AZ Auditor - Fraud Report

In July 2012, the Navajo County Attorney’s Office requested the Office of the Auditor General to assist in its investigation of potential theft at the Show Low Fire District (District). As a result of our investigation, we determined that from February 2005 to June 2012, Natalie Cluff, former district administrative manager, used a fraud scheme to embezzle public monies totaling $1,794,594, falsifying records to conceal her misconduct. The embezzled monies came from taxes paid by district property owners that should have been used to support district operations for fire protection and preservation of life.

Specifically, Ms. Cluff may have violated state laws related to theft, fraudulent schemes, and misuse of public monies when she unlawfully issued 474 checks totaling $1,794,594. In particular, Ms. Cluff issued 446 unlawful district checks totaling $1,623,465 payable in her name, her father’s name (district fire chief), or her then-fiancé’s name (district assistant fire chief), usually writing various false explanations for the checks’ purpose in the memo sections. All of the available checks were deposited in Ms. Cluff’s bank accounts.1 Ms. Cluff also issued another 28 unlawful district checks totaling $171,129 payable to personal credit card accounts associated with the above-listed individuals. Bank and credit card records show this money was primarily spent on retail-related purchases, cash withdrawals, and personal debt, with some money going to two of Ms. Cluff’s siblings.

In addition, Ms. Cluff may have violated state laws related to computer tampering, forgery, and false filing when she attempted to conceal her actions by falsifying information recorded in the District’s accounting software related to 150 of these unlawful checks and by submitting fake district Independent Auditor’s Reports to two entities a total of 11 times.

Ms. Cluff embezzled this nearly $1.8 million of district monies by abusing her authority as district administrative manager and by taking advantage of inadequate internal controls over the expenditure and reporting of district monies. Additionally, district officials, including Ms. Cluff’s father Ben Owens, failed to exercise oversight over Ms. Cluff’s activities. In particular, they did not adequately segregate cash disbursement duties, allowing Ms. Cluff access to check stock, check-register-accounting software, signature stamps, and bank statements without any compensating controls. Moreover, governing board officials failed to ensure Ms. Cluff was appropriately supervised, allowing her to report directly to her father or her then-fiancé.

On May 3, 2016, the Navajo County Attorney’s Office presented evidence to the Navajo County Grand Jury, resulting in Ms. Cluff’s indictments on 21 felony counts related to theft, misuse of public monies, fraudulent schemes, computer tampering, forgery, and false filing. In addition, Ms. Cluff and her father Ben Owens, were each indicted on four felony counts related to conspiracy, illegally conducting an enterprise, assisting a criminal syndicate, and money laundering.

1Deposit records were not available for ten checks dated between May and September 2005. The remaining 436 checks were deposited in seven of Ms. Cluff’s bank accounts: two of her own, two she held jointly with her ex-husband, two she held jointly with her parents, and one she held jointly with her then-fiancé.

In May 2012, the Arizona Attorney General’s Office informed the Office of the Auditor General of potential conflict-of-interest violations by former Pine-Strawberry Water Improvement District (District) Treasurer Michael Greer in regard to his involvement with the District’s award of an $89,700 contract to his former business. Consequently, we conducted an investigation during which we became aware of other potential misconduct by Mr. Greer with the District as well as with another entity for which he was treasurer, the Gila County Mounted Posse (Posse). Our investigation revealed that from April 2011 to February 2013, Mr. Greer may have violated state laws related to conflict of interest, theft, fraudulent schemes, and forgery. We have submitted our report to the Attorney General’s Office, which has taken criminal action against Mr. Greer resulting in his indictment on eight felony counts.

Mr. Greer abused his authority as district treasurer—Mr. Greer illicitly received from two district vendors a total of $65,895 after he participated in awarding district contracts to them totaling $110,700. Mr. Greer also improperly paid $2,299 of his personal and business expenses using his district credit card. In addition, Mr. Greer forged a district letter falsely asserting that the District had received $31,565 in cash deposits from himself.

Mr. Greer abused his authority as posse treasurer—Mr. Greer spent $38,706 of posse money for personal benefit. Specifically, he paid his personal and business expenses by withdrawing cash and writing checks from the posse bank account and by using a posse debit card. He also orally presented false treasurer’s reports, concealing the Posse’s true financial condition by fraudulently overstating bank account balances 12 times at posse governing board meetings.

Although no internal control system can completely prevent dishonest behavior such as Mr. Greer’s, there are ways to help ensure officials properly safeguard and control monies for which they have fiduciary responsibilities. Governing boards should require all board members and certain personnel to complete conflict-of-interest forms every year. In addition, governing boards should develop and implement purchasing policies and procedures that ensure monies are properly controlled and expended. These policies should provide for a clear separation of responsibilities regarding the disbursement of monies so that individuals preparing checks do not also sign them and supporting documentation, such as invoices or contracts, is reviewed for propriety by a separate authorized individual. Additionally, board members should regularly review bank statements to ensure bank accounts are authorized and that reconciliations between the bank statement and check register are independently performed and reviewed.

Our Office received information that some entities have received phishing scam emails that appear to have been sent by upper management and request business office officials to divulge private information or process a wire transfer. Although these emails may appear to be legitimate, they are not. This alert outlines how public officials and other employees can recognize a phishing scam and reduce the risk of loss due to unapproved and erroneously processed transactions, specifically by familiarizing themselves with the general characteristics of phishing scam emails and ensuring that they take the appropriate actions should they receive a suspicious email.

As part of its responsibility to prevent and detect fraud, the Mohave County Community College District (District) administrators took appropriate action by reporting a fraud allegation to our Office. Consequently we conducted an investigation revealing that from October 2012 to April 2013, Trisha Moon, former district clerk at the Dental Hygiene Clinic (dental clinic), may have violated state laws related to theft, misuse of public monies, fraudulent schemes, and computer tampering when she embezzled $1,849 of district dental clinic cash payments. Specifically, Ms. Moon took for herself 46 cash payments made by dental clinic patients that should have been deposited in district accounts for the benefit of the dental clinic and its students. Ms. Moon was able to conceal her actions because she took advantage of the District’s inadequate controls over collecting, recording, and depositing dental clinic monies and manipulated the dental clinic’s computer program information and deposit records without being detected. On June 24, 2016, the Mohave County Attorney’s Office filed a criminal complaint with the Bullhead City Justice Court, alleging that Ms. Moon committed theft, misuse of public monies, fraudulent schemes, and computer tampering against the District.

As part of its responsibility to prevent and detect fraud, Northern Arizona University (University) management took appropriate action by reporting a fraud allegation to both its police department and the Office of the Auditor General (Office). The university police department subsequently requested our Office to investigate the allegations of financial misconduct by Edwin Talley, former university postal services manager, and we determined that from July 1997 through January 2013, Mr. Talley used a fraud scheme to embezzle public monies totaling $354,902. The embezzled monies came from university revenues that consisted primarily of state appropriations and students’ tuition and fee payments, and should have been used to pay for services provided to university students. We have submitted our report to the Coconino County Attorney’s Office, which has taken criminal action against Mr. Talley resulting in his indictment on six felony counts.

During this 15½-year period, Mr. Talley may have violated state laws related to theft, misuse of public monies, fraudulent schemes, and money laundering when he caused the University to issue 245 checks and make 12 purchasing card payments totaling $354,902 to two fictitious vendors he created. The majority of these checks were fraudulently endorsed and deposited in a credit union account he jointly held with another person, and monies were generally withdrawn or transferred to one of Mr. Talley’s separately held bank and credit union accounts within a few weeks. The purchasing card payments were directly credited to another of Mr. Talley’s bank accounts. All of the embezzled monies were commingled with other monies and spent by Mr. Talley for his personal purposes. To orchestrate and help conceal his schemes, Mr. Talley falsified information in the University’s accounting software, submitted fictitious invoices, and fabricated purchasing card records.

Mr. Talley embezzled this money by abusing his authority as university postal services manager, a position he held for over 36 years. He also took advantage of former university officials’ poor oversight of his activities. In particular, management did not monitor or take steps to ensure employees were appropriately following policies and procedures designed to protect public monies. Accordingly, management was unaware that employees falsely verified the receipt of postal supplies never received and improperly shared their accounting software login credentials. Additionally, management did not adequately train employees to investigate invoice anomalies or reconcile purchasing card reports to bank software, either of which actions could have revealed Mr. Talley’s fraud scheme.

With the 2012 implementation of new accounting software, university officials improved certain internal controls which, when combined with a university-wide review of purchasing card activity, led to their discovery of Mr. Talley’s fraud schemes. In addition, in the time since the Office’s investigation began, management reported that they implemented other improvements to controls over university monies such as adding purchasing card software that disallows purchasing card users from manipulating activity statements. Management also implemented a new conduct, ethics, reporting, and transparency program, which outlines employees’ legal and ethical obligations to the University. Finally, management also conducted an employee training regarding internal controls and financial transactions, and mandated that employees not share their login credentials.

The unauthorized use of signature mechanisms can lead to the theft and misuse of public monies. In fact, we recently issued a report detailing a fire district employee’s misuse of signature stamps resulting in that employee embezzling nearly $1.8 million dollars of public monies. This employee was indicted on 25 felony charges. However, effective controls over signature mechanisms could have helped prevent this embezzlement. This alert outlines how public officials can help protect public monies and deter and detect fraud by developing and implementing policies and procedures regulating the use of signature stamp mechanisms; restricting the use of these mechanisms to the person whose signature is represented; and ensuring the appropriate segregation of duties for those employees who have access to these mechanisms.

During the Auditor General’s fiscal year 2015 performance audit of the District, we investigated payroll anomalies revealing that from August 2013 through January 2016, Denise Burden, former payroll clerk, may have violated state laws related to theft, misuse of public monies, fraudulent schemes, and forgery when she paid herself unauthorized overtime totaling $23,504 and prepared documents containing her supervisors’ forged signatures 18 times. She embezzled monies from state appropriations that should have been used to support the District and benefit its students. We have submitted our investigative report to the Attorney General’s Office, which has taken criminal action against Ms. Burden resulting in her December 20, 2016, indictment on 14 felony counts.

As part of its responsibility to prevent and detect fraud, the Phoenix Union High School District (District) administrators took appropriate action by reporting a fraud allegation to our Office. We conducted an investigation revealing that from December 2012 through January 2016, Julie Kendall, former controller, illicitly altered district payroll software information, falsely reducing income amounts reported to federal and state taxing authorities for herself and her sister (also a district employee). Additionally, Ms. Kendall’s actions caused the software to generate electronic deposits of $4,400 and $4,000 to her and her sister’s respective bank accounts. We have submitted our report to the Attorney General’s Office, which, on July 24, 2017, presented evidence of Ms. Kendall’s alleged crimes to the Arizona State Grand Jury, resulting in her indictment on 13 felony counts.

We conducted an investigation revealing that from December 2008 through July 2013, the former business manager for Topock Elementary School District (District) misused $236,548 of district monies that should have benefited the students. The former business manager misused $138,611 of these monies for herself, $75,455 for her daughter, and $22,482 for one of her associates who did business with the District. The former business manager and her associate passed away in February 2017. We have submitted our report to the Arizona Attorney General’s Office, which, on August 8, 2017, presented evidence to the Arizona State Grand Jury. The action resulted in the indictment of the former business manager’s daughter, Sarah Diaz, on 13 felony counts.

As part of its responsibility to prevent and detect fraud, Santa Cruz County management took appropriate action by reporting a fraud allegation to a law enforcement agency and to the Office of the Auditor General. The County subsequently requested our Office to investigate the fraud allegations, and we determined that from March through April 2015, Gary Shadrick, former landfill supervisor, may have violated state laws related to theft and misuse of public monies when he embezzled $8,233 of landfill receipts that should have been used to support county operations. We have submitted our report to the Santa Cruz County Attorney’s Office, which on September 15, 2017, filed a criminal complaint with the Nogales Justice Court alleging that Mr. Shadrick committed theft and misuse of public monies against the County.

The Gila County Attorney’s Office reported a fraud allegation to the Office of the Auditor General involving Rebecca Sigeti. Ms. Sigeti was the accounting manager for Pine-Strawberry Water Improvement District (District) and the accountant for a private business, Sunny Mountain Realty, LLC (Sunny Mountain). Our investigation of Ms. Sigeti revealed that from August 2010 through January 2016, she may have embezzled a total of $841,056 from her employers: $524,686 from the District and $316,370 from Sunny Mountain. The alleged embezzled district monies came from customer security deposits and water-use payments as well as taxpayer property tax payments and should have been used to support district operations. We have submitted our report to the Arizona Attorney General’s Office, which has taken criminal action against Ms. Sigeti resulting in her indictment on 40 felony counts.

Using data analysis techniques with risk-based assessments to identify trends, patterns, anomalies, and abnormal relationships in data can be an effective anti-fraud control. Regularly using these techniques on your organization’s data and investigating findings can help your organization identify fraudulent activity before it becomes significant. This Fraud Prevention Alert, the first in a four-part series, describes the different data analysis techniques and outlines how public officials can help protect public monies by establishing proactive data monitoring and analysis programs to prevent and detect fraud. The three Fraud Prevention Alerts following this one will provide practical applications for using techniques from each of the three data analysis categories: basic, statistical, and advanced.

The Arizona Attorney General’s Office informed the Office of the Auditor General (Office) of alleged misuse of public monies by Steven Grosz, East Valley Institute of Technology (EVIT) teacher. Our investigation revealed that from February through May 2013, Mr. Grosz may have embezzled $3,750 of public monies that should have been used to support EVIT’s radio station operations. Mr. Grosz also altered two financial reports he submitted to EVIT officials during their inquiry of his alleged misuse of EVIT monies. We have submitted our report to the Arizona Attorney General’s Office, which on November 6, 2017, presented evidence to the Arizona State Grand Jury. The action resulted in the indictment of Mr. Grosz on four felony counts of theft, misuse of public monies, and forgery.  

As part of its responsibility to prevent and detect fraud, Western Arizona Vocational Education District (WAVE) officials took appropriate action by reporting a fraud allegation to our Office. Our investigation revealed that from November 2011 through August 2016, Deborah Long, former business manager, may have embezzled $139,284 of public monies when she issued WAVE warrants to herself and her credit card companies, kept payments made by parents and others that should have been deposited in WAVE bank accounts, made personal purchases with WAVE credit cards, and gave herself an unauthorized payroll raise.  Ms. Long may have also falsified information in WAVE’s accounting software and governing board packets to conceal her actions. We have submitted our report to the Arizona Attorney General’s Office, which on July 30, 2018, presented evidence to the Arizona State Grand Jury. The action resulted in Ms. Long’s indictment on seven felony counts related to theft, fraudulent schemes, and misuse of public monies.

The Arizona Attorney General’s Office requested the Office of the Auditor General to assist in its investigation of potential fraud by Stephen Banta, former Valley Metro chief executive officer. Our investigation revealed that from April 2010 through October 2015, Mr. Banta may have abused his authority and caused Valley Metro to pay $32,491 of his and his wife’s personal travel, meal, and alcohol expenses, falsifying certain Valley Metro records to conceal his actions. On September 10, 2018, Mr. Banta pleaded guilty to one felony count of fraudulent schemes and practices.

As part of its responsibility to prevent and detect fraud, the Glendale Union High School District (District) took appropriate action by reporting a fraud allegation to our Office. Our investigation revealed that from May 2015 through July 2017, Eunice Lopez, former attendance secretary at Sunnyslope High School, may have misappropriated $3,455 of Sunnyslope student parking permit payments and used them for her own personal purposes. We have submitted our report to the Arizona Attorney General’s Office, which presented evidence to the Arizona State Grand Jury on August 27, 2018. The action resulted in Ms. Lopez’s indictment on five felony counts related to theft, misuse of public money, and fraudulent schemes.

The Navajo County Attorney’s Office requested the Office of the Auditor General to assist in its investigation of potential fraud by Silver Creek Irrigation District’s (District) former bookkeeper. Our investigation revealed that from August 2011 through December 2016, the former bookkeeper withdrew $829,400 of district monies and reportedly gave it all to his friend, Margaret Rogers. Ms. Rogers knew, or should have known, the monies she requested and received from the former bookkeeper were district monies. Some of these monies were purportedly deposited in and spent from the joint checking account she held with her husband, Russell Rogers. We have submitted our report to the Navajo County Attorney’s Office, which on September 11, 2018, presented evidence to the Navajo County Grand Jury. The action related to our report resulted in Ms. Rogers and Mr. Rogers each being indicted on five felony counts related to theft, conspiracy, assisting a criminal syndicate, and money laundering, and Ms. Rogers being indicted on three additional felony counts of fraudulent schemes. The former bookkeeper passed away in February 2018.

As presented in our November 2017 Fraud Prevention Alert—Data Analytics: Part 1, using risk-based assessments and data analytic techniques to identify trends, patterns, anomalies, and abnormal relationships in data can be an effective anti-fraud control. In fact, data monitoring and analysis techniques have been correlated with the largest reductions in global fraud loss and duration, but only 37 percent of victimized organizations implemented these controls. Data analytic techniques can be separated into three categories for practical applications: basic, statistical, and advanced. This alert, the second in a four-part series, focuses on the practical applications for basic techniques and describes how using these techniques on an organization’s data and investigating associated findings can help public officials identify fraudulent activity before it becomes significant.

The Arizona Attorney General’s Office requested the Office of the Auditor General to assist in its investigation of possible conflict-of-interest violations by Laura Smith, former chief financial officer of Scottsdale Unified School District (District). Our joint investigation revealed that from February 2017 through January 2018, Ms. Smith failed to disclose her substantial interest with a district vendor, The Professional Group Public Consulting, Inc. (PGPC), and she participated in district decisions affecting PGPC. On January 23, 2019, the Arizona Attorney General’s Office presented evidence to the Arizona State Grand Jury. The action resulted in the indictment of Ms. Smith on 12 felony counts of conflicts of interest and fraudulent schemes.

For the year ended December 31, 2017, we issued 6 financial investigations that led to prosecuting agencies obtaining 86 criminal charges against 6 individuals for losses totaling $805,121. These charges related to theft, misuse of public monies, fraudulent schemes, money laundering, computer tampering, forgery, theft of a credit card, and preparing a false tax document. Further, 5 individuals previously charged as a result of our financial investigations pleaded guilty in 2017 to charges related to misuse of public monies, theft, fraudulent schemes, and conspiracy. These individuals were sentenced to 16 years of incarceration and $2,335,448 in restitution.