Oregon towns get pockets picked

PORTLAND — Three recent cases involving allegations of embezzlement by public employees show how vulnerable many small towns can be to fraud.

About 1,650 cities, counties and agencies in Oregon handle more than $34 billion each year. Even though the state requires most local governments to pay for annual independent audits, day-to-day operations often depend mostly on the honor system.

Fraud experts, certified public accountants and auditors from other states cited a lack of internal financial controls as a major weakness in local governments, especially in small agencies, where officials may not understand their responsibility to protect public money.

"I think it's just plain laziness, either on the part of the auditors or the managers, who should be aware that they need to assure that there is separation of duties, particularly in a small office," said Kathy Newcomb of Tualatin in Washington County, who worked as a state auditor for 11 years before retiring in 1994.

In the Clackamas County town of Estacada, a bookkeeper is the subject of a theft investigation that could involve several hundred thousand dollars. In a similar case in the same county, a city bookkeeper in West Linn allegedly stole about $1.4 million in city funds.

Both bookkeepers were given virtually unsupervised control over financial transactions and granted exclusive authority to reconcile those transactions with budgets, bank statements and canceled checks — practices that the experts say violate a basic rule of public finance: requiring at least two people to approve transactions and reconcile books.

Another case, with Clackamas Water District, involved a payroll clerk. The district has not revealed how the money disappeared, but Waneta Conway, former board treasurer, said she suspected something was amiss when the clerk once refused a request to provide financial information.

"I think honest people don't think of all the ways people could steal from them," said Fire Chief Alan Hull of the Estacada Fire District.

In Washington, the state constitution designates the state "the auditor of all public accounts," which gives that office a sweeping mandate.

"We do audit all the state and local governments, from mosquito districts to the Department of Health and Human Services, cities, counties, the ports," said Mindy Chambers, spokeswoman for the Auditor's Office.

In addition to financial audits, Chambers said Washington scrutinizes local governments for internal accounting controls, public accountability and compliance with bidding procedures and rules for public meetings and public-records disclosure.

"We look at who has access to what systems. For example, if you have a cash register in a school cafeteria, we would want to be sure that the cash register is being used by one person at a time ... to be sure that there are layers of accountability," Chambers said.

Oregon state auditors conduct annual financial reviews of state agencies but not local governments.

Instead, Oregon requires all but the smallest local agencies to pay for annual independent audits by a certified public accountant, a practice that fraud experts say sounds more foolproof than it really is.

"A financial audit is not a fraud-detection tool," said Tiffany Couch, a forensic accountant at the Acuity Group in Vancouver, Wash., which specializes in fraud investigations.

Most instances of fraud are revealed by tips to authorities or by accident, not through financial audits, she added.

Steven Briggs, chief counsel of the Oregon Department of Justice's criminal division, warned small organizations not to rely too much on audits, citing the case of the Oregon Coast Aquarium, where "an independent auditor came in and said everything was fine when it wasn't."

The former director of the Oregon Coast Aquarium pleaded guilty to felony forgery charges in 2003 after being accused of concealing a $2 million loan to help cover the cost of an exhibit.

Philip Hopkins, Oregon's municipal-audit manager, says financial audits are intended more to verify that financial statements are in order than to ferret out embezzlers. It's up to an agency's financial manager or board to reconcile bank statements and keep tabs on everyday spending, he said.