From worst to first

Learn from this city’s fraud prevention mistakes as it remakes itself


By Richard W. Seals, CFE, CPA, CMA
richard-seals-80x80   Case in Point: Case history dissection

 MarchApril-gambling-city-finances    
  
Elma Magkamit was a model employee for the City of West Linn, Ore. (population 25,109) She began working in the city's finance department as an accountant in 1994. She was promoted to acting finance director in March 2001 and appointed permanent finance director in September of that year. She wrote on her job application that she was a graduate of the University of the East in Manila, Philippines, and a CPA. 

She was a member of the Oregon Municipal Finance Officers Association and the Government Finance Officers Association (GFOA). However, she was leading a secret double life. Magkamit was also a fraudster with a gambling problem and a desire for the finer things. (And she never graduated from college and wasn't a CPA.)

In early 2006, while catching up on the September 2004 monthly bank reconciliation, the city uncovered a discrepancy in a bank statement. Investigators pulled this thread, and a $1.42 million embezzlement scheme unraveled. 

Magkamit had forged and deposited 57 city checks into her personal account. The money supported her gambling habit — she dumped thousands into the slot machines at a local casino where everybody knew her name — and a lifestyle that included Ralph Lauren clothing, $17,000 in jewelry, a Mercedes-Benz SUV and a nice home on a golf course. 

In April 2006, a county grand jury indicted Magkamit on 114 felony counts: 52 counts of aggravated first-degree theft, five counts of first-degree theft and 57 counts of first-degree forgery.

In November of 2006, the Clackamas County Circuit Court sentenced Magkamit to eight years in prison and ordered her to repay the city. “We had a community that placed very limited resources in the hands of the defendant with the idea that she very carefully, with scrupulous integrity, manage those funds,” said Judge Steven Maurer. “That trust was violated over and over and over again. The impact of that can hardly be exaggerated.”

At the time of her sentencing, Magkamit's crimes were reported as the largest-ever Oregon city government embezzlement. Taxpayers lost money, the city's bond rating was suspended, and residents — shortly before Magkamit's sentencing — voted down a five-year levy to finance the police department to the tune of $1.7 million annually probably because they just couldn't trust the city's management. 

Before the city had discovered the fraud, it hadn't conducted an external audit for five years. (The City Council, which had gotten into a disagreement with the external auditors, fired them and didn't replace them.) 

Obviously, the city had some fraud prevention and detection issues that allowed Magkamit to rob it blind. 

The new city manager hired an interim CPA on contract, Andy Parks, between 2006 and 2008. I came into the situation in 2008 when the city hired me as the permanent finance director (The city later promoted me to chief financial officer). The city staff, including the finance team, has worked to be original and creative in surviving and recovering from the fraud with the ultimate goal of becoming a model of municipal responsibility and prudence. 

This type of fraud can happen to your organization. Learn from this city's mistakes and improvements so you don't have to endure its pain from a former lack of integrated prevention and deterrence systems. 

MORE THAN FIVE YEARS OF MONTHLY EMBEZZLEMENTS

Magkamit had complete control over the city's check stock, the bank reconciliation function and adjustment of entries to the general ledger. The city didn't have any oversight on what she was doing. From September 2000 through March 2005 Magkamit wrote monthly checks (except for the standard audit months of June and July, just in case the city hired new external auditors) averaging about $30,000 on the city's accounts payable voided check stock. (See an example of one of her checks below.) 

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An example of one of Elma Magkamit's checks to herself. 

She would retrieve checks from the accounts payable tractor-feed printer that hadn't been voided and destroyed, bring them home and type in her name or a fake consulting business as the beneficiaries. Magkamit didn't enter the checks into the general ledger; she would then alter the bank statements and reconcile around them. No one could tell funds were missing because the financial reporting adjustments and reports were convoluted, confusing and poorly formatted. 

Oregon state law and the West Linn local charter required Magkamit to perform financial audits but, of course, for years she ignored those rules as well as the secretary of state's office when it asked for the audits. Finally, around 2004 the exasperated secretary of state told The Oregonian newspaper that Magkamit was ignoring her responsibilities. The city's books were a mess. Magakamit resigned in September of 2005. 
The city hired a new finance director, Elizabeth Carlson, and new city manager, Chris Jordan, in 2006. Carlson began historical bank reconciliations to regain financial control over a lost department. 

In early 2006, an internal accountant, when performing the September 2004 reconciliation, discovered that a check was missing from the city's copy of the bank statement; it was for $36,884.70 and made payable to “Larry Magkamit, Magkamit Consulting.” (External forensic auditors subsequently found the check on April 12, 2006.) 

The accountant immediately told the finance director and Jordan about the discrepancy. Later that day, Jordan met with the city police chief; they then contacted the Oregon Department of Justice. In the meantime, the finance department had uncovered 24 checks totaling $750,000 in embezzled funds.

Jordan engaged forensic and financial auditors who revealed the extent of the fraud. On April 19, the state justice department and the city police chief confronted Magkamit and later arrested her at her home on the golf course. 

The external forensic and financial auditors then reviewed the city's bank statements, some of which were originals; others were copies. They found that the copies were altered to conceal suspect activity by using Wite Out®, cutting and pasting, and folding over (statements were folded over, which concealed suspect activity, and then copied). 

 

Jordan consulted with attorneys and insurance companies for legal remedies. Carlson, who had spearheaded the initial investigation, moved on to another position in a different city. When I came on board in 2008, I hired another CPA, Casey Camors, to help me lead the new finance team. We completed all financial audits for 2003 through 2008, terminated some employees and hired new staff, revamped internal controls and implemented best-of-practice financial reporting. Some of the revamped internal controls included clear segregation of duties from the finance director, the bank reconciliation process, access to cash, and printing and control over check stock. Other new controls included documenting procedures, double reviewing, sign offs and rotating staff functions. 


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By Joe Collins
This is a great article to send to other city governments. It will open them up to CFE's to teach them preventative measures to avoid the losses and the publicity.