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ACCT2212 Forensic Business Investigation Group Assignment Class: LF01 Group: 4 Word Count: 2819 words

Group Member Name

RMIT ID

Nur Kaiyisha Binte Zainudin

S3809393

Ong Ying Jie

S3709341

Liu YiJun

S3709236

Tay Wee Zheng Clement

S3809631

1. Analyse and explain the fraud committed by Crundwell. (8 marks)

The fraud committed by Crundwell is embezzlement. Her way of embezzlement is by siphoning the money that was supposed to be for different purposes into one fraud account, the Reserve Sewer Capital Development Account or RSCDA, that she created by secret, and no one knows about this fraud account. She created fake invoices and fake contracts in order to facilitate movement of money from the capital development account into her fraud account. Subsequently, she transferred money out of the RSCDA account for her own personal use. From the fraud triangle, fraud results from three key factors: opportunity, rationalization and pressure. Firstly, the most possible element that led Crundwell to commit fraud is perceived opportunity. Most of the accounting work involving the movement of money was done by her, thus she had total control and knowledge of Dixon’s financials, which enabled her to commit fraud. Moreover, too much trust was placed in her in which nobody went on and counter check or questions her statements and hence she could take this advantage for her own benefit, without anyone from the town council knowing. Secondly, another element that led her to committing fraud is pressure. In order to maintain her extravagant lifestyle and care for her 400 beloved quarter horses, this had led her the incentive of committing fraud. Lastly, about the last element of rationalization, Crundwell was smart at a young age and as a young kid, she only wanted the best. She kept good records of the money she embezzled and was well-trained in explaining away accounting inconsistencies. Thus, she was confident enough about getting away from getting caught, that she decided to go on a long leave. She believed that everyone around her was ignorant and lacked in the knowledge she had. From the fraud scale, the possibility of committing fraud is high if an individual’s integrity is low. In Crundwell’s case, her integrity is zero, as she did not admit at all about her doings, which led to the high possibility of her committing fraud.

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The most possible power that Crundwell has in order to commit the fraud is expert power. Any workers around her that needed help would seek her as she has a lot of experience, especially in accounting.

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Crundwell was in charge of almost everything in the City Council. For example, she picked up the mail, made deposits, updated journal ledgers, prepared and signed cheques, moved investment money and reconciled the bank accounts. Since Crundwell did everything, this means that there was little segregation of duties since she did not separate any functions among her work colleagues.

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2. Discuss the impact of the fraud committed by Crundwell on the City of Dixon and her work colleagues. (5 marks)

After 20 years of committing fraud, the impacts of fraud committed by Crundwell on the City of Dixon and her work colleagues were devastating. Firstly, the City of Dixon was adversely affected economically. In terms of financial impact, due to Crundwell’s embezzlement for over 20 years, the City of Dixon, Illinois, experienced a huge deficit every year from 1993, accumulating up to a total of $2.1 million. As the deficit increased over the years, Dixon was forced to borrow more money. However, the deficit was not detected as Dixon has been borrowing large amounts of money. This caused Dixon residents to be confused as they could not detect the red flags, whereas their neighbouring city, Sterling, was able to. There was also a slowing down in tax collections as a result of the economic downfall which caused Dixon to refinance $6 million in debt. In terms of social impact, facilities were in bad shape as roads were in disrepair and streets could not be resurfaced. Infrastructures were in shambles as ambulances, police radios and facilities in the public libraries needed to be replaced. Moreover, the improvement in the waste water treatment facility was also delayed. This caused numerous sufferings and inconvenience to the residents of Dixon as they were not able to access basic amenities. For three years, city employees did not get pay raises and the city even had to lay off employees. During Crundwell’s tenure, she made the books and numbers complicated which made her work colleagues find it difficult to understand. This made her work colleagues seek help as she knows everything which is under expert power. From there, Crundwell took the opportunity to deceive her work colleagues. The city of Dixon was able to recover about $40 million through settlements with former auditor CliftonLarsonAllen, former auditor Sam Card and the Fifth Third Bank, due to their inabilities to catch her embezzlement. To recover the debt, the city generated around $12 million from the auction of Crundwell’s possessions. It took U.S. Marshals 1.5 years to sell 400 horses that were worth $5 million, ranch and other properties that were worth millions, jewelleries that were worth $250,000, a trailer and 2 vehicles that were worth $36,000. The amount is only enough to cover

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the city’s attorney’s fees. In the end, the horses were sold but losses were incurred. For example, the horse, “Sacred Sierra”, was purchased at $225,000 but was eventually sold for just $47,000. In total, Crundwell’s restitution was about $107 million which would take her more than 120,000 years to pay back to the city, given that she will be paying $65 per month.

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3. Prepare a vertical and horizontal analysis based on the Statement of Net Assets and the Statement of Revenue, Expenditures and Changes in Fund Balances for the City of Dixon for the year ended 30 April 2010 (see Excel documents) and discuss any red flags, if any, identified by your analysis. (15 marks)

Comparing the Statement of Net Assets for the City of Dixon for the years ended 30 April 2009 and 30 April 2010, and comparing the Statement of Revenue, Expenditures and Changes in Fund Balances for the City of Dixon for the years ended 30 April 2009 and 30 April 2010, Horizontal analysis: 1. In the assets section, there is an 85% decrease in investments, which is very significant as the City of Dixon may have received less investments for the financial year ended 30 April 2010. 2. In the assets section, there is a 63% decrease in cash and cash equivalents, which is a very significant change.

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3. In the liabilities section, there is a 51% decrease in vouchers payable, which means that there is a significant amount of debt being paid off, leading to less cash for the City. 4. In the net assets (deficits) section, there is a 191% increase in unrestricted net deficits. 5. In the revenues section, there is a 259% increase in other revenue. It is possible that there is revenue manipulation. 6. In the revenues section, there is a 59% decrease in revenue from use of money and property. This could be because there were decreases in usage of public properties, such as the library, where it is reported that there were no books in it. 7. In the expenditures section, there is a 117% increase in expenditure for highways and streets. Given that the city’s roads were in disrepair and streets could not be resurfaced, it is not possible that more money was spent on repairing the roads. Hence the figure could be manipulated. 8. In the expenditures section, there is a 244% increase in expenditure for welfare and civil defence. This figure could also be manipulated.

Vertical analysis 1. Investments made up 5.69% of the City’s total assets for the year ended 30 April 2009, while for the year ended 30 April 2010 it made up 0.84% of the City’s total assets. 2. Other capital assets, net of depreciation made up 71% of the City’s total assets for the year ended 30 April 2009, while for the year ended 30 April 2010 it made up 85% of the City’s total assets. 3. Construction in progress initially made up 9.1% of the City’s total assets for the year ended 30 April 2009, but for the year ended 30 April 2010, there was a huge decrease to 1.9%. However, there was still not much change made to Dixon despite a lot of money being used to construct the City. 4. Cash and cash equivalents made up 3.71% of the City's total assets for the year ended 30 April 2009, while for the year ended 30 April 2010 it made up 1.35% of the City's total assets. 5. Expenditure for highways and streets made up 4.92% of the City's total expenditure for the year ended 30 April 2009, while for the year ended 30 April 2010 it made up 10.58% of the City's total expenditure. 6. Intergovernmental revenues initially made up 65.13% of the City's total revenues for the year ended 30 April 2009, while for the year ended 30 April 2010 it made up 52.42% of

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the City's total revenues. There is no capital development fund recorded to intergovernmental revenues for the year ended 30 April 2010, hence the significant decrease. 7. Other revenues initially made up 2.24% of the City's total revenues for the year ended 30 April 2009, while for the year ended 30 April 2010 it made up 9.4% of the City's total revenues. This is primarily because there is a significant increase in capital development fund for other revenues.

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4. In the movie ‘All The Queens Horses’ it is asserted that anomalies could have been detected by comparing the City of Sterling financials against City of Dixon financials, since both cities have similar economies.

(i) Prepare a vertical and horizontal analysis based on the Statement of Net Assets and the Statement of Revenue, Expenditures and Changes in Fund Balances for the City of Sterling for the year ended 30 April 2010 (see Excel documents) and evaluate your City of Sterling analysis against the City of Dixon analysis to test the above assertion. (25marks)

Comparing the Statement of Net Assets for the City of Sterling for the years ended 30 April 2009 and 30 April 2010, and comparing the Statement of Revenue, Expenditures and Changes in Fund Balances for the City of Sterling for the years ended 30 April 2009 and 30 April 2010, Horizontal analysis 1. In the revenue section, there is a 285% decrease of revenue over expenditures. This could be a result from the higher expenditure that incurred during the year ended 30 April 2010. 2. In the revenue section, there is a 40% decrease in investment income. This could be a result

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from the lack of investment for 2010 for Sterling. 3. In the expenditure section, there is a 52% increase in community development. 4. In the other financing sources (uses) section, there is a 249% increase between 2009 and 2010 from sale of property. 5. In the assets section, there is a 55% increase in cash. 6. In the liabilities section, there is a 66% increase in accounts payable. This increase helps in the increase in cash balance of the City. 7. In the liabilities section, there is a 227% increase in deposits. This may be because more money is deposited into the City’s bank and has to be paid back to the depositors. 8. In the liabilities section, there is a 67% decrease in claims payable. This may be because more claims are paid throughout the year.

Vertical analysis 1. Investments made up 24.95% of the City’s total assets for the year ended 30 April 2009, while for the year ended 30 April 2010 it made up 24.12% of the City’s total assets. This is a very small decrease and was at a constant value. 2. Community Development made up 5.57% of the City’s total expenditures for the year ended 30 April 2009. Meanwhile for the year ended 30 April 2010, it made up 8.233% of the City's total expenditures. Although it was a slight increase, it wasn’t a drastic one. 3. Expenditure on public works and transportation made up 16.40% of the City’s total expenditure for the year ended 30 April 2009, while for the year ended 30 April 2010 it made up 15.121% of the City's total expenditure. 4. Cash made up 1.40% of the City’s total assets for the year ended 30 April 2009, while for the year ended 30 April 2010 it made up 2.21% of the City’s total assets. 5. Other capital assets net made up 26.74% of the City’s total assets for the year ended 30 April 2009, while for the year ended 30 April 2010 it made up 26.41% of the City’s total assets. 6. Land and construction in progress made up 2.84% of the City’s total assets for the year ended 30 April 2009, while in 2010, it made up 3.64% of the City’s total assets. 7. Intergovernmental revenues initially made up 19.92% of the City's total revenues for the year ended 30 April 2009, while for the year ended 30 April 2010 it made up 17.45% of the City's total revenues.

Evaluation

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Based on the vertical analyses of City of Dixon’s financial statements and City of Sterling’s financial statements, most of the types of assets and liabilities in City of Sterling had recorded steady values, with very little increase or decrease, while several of the types of assets and liabilities in City of Dixon had recorded significant increases or decreases. Sterling’s other capital assets for the year ended 30 April 2010 was 26.41%. However, in Dixon's vertical analysis on other capital assets, it was 85.75%. This was because Dixon's financial statements were not broken down in detail. This might be due to hiding certain transactions of fraud. However, due to this, it reflected a red flag on the anomalies in the financial situations within both cities. Comparing the vertical analyses of Sterling and Dixon's land and construction in progress, we noticed that Sterling was at 17.45% for the year 2010. However, for Dixon, it was only at 1.9% in 2010. There was a drastic difference between the two cities, with Dixon using very little money for building or assembling. Therefore, it does prove that there was an anomaly. This could mean that Rita uses this account to siphon the money away hence showing the huge differences in the two accounts. For the 2 years, Sterling recorded a 55% increase in cash, but Dixon recorded a 63% decrease in cash, and this is a possible red flag. Both cities have similar economies, but Sterling experienced an increase in cash while Dixon experienced a decrease in cash, meaning that it is possible that in Dixon someone misstated the amount of cash. For the 2 years, Sterling placed nearly the same percentage of its expenditure for public works, but Dixon increased the percentage of its expenditure for its public works by nearly 6%. However, it is seen that the public works are rarely done in Dixon, hence it is possible that the expenditure meant for public works was never used but recorded as used, a fraudulent action possibly done. Sterling has a smaller percentage of intergovernmental revenue over total revenues compared to Dixon. This means that Dixon received more of its total revenue from another government than from its citizens. Sterling received more of its total revenue from its citizens than from another government. Despite the same tax rate and similar population numbers in both cities, Dixon recorded a significantly less amount of tax revenue than Sterling. This is a possible red

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flag as Crundwell may have siphoned some of the tax revenue but due to the people around her lacking knowledge that only Crundwell has, she can do it without anyone knowing. There was a huge fall in investment for the City of Dixon compared to City of Sterling. Investment for City of Sterling was 24.95% at the end of 30 April 2009 and 24.12% for total assets at 30 April 2010. City of Dixon made 5.96% investment on 30 April 2009 and 0.84% for total assets on 20 April 2010. This shows that the City of Dixon made a huge deficit while the City of Sterling recorded a small deficit in investment. This means Crundwell’s fraud made a huge impact on the City’s fund. For liabilities, City of Sterling has a 66% increase of accounts payable while City of Dixon has 51% decrease in vouchers payable. City of Sterling is facing an increase in cash balance while City of Dixon is facing a great amount of debt being paid, which means that there is little cash for the City. This could show that Dixon has been using up a large sum of bills that are owed by companies to vendors and suppliers, assumed to be by Crundwell. For other capital assets, City of Dixon has a net depreciation of 71% of the total assets while City of Sterling has a net made up of 26.74% at the end of 30 April 2009. At the end of 30 April 2010, Dixon faced more depreciation of 85% and Sterling had 26.41%. It is assumed that have used up most of the money for personal use such as buying her two large houses, house barn, jewellery and many more. Sterling was also financially responsible for CGH Medical Center, which is the component unit of Sterling as stated in the financial statements of Sterling. Dixon did not have any component units to include in the City’s financial statements. A component unit is defined as an entity or non-profit benefiting a government by soliciting contributions and managing the funds such as utility companies, foundations, charter schools, housing authorities and not-for-profit organizations. It is a legally separate organization for which the elected officials of the primary government are financially accountable. Noting that in 2009 and 2010 Dixon did not have a component unit as compared to Sterling, this exclusion of the component unit also showed that the reporting entity’s financial statements would be misleading and could be a red flag for possible misappropriation of funds.

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References All The Queen’s Horses 2017, streaming video, Gravitas Ventures, El Segundo, California, viewed 14 March 2020, . Former Dixon Comptroller Rita Crundwell Sentenced To Nearly 20 Years In Federal Prison For $53.7 Million Theft From City 14 February 2013, Department of Justice, U.S. Attorney’s Office, Northern District of Illinois, viewed 15 March 2020, . GASB, Summary of Statement, viewed 25 March 2020 . Intergovernmental Revenue n.d, AccountingTools, viewed 27 March 2020, . Pearce, M 2015, ‘How one of the biggest swindlers in American history built a horse-breeding empire’, Los Angeles Times, 1 November 2015, viewed 27 March 2020, . What is a Governmental Component Unit? 8 January 2019, Carr, Riggs & Ingram, viewed 25 March 2020, . Why does an increase in accounts payable appear as an addition on the statement of cash flows? n.d, Accounting Coach, viewed 26 March 2020, .

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