The city of Dixie recently made headlines because of budget cuts and problems with the pension fund for city employees. The city has never had financial difficulties before. Most of the residents in the community have an income well above the national average. Their large houses have always provided significant cash flows to the city through property taxes, and their local shopping provides extra revenue through an additional sales tax. Because of this stability, the city had, until recently, boasted an impressive fire department, an extensive police force, and many other services, attracting talented individuals away from nearby communities with their high salaries and very competitive pensions. While revenues do not appear to be dropping, the citys cash flows have been negative for the past three years, cutting deeply into the mayors emergency fund and into local coffers. The problems have become so severe that the fire department and emergency medical technician (EMT) services have held fundraisers and solicited donations to stay operational and meet their salary commitments. Other public services, such as road repair and park maintenance, have also started to suffer. A few prominent businesses and members of the community have already moved away because of these problems, and rumors that many others are beginning to consider moving have flooded the mayors office. The loss of a large number of affluent citizens or successful businesses would be disastrous for the struggling community, making city leaders desperate to find a solution to their current cash crunch. In a meeting of all the senior public officials and financial officers of the town, the mayor and city council offered a plea to cut costs wherever possible, to downsize if necessary and to look for any clues as to where the city funds are disappearing. The frank discussion of the citys position unsettled many of the leaders, especially Cathy Clark. Cathy is an accounting specialist, the communitys only remaining accounting specialist due to the recent cuts. Cathy and Kimberly Hedges, the citys comptroller and treasurer, make up the entire finance department for the city. As the mayor talked, Cathy started to worry. Could the trouble be in the comptrollers office? She hoped not but was starting to wonder. While the mayor continued to talk, Cathy recalled a couple of specific incidents in the past few weeks that worried her. The first was a discussion of a strange account Cathy had found almost two months ago. The second was a conversation about workload that happened just two weeks ago. TWO MONTHS BEFORE THE MEETING: THE DCDA ACCOUNT Kim, can I talk to you for a minute? Cathy called out to her boss through Kimberlys open door. Cathy had a hard time with such informal behavior when she came to Dixie from a large corporation in Seattle, but Kimberly encouraged a relaxed atmosphere. She felt that it was important for the Comptrollers office to mirror the atmosphere in the small town. And she hated being interrupted in her office. Cathy had always thought it was weird that Kimberly would rather come to her than have Cathy go into her office, but the pay IMA EDUCATIONAL CASE JOURNAL 1 VOL. 9, NO. 1, ART. 1, MARCH 2016 ISSN 1940-204X Tough Choices: Ethical Decisions in Whistleblowing Marla A. Kraut, Ph.D. University of Idaho Jason C. Porter, Ph.D. University of South Dakota Amber Gray University of Idaho 2016 IMA was good enough and the job comfortable enough that she certainly wasnt going to complain about something so simple. What do you need, Cathy? Kimberlys question brought Cathys mind out of the clouds. I just had a question about this new account, she said quickly. New account? Kimberly asked, frowning. What new account? This one, Cathy pointed to the new line on her spreadsheet: DCDA Dixie Capital Development Account. I havent seen this one before. Oh, its been around for a while, Kimberly said, looking back at her office. Maybe you havent seen it because nothings gone through there for a while. Maybe, Cathy agreed with a frown. But its still weird. I mean, it looks like you are the only signatory on the account. Dont all of the accounts need at least two signatures? Kimberly smiled. Oh, so thats the trouble. Your internal auditing buzzers are going off. Thats a pet account of the mayor. He uses it to take care of potential investors that come in and for hosting parties for the staff and the other small costs. Since the amounts are so small, he and I just take care of it. There are several very large transactions, Cathy noted, and some of the checks were made out to Treasurer. Well, my dear, the older woman responded as she usually did when Cathy started to get on her nerves with lots of questions, were trying to bring in new businesses and keep people from moving away. Of course were spending a little more of those kinds of funds. She looked at the clock. Look, Ill tell you what. You look tired. Since its already almost 3 p.m., why dont you go home and get some rest. Ill talk with the mayor about these funds the next time I see him, and Ill try to get him to control his spending. Okay? Cathy felt a twinge of guilt, but then again, who was she to argue with the boss? Kimberly let Cathy leave early when she needed to, never docked her any pay, and never expected her to make up the hours. And there was that new restaurant that she has wanting to try. This account obviously had a political agenda, so why not leave it to the politicians? Shed go enjoy a quiet afternoon. It wasnt until later that day that she wondered if Kimberly had been trying to get her out of the office for more than just politics. TWO WEEKS BEFORE THE MEETING: WORKING WEEKENDS Cathy smiled as she settled into her office chair, a hot chocolate from a local coffee shop in one hand and a fresh donut in the other. She loved coming to work on Monday mornings. How many people could say that? Recently, Kimberly had started providing hot chocolate and pastries every Monday to make the day more pleasant, she claimed. Mondays workload was also lighter now. Thats because Kimberly had started coming in on weekends to work on some of the more trivial projects, which if left until Monday probably would have made the Monday morning workload a nightmare. Cathy had tried to argue with her a month before when she had come in to find so much done. I have nothing to do now on Monday mornings. Besides, bookkeeping tasks are supposed to be my job. Why dont you let me take care of them? As always, Kimberly had laughed nervously and waved her hand in the air. Youre not a bookkeeper, Cathy. Your job is to take care of the budgets, file the financial records and make sure that were in compliance with local ordinances. Nowhere in that description does it say that you are supposed to do bookkeeping. It says other duties as assigned. Id be happy to take care of that stuff for you like I have been, as well as picking up the mail like youve been doing. Im supposed to make your life easier, not leave you to take care of all of these little details. Oh, Cathy, Kimberly sighed. To be honest, I wish I could let you take care of this stuff. But the truth is that Ive started suffering from terrible insomnia on Sunday evenings. I dont know if its nerves about the politics and meetings I know are starting the next day, or just a problem with my bed. Maybe its the horses being restless. I dont know. All I know is that I cant settle down on Sunday nights, so instead of watching TV, I come in and get some work done. That way, if I get some work accomplished, it makes me feel better about the lack of sleep. Well, why dont you work on some of your own projects? At least then you would be making headway and maybe lighten your own workload for the coming week. Kimberly laughed nervously again. My projects never get done, she said, shaking her head. So, I work on yours. Yours have a definite beginning and ending, and by the time I get sleepy, I have a nice thick stack of invoices paid, accounts reconciled, and checks printed. Cathy shrugged her shoulders. Well, youre the boss. You can do what you want. Thank you for noticing, Kimberly said dryly. IMA EDUCATIONAL CASE JOURNAL 2 VOL. 9, NO. 1, ART. 1, MARCH 2016 Cathy smiled then looked at Kimberly in concern. Maybe you should take a trip. You know, a nice vacation. That would give you the opportunity to unwind and relax. No! Kimberlys voice was sharp, then she mellowed. No, I cant do that in this crisis. There are things I have to do myself. With only the two of us in the office, only I can do them. I am a CMA too, you know, Cathy began, but Kimberly cut her off with a wave of her hand. I know, but then Id have to train you. Its less work for me to just do it myself. Cathy bit her tongue to keep from mentioning that Kimberly would only have to do that once. After that, she could have more time for her projects and have some vacation time. Obviously, her boss didnt want to think about vacations right now. Knowing how much money Kimberly earned, Cathy didnt really understand why she didnt take more time to enjoy it. But she could sort of understand Kimberlys desire to help ease the financial crisis. Still, given how slowly governments moved, even small town governments, surely Kimberly had time to plan one weekend vacation. LATER THAT EVENING: TOUGH CHOICES Cathy sat on the couch, looking out over the small meadow behind her house. She didnt even hear her husband, George, come in or feel him sit down next to her. A penny for your thoughts? he finally said quietly. Cathy looked over at George and smiled. Theyre pretty depressing thoughts. Perhaps, I should pay you for them instead. George just smiled back at her and she sighed. Im a little worried about the town. You mean the financial crunch? Yeah, I think Kimberly might be behind it. What? George sounded shocked. How could Kimberly be behind it? Shes the hardest worker I know, and shes cut the department down to about nothing. I mean, its just the two of you, right? And she does so much of the work herself. I know, I know. Im probably wrong. She paused. But, George added. Youre afraid youre right. Cathy nodded. What do you think Kimberlys doing, stealing from the city? he asked sarcastically. She could be! Cathy protested. And I have an obligation to report a fraud if I find one. George shook his head with a smile. Come on, Cathy. Do you really think Kimberly would be involved in a fraud? Shes one of the wealthiest people I know. She has that huge ranch. What does she call it? Stepping Stones Stallions. Right. And it just keeps getting bigger. I mean, didnt she just add another champion stud? Cathy nodded. Right, and look at the way she treats everyone. She takes us to dinner, and takes you out for lunch all the time, buys nice Christmas gifts for us and the kids, and what about those expensive tickets for the horse show that she gave to everyone in city hall? Shes loaded. Maybe, Cathy said, still sounding doubtful, but she doesnt enjoy it. Whats that supposed to mean? George asked. Well, take that horse show you mentioned. Shes the only one who didnt go, other than the emergency staff. She begged off at the last minute. And she never goes on vacation or goes to races any more. I leave early and come in a little late, because she insists that I do, but shes working all the time. Why doesnt she ask me to help with all of the work that needs to be done? It just doesnt seem right. Okay, George agreed. Youre right. Shes definitely a workaholic. But that doesnt mean shes a criminal. Her familys been in the area for generations. Theyre wellrespected but keep a low profile. Maybe shes just spending the family fortune. Cathy still looked concerned. Well, what about the recent audit? Wasnt it one of the big firms? And didnt they sign off with only minimal issues? I know, I know. It was a big regional firm, but they didnt actually come to the offices themselves. They hired a local CPA do the leg-work. Hes done lots of small audits, but he isnt really capable of doing everything that needed doing if theres a suspicion of fraud. And theres more to it than that. I told you about the DCDA account that I found a few months ago, right? George nodded. Well, I did a little more digging, and several of the invoices that support the payments made from that account look suspicious. The invoices are not on proper letterhead and dont have approved contracts. In fact, it looks like most of the building projects didnt even happen. Also, I found several more checks made out to Treasurer, and many of them were not supported by invoices either. They add up to a pretty large amount. Well, George threw up his hands, if it bugs you that much, then perhaps you should talk with the mayor or a member of the city council about it. You wont be able to sleep until you do. Cathy shook her head. How can I do that, George? What if Im wrong? Id be slandering the best boss Ive ever had. It could be nothing, just coincidences. How can I report something that might not even exist?

1. Explain how Kimberly (Rita Crundwell) of the city of Dixon, Illinois perpetrated the fraud.
2. Who is to blame for the fraud occurring and not being detected?
3. Approximately how much did the City of Dixon recover in lost funds from the fraud? What were the sources of the recovered losses?
4. Research the City of Dixon fraud on the internet. What other services did the accounting firm provide Rita Crundwell? Should the auditors recognize any other red flags that could have helped identify that fraud was occurring?
5. What have you learned from this case study? What, if any, impact does this have on your perception of human nature?