Thefts show towns’ vulnerability to fraud

PORTLAND – Three recent cases of public employees embezzling taxpayer money show how vulnerable many small towns can be to fraud.

About 1,650 cities, counties and agencies handle more than $34 billion each year around Oregon. Even though the state requires most local governments to pay for independent audits each year, day-to-day operations often depend mostly on the honor system.

Fraud experts, certified public accountants and auditors from other states cited a lack of internal financial controls as a major weakness in local governments, especially in small agencies, where officials may not understand their responsibility to protect public money.

“I think it’s just plain laziness, either on the part of the auditors or the managers, who should be aware that they need to assure that there is separation of duties, particularly in a small office,” said Kathy Newcomb, of Tualatin, who worked as a state auditor for 11 years before she retired in 1994.

Steven Briggs, chief counsel of the Oregon Department of Justice’s criminal division, said he believes theft in local government “is a pretty common occurrence,” from stealing supplies to diverting large sums of money.

“Often there’s just a lack of financial sophistication, and so they don’t have the safeguards in place to make sure there’s more than one person keeping track of what’s going on,” Briggs said.

He said the same issues typically plague private organizations such as Little Leagues and churches.

“They trust this person, and that person is the one who does the books for them, and the next thing they know, $100,000 is missing,” Briggs said.

In Estacada, a bookkeeper is the subject of a theft investigation that could involve several hundred thousand dollars. And in a similar case in West Linn, a city bookkeeper stole about $1.4 million in city funds.

Both bookkeepers were given virtually unsupervised control over financial transactions and granted exclusive authority to reconcile those transactions with budgets, bank statements and canceled checks – practices that the experts say violate a basic rule of public finance: requiring at least two people to approve transactions and reconcile books.

A third case with Clackamas Water District involved a payroll clerk. The district has not revealed how money went missing, but Waneta Conway, former board treasurer, said she suspected something was amiss when the clerk once refused a request to provide financial information.

“I think honest people don’t think of all the ways people could steal from them,” said Chief Alan Hull, of the Estacada Fire District.

Oregon state auditors conduct annual financial reviews of state agencies but not local governments. Instead, Oregon requires all but the smallest local agencies to pay for annual independent audits by a certified public accountant, a practice that fraud experts say sounds more foolproof than it really is.

“A financial audit is not a fraud detection tool,” said Tiffany Couch, a forensic accountant at the Acuity Group in Vancouver, Wash., which specializes in fraud investigations. Most instances of fraud are revealed by tips to authorities or by accident, not through financial audits, she added.

Briggs, the Oregon Justice Department counsel, warned small organizations not to rely too much on audits, citing the case of the Oregon Coast Aquarium, where “an independent auditor came in and said everything was fine when it wasn’t.”

The former director of the Oregon Coast Aquarium pleaded guilty to felony forgery charges in 2003 after being accused of concealing a $2 million loan to help cover the cost of an exhibit.

Philip Hopkins, Oregon’s municipal audit manager, says financial audits are intended more to verify that financial statements are in order than to ferret out embezzlers.

It’s up to an agency’s financial manager or board of directors to reconcile bank statements and keep tabs on everyday spending, Hopkins said.