David Anderson is principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation, fraud deterrence, litigation support and expert witness testimony services in Philadelphia and the Delaware Valley. . . . In this, the first of a two-blog series on municipal fraud, Certified Fraud Examiner David Anderson shows how an innocent act can grow into a felony theft.

The fraud started almost by accident.

Randy, a maintenance supervisor at a mid-sized Pennsylvania township, was buying personal items at the local Home Depot and had forgotten his credit card.  However, he did have a township-issued Home Depot card which he used for purchasing maintenance supplies for the township.  So, he used the township Home Depot card, intending to reimburse the township for his purchase (and, incidentally saving on state sales tax since the township was exempt).  Randy forgot to mention his purchase to the township treasurer and never was approached about his unauthorized purchase.

A few months later, Randy decided to remodel one of his home’s bathrooms.  He remembered he had never been approached about his previous purchase, so he decided to use the township’s Home Depot card to buy the materials and supplies for his remodeling.  He even had Home Depot ship the materials directly to his home.

He promised himself if the township came to him about the purchases, he would reimburse the township (he figured even if he had to reimburse the township, he would still have saved the state sales tax on the purchases).  But again, no one came after him for the purchase.  Of course, Randy continued to make personal purchases using the township’s Home Depot card.

That’s not all: Randy also had a township-issued gasoline card which he used for purchasing gasoline and other supplies for township vehicles from the local truck stop.   One day, Randy took his F-150 pick-up truck to the truck stop and used the township gasoline card to fill his tank.  Again, he promised himself he would reimburse the township if they came to him about these purchases. Still, no contact from the township.

One time, unbeknownst to Randy, one of his senior employees, Chuck, saw him using the township gasoline card to fill his tank.  He spoke to Randy about what he had seen. Randy told Chuck if he kept his mouth shut, he could use Randy’s township gasoline credit card to fill his own personal vehicle’s tank.  And so, for the next year or so, Randy and Chuck had their personal vehicle’s gasoline paid for by the township.

This might have continued for a longer period, but one night, Chuck had a little too much to drink, and started bragging to his neighbor about how he never paid for gasoline any more.  His alarmed neighbor called the township and left an anonymous message on the township’s answering machine about Chuck’s actions.  The township’s treasurer started to investigate, and, noted the many unusual after hour purchases on Randy’s township-issued gasoline card.

Based upon this preliminary investigation, the Board called in David Anderson and Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation, to investigate among other things, all credit card use by township employees, as well as purchasing practices of the township.

Our investigation found Randy’s Home Depot purchases as well as other instances of township employees using township credit cards for personal purposes. Additionally, we noted instances of purchases of equipment and other significant items, including office supplies, which had circumvented the normal competitive bidding practices of the township.

These cases did not involve Randy, but rather the Township treasurer.  In one case, a $77,000 piece of heavy equipment was purchased with 16 different invoices of less than $5,000 each (the expenditure amount which triggered additional levels of approval).  Needless to say, Randy, Chuck, and the treasurer were all terminated.

We determined certain controls were lacking in the township’s procedures.  These included:

• No requirements that the purchase invoice be submitted for credit card and gas card purchases – only the charge slip;
• Even with the charge slip requirement, in less than 50 percent of the cases, the person using the credit card or gas card did not even submit the charge slip;
• No review of credit card or gas card transactions – neither the township treasurer nor anyone else regularly reviewed credit card or gas card transactions. The township merely paid each month’s credit and gas card statements.
• Lack of oversight and analysis of township financial transactions – none of the supervisors had responsibility for more in-depth oversight of the township’s financial transactions.

Additionally, there was no analysis of year-to-date expenditures against budget.  For example, we found because the heavy equipment purchase was disguised as purchases of maintenance and repair supplies, the township had used over 90 percent of its annual maintenance and repair supplies budget line item in the first three months of the current fiscal year.

In addition to recommending implementation of the above controls, we also recommended:

• Implementation of a policy prohibiting fraud.
• Implementation of anti-fraud training for township employees.
• Regular analysis of financial transactions below purchasing or authorization limits to identify attempts to circumvent purchasing controls (in this case, we recommended reviewing all transactions between $4,000 and $5,000).
• Implementation of a cost-efficient third-party tip hotline so township employees, vendors and others could provide anonymous tips regarding potential fraud, waste and/or abuse.

Based on these recommendations, the township engaged us to perform the above recommended analysis of township financial transactions (for which we used data mining software to facilitate the analysis) and anti-fraud training.

In next week’s blog, I’ll discuss some additional municipal frauds we investigated as well as the recommendations we made for preventing these frauds.

If you require the services of a forensic accountant, a Certified Fraud Examiner, or any other financial expert to help with fraud investigation, fraud deterrence, or other forensic accounting services in Philadelphia and the Delaware Valley, please contact the Philadelphia forensic accounting firm of David Anderson & Associates by calling David Anderson at 267-207-3597 or emailing him at david@davidandersonassociates.com.

About David Anderson & Associates

David Anderson & Associates is a Philadelphia forensic accounting firm that provides a full range of forensic accounting services in Philadelphia and the Delaware Valley.  The experienced professionals at David Anderson & Associates provide forensic accounting, business valuation, fraud investigation, litigation support, economic damage analysis, business consulting and outsourced CFO services.  Company principal David Anderson has more than 30 years of experience in financial and operational leadership positions and is a Certified Public Accountant, a Certified Fraud Examiner and a Certified Valuation Analyst.