Washington State Auditors Office

Fraud Investigation Report

Department of Social and Health Services

Investigation Period August 7, 2003 through November 18, 2010 Report No. 1007720

Issue Date May 15, 2012

Washington State Auditor Brian Sonntag

May 15, 2012

Robin Arnold-Williams, Secretary Department of Social and Health Services P.O. Box 45010 1115 Washington St. S.E. Olympia, WA 98504-5010

Report on Governmental Fraud Investigation

Attached is the official report on a misappropriation at the Department of Social and Health Services. On December 9, 2010, the Department notified the State Auditors 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 review of the Departments investigation of a loss of public funds from August 7, 2003 through November 18, 2010. The purpose of our review was to determine if we agree with the Departments findings Our review was performed under the authority of state law (RCW 43.09.185) and included procedures we considered necessary under the circumstances. Questions about this report should be directed to Communications Director Mindy Chambers at (360) 902-0091.

BRIAN SONNTAG, CGFM STATE AUDITOR cc: Jacob White, Public Disclosure and Ethics Administrator

Insurance Building, P.O. Box 40021 Olympia, Washington 98504-0021 (360) 902-0370 TDD Relay (800) 833-6388 FAX (360) 753-0646 http://www.sao.wa.gov

Special Investigation
Department of Social and Health Services
August 2003 through November 2010 INVESTIGATION SUMMARY
On December 9, 2010, the Department of Social and Health Services reported a potential loss of public funds to our Office. The Department investigated and found a fiscal analyst had misappropriated $304,755 from three accounts. One of those accounts contained money belonging to residents of the Frances Haddon Morgan Center and a second account contained public donations. The Department suspended and later terminated the employment of this individual, who pleaded guilty to the misappropriation on January 5, 2012. Sentencing for this individual is scheduled for later this year.

BACKGROUND AND INVESTIGATION RESULTS

The Frances Haddon Morgan Center was home for more than 50 disabled individuals until it closed in December 2011. The Division of Developmental Disabilities within the Aging and Disability Administration at the Department of Social and Health Services administered the Center. On December 9, 2010, the Department contacted our Office regarding a potential loss of public funds. The Department stated its auditors, who were performing an internal audit of the Center, found issues regarding accounts that held money for the residents. After finding these issues, the auditors expanded their work to look for payments to unauthorized vendors or clients, unsupported or altered transactions, and deposits. The Department found the Fiscal Analyst misappropriated at least $304,755 from August 2003 through November 2010. The amount includes $212,000 taken from 96 client accounts; $16,191 in state funds, $57,661 in donated funds; and $18,903 in federal funds. The Department found the Fiscal Analyst used the following methods to misappropriate funds: Payments

Photocopied and altered information such as purchase dates, method of payment and approval signatures on original purchase requisition forms and invoices to support fraudulent payments. Increased dollar amounts and/or added taxes to some invoices when no tax was to be charged. The Fiscal Analyst altered invoices to increase the amounts to obtain large dollar payments. Changed the payee on several checks from a vendor name to "FHMC -- For Cash". The Fiscal Analyst cashed the altered checks and took the funds.

Washington State Auditors Office 1

Cash-receipting

Marked cash transactions as void on the cash log and on back-up copies of the receipts so it appeared no transaction took place and kept the funds. Kept funds that were not spent during group outings rather than receipting the funds and depositing them back to Center accounts. Changed the mode of payment (cash or check) to conceal cash taken.

We confirmed $24,435 in cash collected was not deposited in any of the Center's bank accounts and the remaining balance taken, $280,320, was obtained through fraudulent payments.

RESULTS
We reviewed the Departments investigation and agree with its scope, methodology and conclusions. The amount of the loss, $304,755, is less than the states bond deductible of $500,000.

CONTROL WEAKNESSES
The Fiscal Analyst performed incompatible duties related to the handling of checks and cash, preparing accounting records and completing bank reconciliations with no independent review.

RECOMMENDATION
We recommend the Department strengthen internal controls over cash-receipting and payments agency-wide by ensuring duties are segregated and adequate supervisory oversight and/or compensating controls are provided to safeguard public resources. We also recommend the Department seek recovery of the misappropriated $304,755 and related investigation costs of $3,846 from the former employee. Any compromise or settlement of this claim by the Department must be approved in writing by the Attorney General and State Auditor as directed by state law (RCW 43.09.330). Assistant Attorney General Cindy Evans is the contact person for the Attorney Generals Office and she can be reached at (360) 586-2837 or cindye@atg.wa.gov. The contact for the State Auditors Office is Jan Jutte, Director of Legal Affairs, who can be reached at (360) 902-0363 or jan.jutte@sao.wa.gov.

DEPARTMENTS RESPONSE
The Department concurs with this Investigation Report. In response to this audit the Department immediately changed the controls in place at Frances Haddon Morgan Center. Banking duties, checking account activities, handling of cash and resident trust accounting methods were revised. Reconciliation and internal audits were assigned to Rainier School business office that functioned independently.

Washington State Auditors Office 2

Additionally, a centralized institutional business services organization was established, thus removing some business functions from the de-centralized, local control of facilities. Also, FHMC prepared and implemented a corrective action plan that was approved by the Departments Internal Audit Program to ensure all citations and findings were appropriately addressed. The Department has been working cooperatively with the United States Attorneys office, Department of Justice, Western District regarding the loss and the internal costs incurred by DSHS to investigate this situation and reimburse the residents for their personal losses. DSHS has requested that any restitution that can be made should be made to the department. The employee who misappropriated Department and client funds pled guilty to five counts of embezzlement, theft, and conversion of public money, property, or records. She is scheduled to be sentenced in June 2012.

STATE AUDITORS OFFICE REMARKS

We thank Department officials and auditors for their assistance and cooperation during our review.

Washington State Auditors 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. Our mission is to 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 Deputy Chief of Staff Chief Policy Advisor Director of Audit Director of Performance Audit Director of Special Investigations Director for Legal Affairs Director of Quality Assurance Local Government Liaison Communications Director Public Records Officer Main number Toll-free Citizen Hotline Website Subscription Service Brian Sonntag, CGFM Ted Rutt Doug Cochran Jerry Pugnetti Chuck Pfeil, CPA Larisa Benson Jim Brittain, CPA Jan Jutte, CPA, CGFM Ivan Dansereau Mike Murphy Mindy Chambers Mary Leider (360) 902-0370 (866) 902-3900 www.sao.wa.gov https://www.sao.wa.gov/EN/News/Subscriptions/

(SAO FACTS.DOC - Rev. 09/11)