Below are three of several articles on the conviction and methods related to a $3.8-million school district fraud in Wake County, NC - home of the famous Wake Forest University. Several people went to jail, and they finally created an internal audit department. Notice that another "unexpected consequence" is that the evidence of poor management by the elected officials may result in an upcoming school bond issue being turned down by the voters. Can you guess how the reputation of elected officials was affected by the fraud? I changed certain statements to red, italic so they were not missed.
The third article, from March, 2006, describes some specifics of how the fraud took place, quoting a report from a consultant. It said that many fake invoices under $2500 were submitted because they only required one signature. One thing that internal audit departments do to find these situations is do a computerized accounts payable aging report that would show all payments by vendor with a grand total. This would clearly have shown a huge string of small payments to one vendor - but apparently neither the existing finance staff or one internal auditor knew of that technique and did not do it.
vj
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Dated: Sept. 19., 2006
From: http://www.newsobserver.com/211/story/488122.html - this link also contains links to several other articles about the fraud.
The prison terms and fines nearly wrap up the $3.8 million conspiracy in Wake
Four people were sentenced in the fake-invoice scam, which cost the Wake school system at least $3.8 million in taxpayers' money. Several employees of the school transportation department and Barnes Motor & Parts Co. in Wilson participated in the scheme.
"Perhaps it's this feeling that stealing from the government is really not stealing," Wake Senior Resident Superior Court Judge Donald W. Stephens said in court. "Stealing from the government, in a democracy, is stealing from us all -- especially when you steal from the citizens in a time when budgets are tight and teachers have to buy their own supplies."
Although the criminal chapter is being closed, the reverberations may be felt for some time.
School leaders hope the sentences, nearly $5 million in recovered money and fines and various anti-fraud measures will help them regain the public's trust. Critics warn that the case will hurt the school district at the polls in November, when voters will decide a bond referendum for school construction.
In court Monday, Carol Dail Finch, whom investigators had painted as the ringleader, got a reprieve.
Finch, 43, was sentenced to between five years, 10 months and seven years, nine months in prison -- a shorter stretch than two others involved. She was fined $100,000. In December, Finch pleaded guilty to felony fraud charges but turned down a deal that would have sent her to prison for at least nine years.
"She didn't have the authority to make this happen by herself," Wake District Attorney Colon Willoughby said Monday. "I will say my assessment of her relative culpability has, in fact, changed."
Former Barnes managers Bobby Joe Browder Jr. and Connie Capps both got between four years, 10 months and six years, seven months. Capps was fined $500,000.
Finch's former assistant, Pamela Allen Stewart, was sentenced to 60 days in jail and five years of probation, and was ordered to pay $39,597 in restitution.
Late Monday, Stephens explained why Finch got a minimum sentence just a year longer than those of Browder and Capps:
"She turned out to be more akin to the others who made plea arrangements," he said. "I thought her cooperation was significant, and I gave her credit for that."
Finch cooperated with prosecutors, testified at their behest returned goods and detailed her emotional and medical problems in a letter to the judge.
Before Monday's sentencing, she walked nervously in the third-floor lobby of the Wake County Courthouse, gripping four bottles of prescription medication.
She watched as Capps, then Browder and Stewart were led away by deputies, then cried when it was her turn to sit in the defendant's chair.
"I'm just sorry for everything's that happened," she muttered in a brief statement to the judge.
"Yes, ma'am," Stephens said. "I'm sorry too."
Although school administrators think their loss was $3.8 million and have recovered $4.86 million in cash, goods and fines, investigators say they'll probably never know how much was actually stolen.
Since the fraud was discovered, the school district has hired internal auditors and other fiscal administrators to monitor each department's spending. Surprise internal audits are being conducted, and a fraud hot line was set up.
Patti Head, chairwoman of the school board, said, "I'm trusting that people looking at it will appreciate the things that happened after the fraud, that evil people did evil things and the positive things that came out of this."
State Rep. Russell Capps, president of the Wake County Taxpayers Association, said there will always be a lingering suspicion of how the school district is spending taxpayers' money.
"I'd like to think it won't happen again, but there's always going to be doubt from people," he said.
Capps said the distrust will carry over into opposition to fall's $970 million school bond referendum.
North Raleigh parent Kim Lewey said concerns about mandatory year-round schools will have far more impact on the bond campaign. But she said the fraud shocked people like her who are strong school supporters.
"It has opened many eyes that were assuming things were going along well," Lewey said.
Employees of the Wake County school district and Barnes Motor & Parts Co. exchanged phony invoices over a period of at least two years. Barnes would send fake invoices to the transportation department in amounts small enough to require only the signature of Vern Hatley, the former school transportation director. Although Barnes never filled the phony orders, the school district paid the bills. The money was used by Barnes and school transportation employees to buy luxury items such as large-screen TVs, vehicles and Jet Skis. WHO WAS BEHIND IT Carol Dail Finch, 43: District attorney called former transportation department budget analyst the "catalyst' in the scheme. Helped steal millions of dollars to buy home, SUV, golf carts, other luxury items. Pleaded guilty in December to fraud charges but rejected plea deal of at least nine years in prison. Cooperated with prosecutors, turned in goods that grossed $97,975 at auction; and school district got $16,215 from sale of her home in Benson. Sentence of five years, 10 months to seven years, nine months; fined $100,000. Bobby Joe Browder Jr., 44: Former Barnes Motor & Parts Co. regional manager pleaded guilty to fraud charges, though he got only about $3,000 worth of goods. Has repaid that amount. Described as loyal employee who wanted to make sure the company did well, turned a blind eye to the fraud. Got annual bonuses of $5,000 to $10,000 from Barnes. Sentenced to between four years, 10 months and six years, seven months in prison. Connie Capps, 54: Former Raleigh store manager for Barnes pleaded guilty, returned several items that were auctioned off for $192,100. Sentenced to between four years, 10 months and six years, seven months; fined $500,000. Pamela Allen Stewart, 38: Former secretary to Finch admitted helping to cover up fraud, accepted gifts, accompanied Finch on shopping trips financed by fraud. Returned $11,000 worth of goods. Sentenced to 60 days in Wake County jail, five years' supervised probation and ordered to pay $39,597 in restitution. Harold Ray Estes, 61: Only one charged who went to trial and only one who was not Barnes or school employee; married to Capps. Prosecutors said that more than $500,000 in stolen money went through his personal account and that he kept $140,000 to $200,000. Returned several items that he co-owned with Capps and a John Deere motor that school district decided to keep. Convicted of fraud and conspiracy, serving to 11 to 15 years in prison, fined $500,000. Vern Hatley, 58: Former school transportation director repaid $47,722 for goods he admitted getting from Barnes. As with other defendants, how much he actually profited remains unknown. Began serving seven- to 10-year prison sentence in February. Angela Malloy-Sanders, 49: Former transportation department employee pleaded guilty to helping cover up the fraud. Agreed to repay $39,932 in goods, returned items auctioned for $9,700. Other items, such as wide-screen TV and laptop computer, being kept by school district. Filed for bankruptcy. Because of a health issue, she will be sentenced in a few weeks. Barnes Motor & Parts Co.: Wilson vehicle parts company supplied parts to school district, held responsible in fraud case. Paid $2.5 million criminal fine. Including fine, Barnes has turned over $4.5 million in cash and items to school system. OTHERS NOT CHARGED Phil Lambert, former transportation information management system manager, repaid $800 for gift cards, plus other goods, but wasn't charged. Neither was Mike Wade, former area bus transportation manager, who agreed to repay $4,588 for a storage unit and returned a pickup truck that was auctioned, plus several items co-owned by Finch, his former girlfriend. Dewayne's Home & Garden in Selma paid the school district $6,000 for gifts from Finch but wasn't involved in the scheme. COMPILED BY T. KEUNG HUI AND CINDY GEORGE |
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Article 3 - published March 8, 2006
Consultant wants tighter oversight
Public pressure had been mounting on the school board to bring in an outside auditor after the theft of money from the transportation department and the cafeteria at Garner High School.
The board hired Birmingham, Ala.-based Summerford Accountancy PC -- chosen over five other firms because it specializes in fraud cases -- in hope of restoring public confidence. The board agreed in November to pay Summerford up to $470,000 to conduct the audit.
Summerford's review didn't find anything to warrant a more detailed fraud examination, but company officials said that steps can be taken to correct situations that could lead to fraud if not corrected.
"Your internal control system is adequate, but you need to be more proactive," said Kelly Todd, the senior manager for Summerford who led the audit team.
School board members focused on the good news about the lack of fraud detected in other departments.
"We're better because of the changes we've made, but other than that one breach, we were not bad before that," said board member Beverley Clark.
Investigators say employees in the school transportation department and Barnes Motor & Parts Co., based in Wilson, conspired to submit at least $3.8 million in fraudulent invoices for parts. Much of the money was used by the employees to buy personal items such as automobiles, campers, golf carts and plasma-screen televisions.
On Friday, Barnes pleaded guilty to criminal charges and agreed to provide an additional $3 million that will go to the school district. The district has recovered $4.8 million from Barnes and the former employees.
Summerford reviewed transactions throughout the school district made between July 1, 2002, and Dec. 31, 2005. Todd said the only red flags were the transportation department's dealings with Barnes.
For instance, the transportation department's payments to Barnes increased 342 percent from 2002 to 2003, an increase of more than $3.7 million. The review also found that almost all of Barnes' transactions one year, and all in another year, were less than the $2,500 that would have required competitive bidding.
They found that on 24 occasions, 50 or more invoices with the same date were submitted. There were 466 invoices dated June 10, 2003, totaling $909,266.
"Given that we know that fraud took place, had we looked at it more proactively, I believe the fraud would have been detected much sooner," Todd said.
Todd said the fact that the district had only one internal auditor at the time didn't allow for a proactive approach.
Although no other fraud was found, the audit raised questions, such as how money is paid to rent school facilities and how detailed cafeteria transaction data are kept only at the school level.
The district has implemented changes such as hiring additional internal auditors, more substantive reviews of invoices and payment requests and creating an anonymous tip line to report fraud.
Overall, the company praised the district for setting a tone that discouraged fraud.
"I commend the school board for taking this stand and sending out the message that fraud will not be tolerated in this organization," Todd said.
Schools Superintendent Bill McNeal said the district will try to implement the recommendations.
Patti Head, chairwoman of the school board, expressed optimism that the audit will accomplish its mission of boosting public confidence, something that will be needed to win public support for a bond issue on the November ballot that could exceed $1 billion.
"I think [the public] will see we're doing everything we can to reassure them and that what happened in the transportation department and child nutrition was an anomaly," Head said.
