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Whose duty to find fraud?

Debate on issue uses Dixon as case study

Published: Thursday, May 1, 2014 1:15 a.m. CST • Updated: Thursday, May 1, 2014 10:25 a.m. CST
Caption
Devon Bruce and Kelly Richmond Pope.

CHICAGO – Where does the responsibility fall for catching fraud – like that in the case of Rita Crundwell? 

That was the topic of debate Tuesday night at the Spertus Institute for Jewish Learning and Leadership in downtown Chicago.

The debate was between Devon Bruce, Dixon’s attorney in the lawsuit against its former auditors and bank, and Kelly Richmond Pope, an associate professor in the school of accountancy and management information systems at DePaul University. 

Pope suggested the responsibility is shared between the auditors and the municipality or company, because a regular audit isn’t designed to detect fraud.

To illustrate her point, Pope played a video of two teams – one wearing white and the other black – that prompted the audience to count how many times the white team passed a basketball.

At the same time, the black team was passing a basketball as both teams moved around in the same confined area.

The answer was 13, but the point was that while the audience was focused on what the white team was doing, it missed the moonwalking bear that made its way through the middle of the video.

Bruce looked at the quesion from two perspectives – factual and legal.

“From the factual standpoint, I would stand on the Statement of Auditing Standards 99, which tells us in great detail that detecting fraud is an ongoing process to be considered throughout the entire auditing process,” Bruce said.

From a legal perspective, the Illinois Supreme Court, like courts in several other states, has adopted the audit interference doctrine. Bruce said that meant an auditor could not claim that a client was at fault unless there was interference with the audit.

That interference, Bruce said, doesn’t refer to fraud or theft, but in not supplying all necessary documents and answering questions.

“In this particular case, knowing that law, I spent some time deposing the [CliftonLarsonAllen] employees that were involved in this audit,” Bruce said.

“And they readily acknowledge that the city of Dixon employees provided all of the documents that they needed, answered every question, and that there was no interference at all in the performance of their audit.”

The nature of financial fraud makes it difficult to find, Pope said, adding that Crundwell’s theft was an outlier in the way it was done and the amount that was taken.

Auditors are not law enforcement officials who are trained to find and investigate criminal activity, Pope said, adding that maybe catching fraud would be more effective if FBI agents were involved with regular audits.

“The traditional audit is not going to find fraud,” she said. “... This should be a shared responsibility. I believe that.”

At the end of the debate, Bruce was asked by an audience member whether it was going to be his argument, if the lawsuit had gone to trial, that Dixon’s part-time City Council was too unsophisticated to understand its responsibilities and budget management.

Bruce’s answer was no. The city had a duty and responsibility in that regard, he said, and it was fullfilled by the city when it paid about $1 million over 20 years for the audits to be done by a respected firm.

Among the documents CliftonLarsonAllen received when doing the audits were fake invoices that Crundwell had used to steal nearly $54 million during 2 decades.

The auditors should have noticed – and investigated – those fake invoices, Bruce said, which would have brought Crundwell’s theft to light.

In September, the city settled the lawsuit with its former auditors and bank for $40 million.

“The settlement speaks for itself,” Bruce said Tuesday night.

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