Rita Crundwell was the type of person that everyone trusted. As the comptroller and treasurer of thesmalltownofDixon,Illinois,shewaswell-versedincompanyfinances.Wheneveranyonehada question, they were advised to "ask Rita." In 2011, the city commissioner praised Rita as someone who "looks after every tax dollar as if it were her own." What the commissioner and the rest of Dixon did not realize until the next year was that Rita Crundwell took this view quite literally.

In addition to her trusted position with the city, Rita was also a champion quarter horse breeder. She had won 52 world thoroughbred championships and owned hundreds of horses. The competitions often took Rita away from her city job, but she would dock her pay for the extra time shetookoff.In2011duringoneofhertrips,acityclerktookoverRita'sjobwhileshewasawayand came across a bank account in the city's name that made no sense to her. Money from the account was being used to purchase lavish items such as jewelry and boats. The suspicious account was reported to the mayor and then the FBI. After taking five months to build their case, the FBIarrested Rita Crundwell for municipal fraud on April 17, 2012.

The extent of the fraud was staggering. Rita Crundwell had first opened the fictional account in 1990, meaning that she had successfully stolen from the city for 22 years before being arrested. In thosetwodecadesshestoleover$53millionfromacityoflessthan16,000people.Dixon,Illinois known for being the boyhood home of President Ronald Reaganhas now gained the distinction of being the victim of the largest municipal fraud to date.

Rita Crundwall was born in 1953 to Ray and Caroline Humphrey. Although a family of modest means,Carolinelovedshowingquarterhorses,apassionthatRitainheritedasshegrewuponher family's farm. While one family member has expressed the belief that Rita was entitled as a child, nothing much about her situation growing up was indicative of the massive fraud she would one day orchestrate.

At age 17 Rita was hired as an intern at City Hall as part of a work-study program for high schoolers. In 1974, she married Jerry Crundwell and later divorced in 1986. Rita continued her positionatCityHallandprovedtobeaquicklearner.Everyonewassoimpressedwithherskills that she assumed the position of city comptroller and treasurer in 1983. In 1978 Rita began showinghorsesatshows.Thisstartedherlong-timepassionwithbreedingandshowingquarter horses. At the time of her arrest Rita Crundwell owned 400 quarter horses at different farms in Illinois and Wisconsin.

The year 1990 was a landmark year for Rita Crundwell. She began expanding her quarter horse operationsandherhome.InDecemberofthatyear,shealsoopenedasecretbankaccountunder

the city's name called the Reserve Sewer Capital Development Account (RSCDA). Crundwell used false invoices made out to "treasurer" to deposit city money into this account, which she then used to finance the beginnings of a highly lavish lifestyle. At first she started out stealing thousands of dollarsfromthecityayear.However,astimewentonwithouthergettingcaught,sheincreasedthe amount of money she stole. Before her arrest, she was stealing millions each year. To hide her fraud,Ritacollectedallthecitymailfromapostofficeboxandhadarelativecollectthemailforher when she was out of the office.

During the two decades of the fraud, Rita purchased hundreds of horses, expanded her home, bought a home in Florida, and purchased a number of vehicles and motor homes. Among her purchases was a luxury motor home worth $2.1 million. Meanwhile, Rita established a name for herselfinthequarterhorseindustryandwon52competitions.Hertrophiestookupanentireroom at her house. Eight years before her arrest, Rita was named the leading owner for the American Quarter Horse Association.

One of the city clerks that worked with Rita Crundwell, Kathe Swanson, was the one whodiscovered the fraud. Kathe was used to Rita telling her which bank accounts she should request from the bank. But in 2011 Kathe was taking over Rita's job while Rita was out on vacation. In a hurry, Kathe called the city's bank, Fifth Third Bank, and requested allof the accounts under the city's name. Among the accounts she received was the RSCDA account, an account of which Kathe hadneverheard.Lookingatthetransactions,shewassurprisedtoseethatmoneyfromtheaccount was being spent on items that were clearly not city business, such as horses and jewelry.

KathetooktheinformationtothemayorofDixon,JimBurke.MayorBurkereportedthefraudtothe FBI,andforthenextfivemonthsbothheandKatheworkedwiththeFBItobuildacaseagainstRita as she continued to siphon city funds for her own personal use. In April Rita was arrested. She reportedly showed little emotion at her arrest.

During the next year, the extent of the fraud came out. Citizens were stunned when they realizedthe person they had trusted had stolen more than $53 million in city funds over the years. What upsetmanyindividualsisthatinordertostealthemoney,Ritahadtomakecutsinotherareas.This included denying resources to city departments. For instance, the superintendent of Dixon's street department claims that streets could not be resurfaced or vehicles replaced. He was constantly told by Rita that the city did not have enough money.

InNovemberRitapleadedguiltytofraudinafederalcourt.Prosecutorsaskedfor20yearsofjail time. Rita's attorney asked for a lighter sentence because of her cooperation with authorities.

However, U.S. District Judge Philip Reinhard was disgusted by the magnitude of the crime and sentenced Crundwell to serve 19.5 years in prison. Before her sentence was announced, Rita CrundwelltearfullyapologizedtothecityofDixonforthefraud.ThejudgetoldRitaCrundwellthat she cared more about her horses than the people she represented.

The city of Dixon hired the law firm Power, Rogers & Smith to investigate and file a lawsuit against those gatekeepers who were expected to detect fraud. Devon Bruce, a partner at the law firm, was abletoobtain$40millionforthecityofDixon.TheaccountingfirmresponsibleforauditingDixon's

financials-CliftonGunderson-wascharged$35.15millionforwhatDevonBrucecallednegligence for failing to detect the theft of city funds for over two decades. Fifth Third Bank paid $3.85 million, and the accounting firm Janis Card Associates paid $1 million.

While obviously the biggest culprit in this fraud is Rita Crundwell herself, there is a number of stakeholdersthatcouldhaveaskedrelevantquestionsaboutsuspiciousactivitywhofailedtodoso. Attorney David Bruce places much of the blame on Dixon's auditor, CliftonLarsonAllen (formerly known as Clifton Gunderson). However, the role of the bank and of the city itself has also been questioned. The following sections examine these stakeholders.

Theproblemwithsmalltownsisthelackofresourcesavailable.InDixon'scase,whileitwasableto hire a few full-time employees such as Rita, it did not employ a full- or a part-time accountant. Even the position of mayor was part-time. Therefore, those who were knowledgeable about the finances beyond Rita Crundwell were few and far between.

Doesthismeanthatcityofficialsshouldescapeanytypeofculpability?Manypeoplebelievethat whileleaderscannothaveknowledgeofeverydetailintheircompaniesorgovernments,theydo have a responsibility to exert oversight over employees and investigate anything that does not make sense to them. Mayor Jim Burke maintains that he grew suspicious of Crundwell's rising wealth, not understanding how she could live such a lavish lifestyle on a city worker's salary. He claimsheevenapproachedthecompany'saccountingfirmCliftonGundersonbutwasshutdown when he starting asking questions about Rita.

Mayor Burke was not the only one who had questions. Other people in town were also wondering howRitawasabletolivesoexpensively.TherewasageneralbeliefthatRita,whohadwonsomany championships, maintained the horses with her prize money. However, prize money would not be enough to pay for the high costs of maintaining so many championship horses. Others believed she had an inheritance. Nobody could say for sure, and Rita herself was not particularly close to anyone in the town. Mayor Burke describes her as friendly but as also having a "cold angle" about her as if she was maintaining her distance from other townspeople.

The accounting firm CliftonGunderson paid the most in fines for not detecting the misconduct. In reviewingthecase,itisimportanttonotethesignificantconflictsofinterestthatexistedbetween CliftonGundersonandRitaCrundwell.Duringthe1980sRitaCrundwellplayedontheaccounting firm's softball team. She had friends at the firm and would sometimes get together for lunch or beers after work. However, these in themselves are not necessarily unethical. What could be construed as a major conflict of interest is the fact that Clifton Gunderson was not only the city's accountant, but Rita's personal accountant as well.

There are also signs that Clifton Gunderson tried to circumnavigate against new regulations. In 2005 it was mandated that auditors could not provide both non-attest services and auditing services. Clifton Gunderson therefore resigned from auditing assignments for Dixon so it could focus on other accounting services for the city. According to the lawsuit that Dixon filed against Clifton Gunderson, however, Clifton Gunderson continued to perform auditing services and simply hadaCPAfromthenearbytownofSterling,SamuelCard(ownerofJanisCardAccounting),signoff onthefinancialstomakeitappearthatadifferentfirmwasperformingtheaudit.Asalreadynoted, Janis Card Accounting paid $1 million to settle the allegations. Clifton Gunderson maintains that it compiled very basic financial information to help Samuel Card after 2005.

If the city's allegations are true, it shows that Clifton Gunderson did not place much emphasis on guarding against conflicts of interest. Attorney Devon Bruce believes that Clifton Gunderson was downrightnegligentinnotrecognizingsignsthatfraudwasoccurring.Amongtheallegedfailures he cited against Clifton Gunderson includes the company's failure to detect clearly fraudulent invoices Rita Crundwell produced, failure to verify that city funds were being used for their intendedpurpose, andafailuretorequestappropriatedocumentationfor incomeRitaCrundwell was receiving outside of her city job.

Rita Crundwell perpetuated much of the fraud with fraudulent invoices she developed for phony projects. She attempted to make these invoices appear authentic. For instance, she would produce invoices allegedly from the Illinois Department of Transportation. However, these invoices did not adhere to the same standards as authentic invoices. They were missing key information, including thestatelogoandphonenumberofacontactperson.Onsomeinvoicestheword"section"wasalso spelled wrong. In examining emails, Attorney Devon Bruce also found an invoice dated as November 31, 2004 from the Illinois Department of Transportationa date which does not exist.

In defense of Clifton Gunderson, auditing firms will examine a sample of documents in their audits. Inacitywiththousandsofinvoicesandtransactionseachyear,itmightbepossiblethatmostofthe invoices examined by Clifton Gunderson were authentic. The firm also claims that the types of audits it did perform did not require the additional tests necessary to try and detect fraud.

However, critics point out that the firm would most likely have come across some of the fake invoices and should have noticed the discrepancies between them and the real ones. Once the auditordeterminedthattheseinvoiceslookeddifferent,theyshouldhavetakenadditionalstepsto verify where the money actually went.

In addition to detecting the fraud, Attorney Devon Bruce also pointed out that Clifton Gunderson failedtoverifythatmoneywasgoingtowardcityprojects.Heclaimsthatitwouldhavebeensimple for the firm to check and make sure that large capital projects such as bridges were actually being built. Another method of verification is to request meeting minutes from City Hall. Any large-scale projects for the town would have had to be discussed during meetings, which would have been

recorded in the minutes. Fictitious projects that Rita made up would not have shown up in the minutesandshouldhaveactedasaredflag.Concerningtheoneinvoice'snonexistentdate,Bruce felt like the auditing firm should simply have called the Illinois Department of Transportation to check on the authenticity of the invoice. A simple attempt at verification, he believes, would have detected and stopped the fraud much sooner

Finally, there were the discrepancies in Rita Crundwell's income. Rita Crundwell's tax returns had large sums of money that were not accounted for. For instance, a 2007 tax return showed gross receipts of $700,000. All legitimate transactionseven prize money from competitionswould have been documented. There is no indication that Clifton Gunderson requested documentation. When asked about certain unexplainable activities or transactions, Rita would always have an answer ready. Attorney Devon Bruce claims that the accounting firm had a duty to impose "healthy skepticism," meaning that it should not have trustedan individual at his or her word but worked to verifythesefinances.Inthiscase,CliftonGundersonappearedtobetootrustingofRitaCrundwell's character.

While many people cast blame on Clifton Gunderson, it is also necessary to realize that an auditor's job does not involve going out looking for fraud. Additionally, many clients shop around for accounting firms with the best rates, creating an incentive for accounting firms to keep prices low. Thesereducedpricesmightcompromisethequalityofthework,withfirmsplacingnewer(andless expensive) auditors on accounts when they do not have enough experience in the area. This is leading some people to call for changes in the way audits are conducted. One proposed solution is using rotating accountants so that different people can analyze the information. It is believed that the more people who examine the financials, the better chance there will be for someone to detect suspicious behavior.

Finally, Fifth Third Bank was also charged with a failure to exercise due diligence. For instance, when Rita Crundwell first opened the fictitious account in 1990, she was the only person to open theaccount.Manybanks,includingFifthThird,requireadditionalpeopleorentitiestobeinvolved so as to prevent fraudulent activities. A resolution is also required to open up an account at the bank. This resolution never took place.

Thebankalsohadaccesstostatementsshowingthatmoneywasbeingfunneledfromthecitytothe fictitious account and was being spent on items that did not involve city business. A major red flag, however, is that Rita would make "fictitious" checks simply addressed to "treasurer" rather than under her name or the city's name and deposit them into the fictitious account. This is not usual behavior, and according to a former manager at Fifth Third, checks should have been addressed to "treasureroftheCityofDixon"or"CityofDixon."Crundwellalsowrotelotsofchecksforlargesums of money, which, Attorney Devon Bruce maintains, acted as a clear red flag. It appears that the bank had proper procedures in place in theory but did not enforce them.

The city of Dixon, Illinois has dramatically changed many of its practices to ensure nobody has the extent of power Rita had to commit fraud for so long. After she was fired, the city hired a new finance director who reorganized the city's finances and restructured the department. She implemented more internal controls so that no one person could complete an entire process by him-orherselfincludingher.Todaythecityhashiredmoreclerksthatspecializeinspecificareas such as payroll and billing. Mail is no longer pic ked up by one person. Instead, it is delivered straight to City Hall.

In terms of Rita Crundwell's assets, they are being auctioned off. The auction of Crundwell's prize- winning horses was major news to the industry, and many breeders came from all around the world.HerhorseGoodIWillBe,whichhadwonseveralchampionships,soldfor$775,000.Her767 trophies and 122 plaques were also auctioned, as well as her numerous possessions. The money will go toward the city.

ManypeopleinthetownarerelievedthatRitaCrundwellisinprison.Thosewhowereacquainted with her, even those who had worked with her for years, felt like they never truly knew her.

Interestingly, Crundwell still earns $13,000 to $14,000 a year in royalties from her horses. This moneyhasfrozenbythegovernment.Eventually,officialshopetogivethefundstothecity.Inthe meantime, city business has gone on as usual, but with a new structure and greater wisdom to make certain that no one person has full and exclusive power of city finances.

ThiscasewaspreparedbyJenniferSawaydaforandunderthedirectionofO.C.FerrellandLindaFerrell.Itwaspreparedforclassroom discussion rather than to illustrate either effective or ineffective handling of an administrative, ethical, or legaldecision by management. All sources used for this case were obtained through publicly available material 2015

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DevonBruce,"TheCityofDixon:HowRitaCrundwellStole53MillionDollars,"videofeaturedon CityClubofChicago,October14,2014,http://www.cityclub-chicago.org/videos/detail/930/the-city-of-dixon-how-rita-crundwell-stole-53-million-dollars(accessedNovember 24, 2015).

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1. What were some of the red flags from Fraud Triangle that fraud was occurring?
2. Describe some of the ways that Rita Crundwell was able to get away with the fraud for so long?
3. Identify two internal control principles that were missing or violated in the Rita Crundwell scandal and explain what Dixon, Illinois has implemented to prevent fraud in the future?