MANAGEMENT UPDATE.

Understanding Fiscal Scandals and Their Impact on Localities

There’s no shortage of news reports about fiscal scandals, and while we doubt the number of convicted politicians and employees has grown, startling cases of public sector malfeasance crop up with disturbing regularity. We were reminded of this over the weekend, when we saw a Nov. 15 article about the causes of political corruption from the Sol Price School of Public Policy at USC, the University of Southern California.

That piece focused on elected officials, but corruption isn’t limited to just people who got their jobs through the ballot box, but also include appointees and others who, one way or another, have their hands someplace near the public coffers.

While all governments are vulnerable to fraud, strong internal controls, careful fiscal oversight, and a focus on ethics training can insulate governments from the pain of dealing with fiscal scandals. A couple of years ago, a GFOA session about ethics set us off on a determined exploration of some of the common aspects of fiscal scandals that involve powerful individuals.

We subsequently had long talks with the city manager of Durango, Colorado, as well as officials in Cincinnati, Stonecrest, Georgia and Buncombe, County, North Carolina, which had all experienced financial scandals of their own in recent years. Toward the end of July 2022, Route Fifty published our column about the arduous task that government officials have when faced with a financial scandal.

Our research also led us to a fascinating documentary called, “All the Queen’s Horses” – also recommended to us by a very smart GFOA staffer, Katie Ludwig.

We’ve included a video of the documentary trailer at the bottom of this article. The film itself is worth watching to see the story behind what has been labeled the largest municipal fraud in U.S. history – the embezzlement of $53,7 million over many years by the former longtime comptroller of Dixon, Illinois, Rita Crundwell.

When we discovered that the producer and director of the film, Kelly Richmond Pope, was an accounting professor at DePaul University, we decided to learn about the creation of the documentary and the messages that she most wanted this compelling work to deliver.

The following is a brief edited transcript of the conversation we had with Pope in July 2022.

B&G: What were you hoping that your documentary would communicate to people about government fraud?

Kelly Richmond Pope: I was hoping that the documentary would show people how a trusted employee can commit fraud. Sometimes, a finance person or accounting person can be the most powerful person in the room because other people don’t know or understand the same information that they do. A lot of reliance is placed on them. They tend to have a lot of power.

B&G: Is there a difference in the level or opportunity for fraud in the public and private sectors?

Kelly Richmond Pope: To me, the fraud schemes are pretty much the same, regardless of whether they’re governmental, corporate or nonprofit.

B&G: Are their similarities that you see when you look particularly at government fraud or fraud involving high-level officials?

Kelly Richmond Pope: I think the commonality is there’s always an abuse of power and always unlimited access because of the blind trust that’s given. Power and privilege are to me, always behind governmental fraud. I don’t believe there are schemes just designed for state and local governments. I think the schemes are the same, but in government you have people who are in positions much longer than in the corporate sector. So, when you have a longtime employee who has been somewhere for 20 years, it’s easier to conceal that kind of thing.

B&G: Your documentary paints a very clear picture of the life that Rita Crundwell was able to lead, based on the millions of dollars that she embezzled in Dixon. Were there others to blame besides her for what happened?

Kelly Richmond Pope: When I did the documentary, I wanted to make sure that there was a balanced view of blame and a balanced view of accountability. Yes, there was an audit failure on the side of the auditors. And yes, there was some failure on the side of the bank and there was failure on the side of the (elected officials). But there’s also failure on the side of the residents, too. We should mind (government) business the same way we mind our personal affairs, but we don’t.

B&G: Does a more aggressive active auditing function help protect an entity?

Kelly Richmond Pope: Audits aren’t really designed to find fraud because they take a random sample of transactions. The best thing to do, I think, to protect an entity is to make sure that you have good training and a good internal whistleblowing process in place so that when people have something to say, they will. Those are the things I think are important.

B&G: After a scandal, how hard is it to win back resident trust?

Kelly Richmond Pope: It’s a tough thing to win back. It may take several administrations in order to do that. The tough part when scandal happens is the thing that you can’t see. It’s the emotional side, the emotional toll that you can’t clean up and that’s what I think is hard.