How the Largest Municipal Fraud in U.S. History was Committed in Illinois – WP Original
By: Nancy Mathieson*
So, maybe you live in a city like Dixon, Illinois, population 16,000 where everyone knows everyone, people are polite, work hard, and they don’t ask their neighbors too many questions.
In 2012, the mayor, everyone else in the city and the national media discovered that Rita Crundwell, the city’s Treasurer and Controller had embezzled $53.7 million from the city over the past 20 years. How could the treasurer of an Illinois town with an annual budget of $6 million to $8 million steal over $50 million in two decades? Here is the toolkit for municipal fraud, as described by attorney Devon C. Bruce, who litigated the Dixon civil case and obtained the largest municipal settlement of its kind, $47 million.
How could this much money be stolen from a city?
Dixon’s mayor and five commissioners were part-time city employees, holding other full-time jobs in town. Dixon had three full-time city employees, including Crundwell whose salary was $80,000 a year. Dixon had no accountants on staff.
Local accounting firm CliftonLarsonAllen worked for the city of Dixon, preparing payroll, paying bills, creating ledgers and preparing the city’s financial statements. Clifton was Dixon’s outside auditor for two decades, collecting $1 million in billings from the town during that time.
CliftonLarsonAllen was also Crundwell’s personal accountant, and prepared her personal tax filings for 20 years. Crundwell lived a lavish lifestyle, buying, selling and breeding quarter horses. She owned extensive property, a $2 million Liberty Coach motor home, houses, stables and many horses. People in Dixon assumed her wealth came from her horse breeding business.
Prosecutors ultimately determined that Crundwell used a secret account and fake invoices (bills) for years to divert funds coming from Illinois tax-sharing programs to her own accounts. (Local transportation projects have traditionally been paid for in part by user fees such as state gas taxes and vehicle-registration charges, utilizing state tax-sharing programs).
Dixon had already set up a Capital Development Fund account at the local Fifth Third Bank. Crundwell opened up a second secret account, at the same bank. There was no City Council resolution to establish this account, nor were there any additional signatures on the account. This new account was simply called City of Dixon.
From around 1988 to 1991, Crundwell began creating phony invoices (bills) for Dixon capital projects and equipment which never existed. She would then transfer sums of money from the legitimate Capital Development Fund to the bogus City of Dixon account. Dummy invoices were created to show vendors billing Dixon for trucks and other capital items. Checks drawn from the City of Dixon account were repeatedly made to Treasurer of Dixon.
After 1992, Crundwell’s fraud grew in size, with phony invoices in the amounts of $300,000 and $500,000. At that time Clifton was still doing accounting work, auditing and preparing financial statements for Dixon.
As part of auditing books and records, an auditor’s typical practice to verify capital assets includes: 1) verifying the asset exists (looking at it, photographing it), 2) calling the vendor on the invoice to verify, 3) reviewing City Council meeting minutes to determine the purchased was approved. Obviously none of those steps were performed. Another common audit procedure would be reaching out to client banks to determine the identities of any and all bank accounts.
Checks drawn on the City of Dixon account were also made out to entities not typical to public finance, such as equestrian facilities and day spas. Attorney Devon Bruce uncovered instances where amounts in the tens or hundreds of thousands of dollars were withdrawn in cash out of the City of Dixon account. Red flag, anyone?
In 2005, new federal accounting rules were enacted that no longer allowed a firm to perform management functions and also audit its client; therefore, Dixon’s auditors could no longer do non-attest work such as preparing payroll or creating financial statements. To circumvent this new rule, Clifton approached a mom-and-pop local accounting firm to give the city’s audit opinion, stating Clifton was performing a compilation, not the audit. So the fraud continued.
Crundwell’s co-worker becomes a whistle-blower
Crundwell’s ultimate whistle-blower was a fellow employee, Cathy Swanson, who was trying to make sense of some ledgers for a Dixon City Council financial report while Crundwell was away on an extended vacation. Swanson immediately notified Mayor Jim Burke of the financial discrepancies, who then contacted the FBI.
Devon Bruce represented the City of Dixon in its civil case to uncover all culpable parties who should have uncovered Crundwell’s fraud earlier. On a parallel track, U.S. federal attorneys and marshals were responsible for seizing Crundwell’s assets for sale. In September 2013, accounting firm CliftonLarsonAllen agreed to pay a $36 million settlement to the city, and Fifth Third Bank agreed to pay $2.85 million.
Using the approximately $40 million recovered, Dixon is now under redevelopment, replacing sidewalks, curbs, gutters, streets, lighting, and trees in its downtown area. Rita Crundwell was sentenced to 20 years in prison.
*Nancy Mathieson is Contributing Editor of WirePoints. She has a 30-year career in business, securities regulation and public policy. She held positions as staff auditor at the Chicago Mercantile Exchange (CME) and Director of Market Surveillance at the New York Stock Exchange (NYSE). Most recently, Nancy was Operations Director at Truth in Accounting, a Chicago non-profit whose mission is to promote transparency in government financial reporting. In this role, she directed Accounting teams in grant-funded research studies on the financial condition of state and local municipalities.