Nevada County Needs Internal Audits to Detect Potential Fraud

Uncovering the financial failures of Nevada County, California.

For a number of years, Nevada County has used CliftonLarsonAllen (CLA) as an accounting firm. What many people don't know is Clifton Gunderson, founding partner of CLA, was the accountant for what turned out to be the largest embezzlement fraud case in the history of the United States. In the small town of Dixon, Illinois (the boyhood home of Ronald Regan), Rita Crundwell, the city comptroller, embezzled $53 million over a twenty-year period.

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During the two decades that the embezzlement took place, Crundwell, a champion quarter horse owner, purchased expensive clothes & jewelry, hundreds of horses, remodeled her home, and bought a number of vehicles and motorhomes, one worth $2.1 million.

In 2011, Kathe Swanson, Crundwell's office associate, inadvertently discovered the fraud. She immediately went to Dixon's mayor, Jim Burke, who then reported the fraud to the FBI.

With the help of Swanson and Mayor Burke, the FBI built a case against Crundwell and on April 17, 2012 she was arrested. Rita pled guilty to fraud in federal court. Judge Philip Reinhard, so disgusted by the magnitude of the crime, sentenced Rita to nineteen and a half years in prison.

When the extent of the fraud became public, the community of Dixon was shocked. It meant that Dixon, a city of less than 16,000, was always having to make budget cuts, denying resources to city departments. The city never had enough money to pay for street repairs, new vehicles or large projects.

Following the trial, the City of Dixon hired Power, Rogers & Smith Law Firm to investigate how it was possible the fraud went undetected for twenty years. Who was the accounting firm responsible for auditing Dixon's financials? As it turned out, Clifton Gunderson, of CliftonLarsonAllen was charged $35.15 million for negligence in failing to detect the theft of city funds over two decades.

David Bruce, a partner at Power, Rogers, & Smith, blamed Dixon's accounting firm, CliftonLarsonAllen (formerly known as Clifton Gunderson) for the negligence. There were significant conflicts of interest that existed between Gunderson and Crundwell. She played on Gunderson's softball team and hosted lunches at her home for friends in the accounting firm. These unethical activities cross the line that should exist between a government employee and a professional serving in a financial oversight position.

Also, a major conflict of interest is the fact that Clifton Gunderson was also Crundwell's personal accountant. Having done her taxes for years, Gunderson failed to request essential documentation for Rita's lavish income and lifestyle outside of her city job and salary. There were no guardrails against conflicts of interest. David Bruce believes that Gunderson was negligent in not recognizing the many signs of fraud that were occurring, which included failing to detect Rita's clearly fraudulent invoices.

Most importantly, Gunderson failed to detect that city funds were not being used for city projects. He could have asked the public works department if projects were getting done. It would have been easy to ensure that large capital projects were actually being accomplished. Crundwell's fictitious projects should have been a red flag.

It's not always the case that accountants are looking for fraud.

In July 2022, Nevada County Auditor-Controllers Marcia Salter and Gina Will signed a contract with CliftonLarsonAllen for an Agreed-upon procedure (AUP) to examine Fire Safe Council's accounting practices. The contract did not go out for bid. CLA found no wrongdoing by Fire Safe. However, the AUP was not a 'forensic' audit, as Gina Will claimed. CliftonLarsonAllen only made recommendations to Fire Safe to improve their bookkeeping methods.

Apparently, there's no "internal audit position" within Nevada County despite its critical importance to a well-functioning decentralized governance system. The Board of Supervisors rejected the re-creation of an internal audit position during post-COVID budget cuts. Recent Grand Jury reports highlighted significant fraud risks, leaving taxpayer money vulnerable.

Conflicts of interest are a real possibility within the Nevada County Auditor-Controller office. Currently, it lacks the resources to correctly identify and address them, as evidenced by its inability to effectively audit the Fire Safe Council for many years.

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There's a need for change in the way Nevada County conducts internal audits. A solution would be to rotate in-house accountants so that different people analyze the information. The more people who examine the financials, the better chance of detecting anomalies.

Currently, Nevada County has a new auditing firm. Lance, Soll & Lunghard, LLP has replaced CliftonLarsonAllen.

"Many people believe that while leaders cannot have knowledge of every detail in their companies or governments, they do have a responsibility to exert oversight over employees and investigate anything that does not make sense to them." Center for Ethical Organization Cultures, Auburn University

Pauli Halstead - Nevada City

See Also:

The Hidden Costs of Measure V

The County's Duty to Oversee Grant Funding by Fire Safe Council