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09-01-2015 Fraud Investigation ReportCity Clerk Washington State Auditor's Office Fraud Investigation Report City of Federal Way King County Investigation Period July 1, 2011 through September 30, 2013 Issue Date September 22, 2014 Report No. 1012620 Washington State Auditor Troy Kelley Independence • Respect • Integrity Washington State Auditor Troy Kelley September 22, 2014 Mayor and City Council City of Federal Way Federal Way, Washington Report on Fraud Investigation Attached is the official report on a misappropriation at the City of Federal Way. On September 27, 2013, the City notified the State Auditor's Office of a potential loss of public funds. This notification was submitted to us under the provisions of state law (RCW 43.09.185). This report contains the results of our investigation of the former Office Technician's unallowable activities at the City from July 1, 2011 through September 30, 2013. The purpose of our investigation was to determine if a misappropriation had occurred. Our investigation was performed under the authority of state law (RCW 43.09.260) and included procedures we considered necessary under the circumstances. Questions about this report should be directed to Sarah Walker, Fraud Manager, at (509) 454 -3621. 7 y u /4_/(L,-/ TROY KELLEY STATE AUDITOR cc: Mr. Ade' Ariwoola, Finance Director Insurance Building, P.O. Box 40021 • Olympia, Washington 98504 -0021 • (360) 902 -0370 • TDD Relay (800) 833 -6388 Fraud Investigation Report City of Federal Way King County July 1, 2011 through September 30, 2013 INVESTIGATION SUMMARY In September 2013, the Finance Director notified our Office regarding a potential loss of public funds, as required by state law. The City initiated an investigation and determined cash receipts were misappropriated at the City's Community Center. The investigation identified a loss totaling $14,491 between July 2011 and September 2013. The City has filed a report with Federal Way Police Department, which is investigating this case. The King County Prosecuting Attorney's Office was notified of this case and charges have been filed. BACKGROUND AND INVESTIGATION RESULTS The City, located in King County, operated on an annual general fund budget of approximately $44 million in fiscal year 2013, including approximately $500,000 in revenues for the Community Center. The City's Community Center features three gyms, two pools, fitness area, climbing wall, senior lounge, sauna/steam room and rental space. The facility also holds general recreation classes and community events. There were two office technicians and up to four part-time desk clerks that collected membership, usage, and classroom fees. The City's investigation found an office technician, working as a cashier at the Community Center, was cancelling valid cash receipting transactions and taking the cash. The City's investigation focused on cash receipts associated with usage fees at the Community Center. Each user had an assigned log -in ID and there was a temporary login code available for when training part-time staff. The investigation focused on the user ID's of the office technician and the temporary user. A summary, which identified a minimum of three cancelled transactions occurring within minutes of each other, was used to determine the amount of the loss. Based on the City's investigation, the loss occurred over a three -year period by the user as follows: 2011 2012 2013 Total Loss Temp Login ID 2,806.00 2,136.00 4,942.00 Assigned ID 159.00 2,480.00 6,910.00 9,549.00 Total $159.00 $5,286.00 $9,046.00 $14,491.00 Washington State Auditor's Office 1 We reviewed the City's investigation of the Community Center loss and agreed with the results. The City considered other systems the office technician had access to and did not find additional misappropriation. In the fall of 2013, the Federal Way Police Department interviewed the former office technician and she took responsibility for the misappropriation. CONTROL WEAKNESSES Internal controls at the City were not adequate to safeguard public resources. We found the following weaknesses allowed the misappropriation to occur: • Lack of appropriate supervisory review of cancelled transactions, which allowed this activity to go undetected. • The system allowed for the usage of a temporary user ID, this ID was used without monitoring. RECOMMENDATION We recommend the City strengthen internal controls over cash receipting and cancelled transactions to ensure adequate oversight and monitoring to safeguard public resources and compliance with City policies. We also recommend the City seek recovery of the misappropriated $14,491 and related investigation costs of $1,670 from the former office technician and/or its insurance bonding company, as appropriate. Any compromise or settlement of this claim by the City must be approved in writing by the Attorney General and State Auditor as directed by state law (RCW 43.09.260). Assistant Attorney General Matt Kernutt is the contact person for the Attorney General's Office and can be reached at (360) 586 -0740 or mattkl @atg.wa.gov. The contact for the State Auditor's Office is Sadie Armijo, Deputy Director of Local Audit, who can be reached at (360) 676 -2165 ext. 108 or Sadie.Armijo @sao.wa.gov. CITY'S RESPONSE We thank the State Auditor's Office staff that worked on the investigation and appreciate their thorough review of the City's investigation and conclusion. It was part of the Internal Control in place that allowed the city employee to uncover the theft. Since then, we have strengthened our internal control to prevent a situation like this from reoccurring and furthermore, we will be able to detect any losses quickly. The following are some of the changes we have made to our loss prevention policy: • All refunds will be made at the Finance Department in the City Hall with appropriate documentation. • Discontinued the use of generic log -in and passwords. Washington State Auditor's Office 2 • Enhanced the Supervisory control and enhanced the membership check. • Regularly reconcile with program instructors. STATE AUDITOR'S OFFICE REMARKS We thank City officials and personnel for their assistance and cooperation during the investigation. Washington State Auditor's Office 3 ABOUT THE STATE AUDITOR'S OFFICE The State Auditor's Office is established in the state's Constitution and is part of the executive branch of state government. The State Auditor is elected by the citizens of Washington and serves four -year terms. We work with our audit clients and citizens as an advocate for government accountability. As an elected agency, the State Auditor's Office has the independence necessary to objectively perform audits and investigations. Our audits are designed to comply with professional standards as well as to satisfy the requirements of federal, state, and local laws. The State Auditor's Office employees are located around the state to deliver services effectively and efficiently. Our audits look at financial information and compliance with state, federal and local laws on the part of all local governments, including schools, and all state agencies, including institutions of higher education. In addition, we conduct performance audits of state agencies and local governments and fraud, whistleblower and citizen hotline investigations. The results of our work are widely distributed through a variety of reports, which are available on our Web site and through our free, electronic subscription service. We take our role as partners in accountability seriously. We provide training and technical assistance to governments and have an extensive quality assurance program. State Auditor Chief of Staff Director of Performance and State Audit Director of Local Audit Deputy Director of State Audit Deputy Director of Local Audit Deputy Director of Local Audit Deputy Director of Performance Audit Deputy Director of Quality Assurance Deputy Director of Communications Public Records Officer Main number Toll -free Citizen Hotline Website www.sao.wa.gov Troy Kelley Doug Cochran Chuck Pfeil, CPA Kelly Collins, CPA Jan M. Jutte, CPA, CGFM Sadie Armijo Mark Rapozo, CPA Lou Adams, CPA Barb Hinton Thomas Shapley Mary Leider (360) 902 -0370 (866) 902 -3900 Subscription Service portal .sao.wa.gov /saoportal/Login.aspx