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Should auditors have been able to detect fraud?

Expert says invoices should have led to suspicion

DIXON – The hundreds of fake invoices Rita Crundwell used to steal millions in city funds left more than enough clues to detect fraud, a collegiate expert says.

Those phony bills, passed off as being from the Illinois Department of Transportation, lacked the agency’s logo and its phone number. The word “section” was misspelled, and the fonts used were different than the real invoices submitted by the IDOT.

The fake invoices also were made out for large, even amounts.

Click here to compare a real invoice to three that were phony.

Besides all of that, the invoices were for projects that also were phony, already completed, or unrelated to the city’s or IDOT’s finances.

Sauk Valley Media was allowed to see 170 of the 179 phony invoices after making a Freedom of Information request.

According to documents in the city’s lawsuit against its former auditing firms, Crundwell used those invoices to steal about $44 million of the nearly $54 million she took from the city. She deposited the stolen money into a secret bank account from 2001 until her arrest last April.

The invoices requested checks be made payable to “Treasurer, State of Illinois,” but Crundwell would make checks payable to “Treasurer,” allowing her access to the funds for her own personal use.

The city is suing auditors CliftonLarsonAllen, Janis Card Company, LLC, and Sam Card, CPA, and made a motion to add Clifton partners Ron Blaine and Todd Etheridge to its suit, claiming they should have detected Crundwell’s theft.

For example, one invoice made out for $500,000 in November 2003 called for construction at the intersection of Route 26 and South Galena Avenue – the two are the same road.

Other invoices asked for $1.4 million for a state Route 26 traffic light in front of Walmart that actually had been paid for by the store, and $2.5 million for the demolition of a tollway plaza that does not fall under IDOT’s jurisdiction. The city wrote checks on both phony invoices.

While $44 million in city funds was going to the phony IDOT projects concocted by Crundwell, Dixon made just $2,565,858.44 in payments to IDOT for real capital projects dating back to 1990.

Most of these real projects were recycled into Crundwell’s scheme, including $1,068,066.65 the city owed IDOT in May 2007 for construction on the Peoria Avenue bridge. Crundwell made a phony invoice for that amount to go to her, while the city of Dixon persuaded IDOT to extend the deadline on those payments, while it scrounged for funds.

City officials were not aware of the fake invoices, because protocol did not require city department heads or commissioners to sign off on them.

Northern Illinois University accounting professor Dave Sinason, who specializes in forensic auditing, said a good audit should have detected Crundwell’s fraud.

Initially, the difference between the fake IDOT invoices and the others should have raised suspicion.

“No phone number or a P.O. box instead of an address is a red flag,” Sinason said. “There’s always a phone number. ‘If you have a problem, call this number.’”

He also said that if auditors are doing their job properly, they would conduct an inventory – in this case, looking for proof of the projects the city is being billed for.

“Auditors have to make sure the city gets what it pays for,” Sinason said. “Let’s say the city spends $100,000 on a new dump truck. An auditor’s job is to make certain they got it. Call the department head and ask, ‘Did you get this?’ Look for documents of receipt, or take a trip to see it for themselves. There are several ways to check on this.

“If they would have done that with Rita, asked ‘Did this work get done?’ as alluded to in the lawsuit, somebody would’ve said, ‘I don’t know what you’re talking about.’”

In deposition statements, Megan Shank and Ashley Peach, who both worked on Dixon’s account for Clifton, said the auditing firm did not call IDOT or verify whether certain projects were done.

Peach said auditors would have gone to Crundwell to verify amounts.

Both Shank and Peach said they did not do so, because after 2005, Clifton says it conducted only a compilation for Dixon, which meant formatting its financial documents.

It is uncontested, however, that before 2005, Clifton was conducting the city’s audits.

Regardless of the service an accountant is providing, Sinason said accountants have to report misstatements or investigate potential red flags to fraud.

“If you see something that’s inappropriate or see an issue, you are required to follow up on it,” Sinason said. “‘Here’s an account or payment that I can’t find anywhere.’ ‘Oh well, not going to do anything about it.’ You can’t say that.”

In a deposition, the city’s attorney, Devon Bruce, asked Shank: “If at any point in time Clifton, whether it was you or anyone else from Clifton, was doing the audit for the city of Dixon and they would have walked down the hallway to ask a question of the city engineer, ‘Excuse me. Can you tell me about this project?’ Do you and I agree at that point in time the subsequent events would have identified Rita’s theft?”

Shank answered, “Yes.”

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