The “Lost Deposit Bag” and Other Frauds in Schools, Government Organizations

Dennis Dycus, CFE, CPA, CGFM, is director of the Division of Municipal Audit for the State of Tennessee Office of the Comptroller of the Treasury. In a recent Q&A with the ACFE, he provides his insight on fraud investigation from the government agency perspective.

Dennis Dycus, CFE, CPA, CGFM, recently retired as Director of the Division of Municipal Audit in the Office of the Tennessee Comptroller of the Treasury, having been with the office for more than 39 years. In a Q&A with the ACFE, he provides his candid insight on fraud investigation from the government agency perspective. 

 

Can you describe a “typical” fraud case in your line of investigation? 

We conducted many fraud investigations involving school student activity and cafeteria funds and related school support organizations.  Most people have no idea how much cash goes through a large centralized high school in Tennessee. It is not uncommon for a school to generate $1.5 million a year in activity and cafeteria funds.  That does not take into consideration what a related school support group(s) may generate. The school football booster club can easily raise several hundred thousand dollars in a large high school with a winning program. The same goes for basketball and band boosters.

 

The opportunity to commit fraud is provided by the fact that most of the revenues generated by a school are cash, with very little internal control.  In a typical fraud, the bookkeeper does not give receipts for all collections; they substitute nonrecurring revenues for cash; they fail to account for or deposit basketball/football game receipts; issue school checks for personal purchases; use the school's credit card for personal purchases; and often, they just write themselves a check.

 

Why do you find so much fraud in public schools? 

As Willie Sutton said, “…because that’s where the money is!” Sutton was talking about banks, of course, but there is a lot of money involved in public schools – and it is mostly in cash with very few internal controls.  Need I say more?

 

Can you briefly describe some of your most interesting and influential cases? 

There are many, but three come immediately to mind:

 

The “Lost” Deposit Bag 

There was the treasurer of a middle school support organization who stole $145,000 from funds raised by the organization for the school. She claimed she “lost” a deposit bag with $25,000 cash in it. Said she must have thrown it away in the garbage. She used the money to have a breast augmentation, eyelid lift and a few other body makeovers. She spearheaded a fundraising campaign to raise money to pay the medical bills of a fifth-grader dying of a brain tumor, and she stole every dime of it. She faked every document she submitted to court to prove her innocence; including a five-page letter from her former doctor stating that she was bipolar. When we proved the letter was a fake, the judge was not happy. He sentenced her to 16 years in prison. She ended up serving three years.

 

Doubled-Down on Fraud 

There was the trusted utility district manager who wanted to retire, but the board of commissioners did not know what to do. So he talked them into creating a deferred compensation account in which they would deposit $1 million in five years. He withdrew his retirement funds and invested them in the futures market and doubled his money overnight. He doubled-down… and lost everything. He started drawing on his deferred compensation account before he earned it and investing in the futures market… and he lost it all. In total, he embezzled $1,075,000 and lost every penny of it.

 

Fraud Ends in Tragedy 

Then there was a chief financial officer of a medium-size city -- he is the only fraudster I know who never benefited from the more than $450,000 that he stole. He had a friend who convinced him that he had won a large workman’s compensation claim, but he needed money for attorney fees and document processing fees because the case had been appealed all the way to the Supreme Court – but he had won. In the end, the finance office found out that he had been scammed and that he would not be receiving any money in order to pay the city back… so he committed suicide.

 

What are the first things to do when evidence of fraud arises? 

I have to determine the validity/quality of the evidence.  I cannot open an investigation on what a person thinks or heard. In order for me to even consider a case, I must have at least one of two things: 1) documentation or 2) a person with first-hand knowledge. Even then, because of my scarce resources (request for audits is greater than the staff I have to perform them), I have to consider several things. Is this a politically sensitive area? If so, we need to get it done now. I also have to look at how big the fraud might be. I cannot afford to allocate $15,000 or $20,000 to perform an investigation in an area where the maximum loss would only be a few thousand dollars. We often refer such cases to the local public accounting firm that is performing the financial audit and ask them to look into the areas and get back to us.

 

What are some of your general methods during your fraud examinations? Are there formally developed investigative protocols? 

I do not have a standardized checklist because every client is different and you have to develop your procedures after you have evaluated the situation, including internal controls, in order to find out where the weakness (opportunity) is and then design tests to determine if a fraud had been committed.

 

How do fraud examiners avoid tipping suspects off to an investigation? That must be particularly hard in a close-knit school setting. 

Conducting a fraud investigation is a three step process: You gather your documentation; interview your witnesses; and then interrogate. Any other sequence often proves to be disastrous. Using this method, you do not confront the suspect right off of the bat. You’re talking to everyone. As you gain a better understanding of what happened and who the suspect is, you may often find an enemy where a friend once was.

 

How quickly should you jump to interviewing subjects and suspects? 

You should seldom, if ever, go in and interview the suspect right off the bat; primarily because at that point, you don’t know what questions to ask. You should gather documentation, conduct interviews and then hone in on the subject. The great thing about obtaining a confession is that you don’t have to go to court.

 

What should you do after you get a confession? 

First, praise the individual for admitting that they made a mistake. Then ask them to write it down. The first thing that I would ask them to write is that the confession is voluntary and that they were offered refreshment breaks during the interview process. If a witness is not in the room at the time of the confession, call on one and have them witness the confession just in case the subject changes their mind at a later date and reneges on their confession.

 

What’s the difference between a trial and a sentencing hearing? 

In a trial, the suspect has pleaded not guilty. The case if presented by the prosecution and defense before a judge or a jury.  After the presentation of the evidence for both sides, the judge or jury decides on the guilt or innocence of the subject. After the trial, a judge may set a separate sentencing hearing.

 

When it is necessary to hold only a sentencing hearing, the subject has pleaded guilty. The prosecuting attorney will go over the case and present any enhancing circumstances he wishes the judge to take into consideration in determining the punishment. The defense attorney will present a case for mitigating circumstances. The judge will consider both arguments in arriving at a sentence.

  

What is your advice to budding fraud examiners who want to get into public auditing and fraud examination? How does it differ from other sectors? 

My advice is to spread the word about fraud every chance you get. Take advantage of every opportunity to speak before any group on the subject of fraud. Because fraud affects all of us, everyone is interested in the subject. Go to the ACFE.com and download the PPT presentation on the ACFE’s Report to the Nations on Occupational Fraudand Abuse. Edit it to the extent you need and use it as part of your presentation. It will make you look good! Volunteer to speak to college accounting classes and professional business fraternities. Do whatever you can to get your message out, and then when fraud happens in an organization (and we all know it is just a matter of time), they will remember you.

 

What kinds of skill sets did you look for in aspiring fraud examiners? 

That is a very good question.  I often say that many people want to be fraud investigators, but not all of them have the necessary attributes. While the following list is not meant to be all inclusive, I looked for the following attributes in a wannabe fraud investigator: they have an imagination; they like to think as part of solving a problem; they like to be constantly challenged; they good listeners and in turn know how to elicit information; they are able to set their emotions aside when conducting fraud investigations; they like to ask questions; they are observant; they do not like routine; they love what they do; and their professional skepticism is on 24/7/365. And that’s just a good start.

 

Dennis Dycus, CFE, CPA, CGFM, recently retired as Director of the Division of Municipal Audit in the Office of the Tennessee Comptroller of the Treasury, having been with the office for more than 39 years. He can be reached at dfdcpa@bellsouth.net or www.dennisdycus.com.