Most people are familiar with two of the names above; Charles Ponzi’s 1920’s era scheme cost his investors more than $200 million in current dollars and spawned the name of the “Ponzi scheme” that Bernie Madoff used to commit his $17.5 to $20 billion (yes with a “B”) fraud that was exposed in 2008 (still the world’s largest financial fraud). However, when accounting for the scope of the fraud relative to the environment in which it occurred, Rita Crundwell’s $54 million fraud might take the cake.
Employed by her hometown of Dixon, Illinois since 1983, Ms. Crundwell began her scheme in 1990 and over the next 20+ years embezzled approximately $54 million from an annual town budget of $6 to $8 million dollars per year. In some years, Ms. Crundwell embezzled more than 50% of the town budget. Her embezzlements created budget shortfalls that resulted in millions of dollars in budget cuts and hiring freezes over the course of her scheme. How did she do it?
Ms. Crundwell opened a bank account in the city’s name that she controlled and only she knew about. She then transferred city funds into this account and created fictitious paperwork to provide support for the transactions. Her scheme was not detected by the city’s auditors or state financial reviews and she provided apparently satisfactory answers when city leaders questioned why there were budget shortfalls. Her scheme finally collapsed in 2011 when a city employee discovered the secret bank account while opening the mail when Ms. Crundwell was on vacation. Ms. Crundwell pled guilty and earlier this year was sentenced to 19½ years in prison and ordered to pay restitution to the city (it is hoping to recover 20% of the amount taken).
This case highlights two common internal control issues. First, it is important that key duties are divided amongst more than one person. Because the town trusted her – and had a very small staff – Ms. Crundwell controlled too many aspects of the town’s financial processes. That control allowed her to authorize and document the transactions moving money from the town’s account to the account that she controlled. Second, vacations can provide more than just rest and relaxation for employees. The vacation caused absence of the person committing a fraud may create a window through which the fraud can be identified (as it was here).
What do you think – was Ms. Crundwell’s fraud the most amazing of these three? Has one of your clients been victimized in a similar fashion? If so, how was the fraud discovered? Please share your stories (no names needed) in the comment section below.