinason said. “That may be evidence that points to CliftonLarsonAllen doing the work of the audit, but it’s circumstantial. That seems especially low for Card if they were really doing a diligent audit.”

In an email on March 28, 2007, Clifton manager Megan Shank sent Crundwell a message that said, “Here is the total fee for the April 30, 2007 audit.”

In an April 7, 2009, email, Shank wrote to Crundwell about scheduling “audit field work.” In another email, Shank wrote to Crundwell, “I just wanted to set up some dates for us to come out and do the field work for the audit.”

In Shank’s deposition, she maintains Clifton conducted only a compilation, but in the same deposition said the term “audit field work” is strictly vocabulary used for audits.

NIU’s Sinason said it is not OK for a firm to go above and beyond in services in this case.

“They should be doing work for a compilation and not an audit, a compilation and nothing else,” Sinason said. “They can’t just say, ‘I’m going to do this, this and this here,’ because they step out of the role of the compiler and become an auditor. That’s not appropriate, and with that they take on extra liability.”

Waymire said if either account is true, the city was not in a good position to get reasonable assurance from its auditor, making it more vulnerable to misstatement or fraud.

“If Clinton continued to do the audits, then there’s obviously a question of independence and bias,” Waymire said. “If the smaller firm did the audit, then you ask if they had the resources to do so. It’s disturbing.”

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