Financial Management

Small towns are vulnerable to considerable financial crime. The citizenry tends to be trusting, and government operations are frequently informal and in the hands of people who, although entirely well-meaning, lack the education appropriate for public financial management. Because they know no better, their systems lack some of the important control appropriate to safeguard public funds or to guide public decisions. The case study below shows how those vulnerabilities can be exploited in a trusting environment.

After reading the case study, write a 300- to 500-word paper answering these questions:

· What violations of internal controls are present?

· What questions should have been asked but were not?

· What can Dixon and other small towns do to prevent such crimes?

Dixon, Illinois, is the hometown of Ronald Reagan. Its population in 2010 was 17,733 and in 2009, the Illinois legislature named it “The Catfish Capital of Illinois” (it hosts an annual catfish tournament on the Rock River). It has an annual budget of between $6 and $8 million. And its city treasurer, Rita Crundwell, embezzled $53 million from the town over two decades, according to federal prosecutors, the biggest municipal embezzlement in U.S. history.

Ms. Crundwell started with the city in 1970 while she was still in high school and decided to stick with the city rather than attend college. She moved into the financial function, and in 1983 she became treasurer and comptroller, a position she retained for roughly 30 years. Toward the end of her tenure, she was earning a salary of $80,000. She was widely regarded as a nice person, generous to others, and a credit to the community. One city official told the city council in 2011: “Rita Crundwell is a big asset to the city. She looks after every tax dollar as if it were her own.” How true that last part of the remark was. And, while she worked for the city, she built a remarkable quarter horse breeding operation, RC Quarter Horses LLC, with a large ranch in Dixon, expensive horse trailers and motor homes for travel to competitions, and 400 horses, including 52 world champions recognized by the American Quarter Horse Association. Along with the horse farm, she had several residences and expensive personal vehicles. The spending was not consistent with the salary, but Dixon residents presumed there must be outside investors.

The money actually came from the city. She started the scheme in December 1990 when she opened a secret bank account for the City of Dixon at First Bank South (eventually becoming part of Fifth Third Bank). The city was the primary account holder, and “RSCDA c/o Rita Crundwell” was a second account holder. She was signatory on the account, which was called the Reserve Sewer Capital Development Account-Reserve Fund (RSCDA), and she was the only person who knew about the account. She took care to gather all statements on the account when they arrived in the mail. Obviously, the account was not authorized by the city council and city had no professional manager.

In the next year she started the embezzlement. She transferred funds from the city’ Money Market account to his Capital Development Fund account, then wrote checks on the council-authorized Capital Development Fund payable to “Treasurer” (that’s her), which she deposited in the RSCDA. She created fictitious invoices from the state of Illinois to justify the payments. (All though Dixon procedures required a purchase requisition and approval from an appropriate employee to support an invoice, none of the invoices had the requisition.) The U.S. Attorney’s Office gave the following illustrative transactions: “on September 8, 2009, Crundwell wrote checks for $150,000 and $200,000 drawn on two of the city’s multiple bank accounts. She deposited both checks into Dixon’s Capital Development Fund account and, later the same day, wrote a check for $350,000 payable to “Treasurer” and deposited that check into her secret RSCDA account. Crundwell created a fictitious invoice to support the payment of $350,000 to the state of Illinois that falsely indicated the payment was for a sewer project in Dixon that the state completed. Later on September 8, 2009, Crundwell wrote a check drawn on the RSCDA account for $225,000, which she deposited into her personal RC Quarter Horses account.”

Ms. Crundwell was the person who received, signed, and deposited all checks. She balanced checkbooks, made deposits, and received all financial statement that came to the city mailbox. She started out by stealing $181,000 in 1991 and kept at it until 2009. She got $5.8 million in 2008 and $5.6 million in 2009, her two best years. When city officials would mention that city finances were a little tight, Ms. Crundwell would blame it on slow payments by the state of Illinois. Nobody questioned that response.

City finances were audited regularly, in some years by auditors from a major CPA firm and sometimes by small practitioner firms. The city received an unqualified audit opinion with each audit – no questions of internal control, fair presentation of financial condition, no material noncompliance. How did she get caught? Ms. Crundwell went on an extended vacation. A city clerk opened the mail in her absence, discovered the RSCDA account, and told the mayor. The mayor called the FBI. Eventually Ms. Crundwell was sentenced to nineteen years and seven months in prison. And her assets were sold to recover some of the lost money. At last report, Ms. Crundwell was suing to recover some of the trophies her horses had won, but the feds were resisting. They may have a trophy room of their own to display them.

Source: Mikesell, John L. (2018). Fiscal Administration. Tenth Edition, pp. 152-153.