All the Queen’s Horses – Like Parks & Rec + Fraud

This one comes with a movie so grab some popcorn. The documentary All the Queen’s Horses moves around to different streaming services so Google it and grab it. It’s about 75 minutes long and worth it.

I try to make sure that every new employee of Fastpath sees this. It helps explain why we matter.

Dixon, IL is a modest city with a population of 15,800. Their annual budget is $8-9 million. Over a number of years, their controller Rita A. Crundwell stole $53 million from 1991 through 2012. I’m going to let that number sink in.

On December 8, 1990, Crundwell set up a secret bank account named the Reserve Sewer Capital Development Account (RSCDA). This was not actually a city account, but it looked like one, and Crundwell was the only signatory. Crundwell would move money into the Capital Development Fund. She would then create false state invoices payable to “Treasurer, State of Illinois” and generate checks payable to “Treasurer”, conveniently leaving out the State of Illinois part. Crundwell was the treasurer of the city of Dixon. Those checks were then deposited into the RSDCA account. Her process made it appear that she was making payments to the state when in fact she was moving money into an account over which she had sole control.

Rita was able to accomplish this because she had full control. She opened the mail, processed invoices, prepared checks, signed checks, managed the accounting system, and performed the bank reconciliation. She did this for 22 years.

Rita started small, stealing only $181k in her first year. But her thefts increased from there. In 2008 she stole $5.8 million from a city with a budget of $8-9 million. She averaged about $2.5 million a year over 22 years.

It gets worse, the city had a budget and was audited every year. Crundwell managed the budget and she managed to fool the auditors.

Rita got caught when she took an extended vacation. Her replacement asked the bank for a list of all bank accounts and found the RSCDA account. Forcing accounting personnel to take vacations is actually a control point. A surprising number of frauds are identified because while the fraudster is out. Often the fraudster is described as “hardworking, they never take vacations”.

What did Rita do with all the money? She didn’t blow it on cattle futures, she bought show horses…expensive show horses, and she ran a horse breeding operation. By all accounts, she was good at her hobby too. Her horses won 52 world championships and she was named a leading owner by the American Quarter Horse Association for eight consecutive years. She also had all the accessories like a farm and a multimillion-dollar motorhome for traveling to horse shows.

There were red flags. The city ran a deficit while surrounding cities ran surpluses. Crundwell blamed budget shortfalls on the state being late with tax revenue shares. She was also living well beyond her means. Living beyond one’s means was the number one fraud indicator in every Association of Certified Fraud Examiners annual study since 2008. People had questions so they filled in with assumptions. She had inherited the money. Her horse breeding operation was very profitable, etc.

Fraud like this should be preventable or at least quickly detected. There are a lot of basic controls for this. First up segregation of duties. Rita Crundwell obviously had too much control of the process. No one person should have complete control of any process. Up next, getting a list of accounts from the bank. The auditors almost certainly confirmed the balances from a list Crundwell gave them. It wasn’t until someone asked the bank that Rita was caught. As an aside, bankruptcy investigators at FTX also had to go find all of their bank accounts.

Additionally, a big part of segregating duties is independent bank reconciliations. This is one of the few independent confirmations of company cash flows and the process is often treated as a chore instead of a critical tool. I’ve seen an otherwise very good controller fired because their team couldn’t produce timely bank reconciliations.

Finally, having a whistleblower option like a phone line, website, etc. is also an important defense here. Not everyone sees someone living beyond their means. People had questions about Crundwell’s lifestyle but no one spoke up.

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