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COVER STORY | Vol. 21, No. 5, April 8, 2010
(To Catch A Thief)

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To Catch A Thief

by Rick Outzen

Fraud Rocks Panhandle Sheriff's Offices

A dumpy, middle-aged woman with dyed blonde hair and wire-frame glasses stood handcuffed April 1 in the courtroom of Circuit Judge Paul Rasmussen.

That morning, she may have slept in her home for the last time. The woman, Cathy Lister, stood accused of stealing over $1.4 million while working in the finance department of the Escambia County Sheriff's Office.

Just a few months earlier, the former four-term sheriff of Okaloosa County, Charlie Morris, pleaded guilty to creating a kickback scheme that had many of his senior leaders giving him over $88,500 of their bonuses. The scandal decimated the Okaloosa County Sheriff's Office that was known for its integrity.

These crimes have shaken the public's trust in two of the largest law enforcement agencies in Northwest Florida. Both sheriff's offices have huge budgets and deal with millions of dollars in tax dollars, grants and trust funds. Both are audited annually.

The public is wondering how these crimes happened, and how can they be prevented in the future?

OKALOOSA KICKBACK SCHEME

On Feb. 27, 2009, federal agents arrested Okaloosa County Sheriff Charlie Morris, who had been elected the previous November to his fourth term, at Caesar's Palace in Las Vegas.

Morris, who was also the president of the Florida Sheriff's Association Board, had $5,000 cash in his pockets when he was arrested and another $30,000 in his hotel room's safe.

That same Friday, Teresa Adams, his longtime administrative director, was arrested at the Sheriff's Office headquarters in Shalimar. Morris and Adams were charged with theft, fraud and money laundering.

O'Sullivan Creel LLP was retained by the Okaloosa County Board of County Commissioners to investigate the allegations of a kickback scheme run by Sheriff Morris and Adams. Tammy McGaughy, a certified fraud examiner and partner in O'Sullivan Creel's audit division, led the investigative team.

McGaughy's team discovered excessive bonuses had been paid -- approximately $1.4 million -- to Okaloosa County Sheriff's Office employees from Oct. 1, 2003 to Feb. 17, 2009. 

From voluntary employee interviews, O'Sullivan Creel determined a minimum of $88,500 cash was kicked-back to the sheriff or the director of administration.

In its cover letter for the 66-page report, the firm stated, "The total kickbacks are most likely higher than stated, as some employees refused to be interviewed."

Morris was removed from office by Governor Charlie Crist and is currently serving a 71-month sentence in federal prison for theft, fraud and money laundering. He also pleaded guilty to state charges of racketeering and money laundering.

Teresa Adams pleaded guilty to the same charges and is also serving time in federal prison.

Sabra Thornton, the chief of staff and alleged mistress of Morris, was convicted Jan. 29 on five counts of grand theft and one count of theft, and faces a minimum sentence of 25 months in prison. She will be sentenced for grand theft April 28.

David Yacks, Adams' brother, Michael Coup and Sandra Norris are charged with racketeering for their roles in the kickback scheme and will face trial in June. Yacks was Morris' assistant director of information technology. Coup was the agency's chief deputy and Norris was the finance director.

ESCAMBIA EMBEZZLEMENT

Cathy Lister, a 32-year veteran of the finance department at the Escambia County Sheriff's Office, retired on Jan. 29.

Six days later, she was arrested and charged with stealing more than $100,000 from the Evidence Trust Fund, which contains monies seized during arrests.

Lister allegedly took cash out of bank deposits and created two sets of receipts for bookkeeping. ECSO investigators later determined that over $1.4 million had been stolen over a 10-year period. The State Attorney's Office subsequently increased the charges against Lister to one count of aggravated white-collar crime and 11 counts of money laundering.

Megan Huston, who took over Lister's duties, was the one who discovered problems with the Evidence Trust Fund. While reviewing financial records, Huston was unable to find where $19,294 that the Sheriff's Office seized had been deposited into the bank. Several receipt books were found in a shredder.

Before her retirement, Lister had lobbied hard to come back to the ECSO as a contract worker. When she arrived to be interviewed for the position, Lister was instead questioned by investigators and later arrested.

The trusted ECSO employee's large cash deposits in 2008 did not go unnoticed by her bank, Gulf Winds Federal Credit Union of Pensacola. The Bank Secrecy Act requires financial institutions to file suspicious activity reports with the U.S. Department of the Treasury's Financial Crimes Enforcement Network.

Gulf Winds filed six "suspicious activity reports" with federal authorities between 2008 and 2010. The regulatory agency that received those reports, U.S. Department of the Treasury's Financial Crimes Enforcement Network, apparently took no action on the reports about Lister's possible money laundering.

Neither Gulf Winds nor FCEN contacted the Sheriff's Office.

By the time their investigation of the Evidence Trust Fund was complete, ECSO investigators reported that Lister took more than $1.4 million between June 2000 and January 2010, according to court records.

WHAT AN AUDIT CAN'T DO

Two sheriff's offices and two different counties plotted two very different grand theft schemes. Both sheriff's offices were audited by outside auditors, Nicholson, Reeder and Reynolds (Okaloosa County) and O'Sullivan Creel (Escambia County). Citizens in both counties are asking, "Why didn't the auditors discover the fraud?"

"The purpose of the audit of the financial statements of Escambia County is not to find fraud," says Jack Rowell, who is the partner in charge of Escambia County audit for O'Sullivan Creel, "but to determine if the financial statements present fairly, in all material respects, the financial position of each major fund and the aggregate remaining fund information of the Board of County Commissioners and each constitutional officer."

Rowell makes it clear that the responsibility to citizens for the internal controls that protect government assets from loss or misuse and ensure all transactions are properly authorized rests with the elected officials and their financial managers.

"As in the case of the Okaloosa County Sheriff's Office, it's nearly impossible to catch a bonus kickback scheme when it's perpetrated through the collusion of Sheriff Morris and other senior leaders," Rowell says.

Indeed, it took five Okaloosa County Sheriff's Office employees serving as confidential informants for the Federal Bureau of Investigation to compile the necessary evidence to arrest Morris.

Three of them, Larry Ashley, Larry Donaldson and Mark Schniepp, were majors. George Wilson was the director of maintenance, and Roberta Pifer was an inventory clerk.

Four of the five had received bonuses from Sheriff Morris and had been asked to return a portion of the money. Wilson wore a wire to record his conversations with Morris and the administrative director, Teresa Adams.

CONTROL WITH ELECTED OFFICIALS

In the state of Florida, constitutional officers, such as a sheriff, have the power to make expenditures, according to Patty Sheldon, Escambia County Clerk of Court and Comptroller's Administrator of Financial Services, who compiles the county's Comprehensive Annual Financial Report (CAFR) and serves on the county's audit review committee.

"Once the Board (of County Commissioners) approves their budgets, the constitutional officers aren't required to stick to the line items in that budget and can move money around as they see fit," says Sheldon.

Therefore, the auditors wouldn't have questioned the bonuses that Morris paid, only whether or not the paychecks were recorded properly.

However, Sheldon does point out that new financial reports in the audit do show the budget and actual amounts for each budget line item so the public can see how the Sheriff's Office actually used the funds.

The alleged embezzlement by Cathy Lister failed to catch the attention of the auditors for two reasons. First, the auditors were told by management at the Sheriff's Office that the internal controls and procedures were in place and being followed.

"We consider the Sheriff's internal control over financial reporting in order to determine our audit procedures," says Marvin D. Beasley, Jr., the O'Sullivan Creel audit partner that oversaw the audit of the Escambia County Sheriff's Office.

Secondly, the Evidence Trust Fund was not determined to be a major fund.

"The fund involved in this fraud was not a major fund for the Sheriff's Office and had no impact on its actual operations."

IMPORTANCE OF MAJOR FUNDS

Major funds are those that are particularly important to the users of a government's financial statements. Governmental Accounting Standards Board (GASB) Statement No. 34 establishes the criteria for determining which governmental funds and enterprise funds are to be treated as major funds.

The general fund, whose monies come primarily from the taxpayers, is always a major fund. Any other governmental fund or enterprise fund is required to be reported as a major fund in any year in which its total assets, liabilities, revenues, or expenditures/expenses are both:

a) 10 percent or more of the corresponding total (assets, liabilities, and so forth) for all funds of that category or type, and

b) 5 percent or more of the corresponding total for all governmental funds and enterprise funds combined.

Also, any other governmental fund or enterprise fund that government officials consider particularly important to users may be reported as a major fund.

In the 2008 audit for the Sheriff's Office, the major funds were the General, Jail Commissary and Hurricane Ivan.

"The determination of the major funds is done annually and can change from year-to-year," says Beasley. In 2002, there were only two major funds, General and Jail Commissary.

The Evidence Trust Fund, which had year-end balances of $43,017 in 2002 and $135,358 in 2008, was never identified as a major fund by the Sheriff's Office. It is a fiduciary fund that holds cash seized during arrests and is not a part of the operational statements.

POSSIBLE SOLUTION

If it's not the responsibility of the external auditor to find fraud, how can the public be sure that funds aren't being stolen?

The Clerk of Court is prevented by the state constitution to do internal audits of the constitutional officers, according to Lisa Bernau, Chief Deputy for Escambia County Clerk of Court Ernie Lee Magaha.

"We can't look at their books and internal controls unless we're invited to do so and the Board budgets us the money to do it," says Bernau.

When David Morgan took over as Escambia County Sheriff, he did just that. Sheldon and her team audited the Sheriff's Office's internal controls and issued two reports, one on Human Resources and Payroll and the other on Purchasing and Accounts Payable.

"We've responded to each of their recommendations and have implemented over the past year new policies and procedures based on them," says Sheriff David Morgan. "Sadly, the one area that we were lagging behind in was the area covered by Ms. Lister, who we saw as a trusted employee.

"However, it was those new procedures that helped the finance department catch the problem once she was no longer in the office."

Rowell believes more internal audits could make a difference in ensuring internal controls are functioning properly and that procedures are being followed.

"It's not uncommon to find a gap between the procedures and how a job is actually being done," says Rowell. "Regular internal audits, whether conducted by the Clerk of Court or an outside CPA firm separate from the external auditors, reduce that gap."

The internal audit firm cannot be the same one that does the external audit. The two must be completely independent.

"The cost of an internal audit can be the same or more than the external audit," says Rowell.

Last year, O'Sullivan Creel was awarded the audit contract for Escambia County through Sept. 30, 2013. They will be paid $195,584 for the 2009 Escambia County audit which covers the Board of County Commissioners, Sheriff, Clerk of Court, Property Appraiser, Tax Collector and Supervisor of Elections.

Bernau also sees the value in internal audits.

"At the Board's direction, we have done audits of the Arts Council of Northwest Florida and the stipends paid the volunteer firefighters. Mr. Magaha would like to do more, but we need direction and funding from the Board and the constitutional officers."

The key will be the independence of the internal auditors, according to Rowell.

"They must be free to audit the internal controls and issue a public report with recommendations for improvement," says Rowell.

Until internal audits become more common, the possibility of other fraud in local government will still give elected officials, external auditors and citizens sleepless nights.

rick@inweekly.net