In the wake of the largest municipal fraud in U.S. history, the questions still swirl. How could the treasurer of an Illinois town with an annual budget of $6 million to $8 million embezzle nearly $54 million over two decades? How could such a scam go undetected in annual audits by two independent accounting firms and in annual audit reviews by state regulators?

What can the accounting profession learn to prevent or catch similar schemes in the future?

This article looks at how a quarter horse enthusiast named Rita Crundwell drained the coffers of Dixon, Ill. It examines the circumstances that laid the foundation for the fraud, the strategies she used to perpetrate it, and the red flags that should have signaled something was amiss.

The Crundwell chronicle
Crundwell was a longtime employee of the city of Dixon, her hometown, before she started stealing from its coffers. She began working for the town in 1970, while she was still in high school, and quickly moved into a finance role. In 1983, she was named treasurer and comptroller.

She launched the fraud scheme on Dec. 18, 1990, when she opened a secret bank account in the name of the City of Dixon. Crundwell was the only signatory on the account, which was called the RSCDA - Reserve Fund. The initials stood for Reserve Sewer Capital Development Account, and Crundwell was the only person who knew it existed.

She began transferring funds from city accounts into the RSCDA account in 1991. That year, Crundwell transferred more than $181,000 into the RSCDA account.

The rate of theft escalated over the 21 years she pilfered money from the town.

Trust is not an internal control
The city of Dixon placed a great deal of trust in Crundwell—too much, as it turned out. The city, which does not have a city manager, gave Crundwell wide rein over its finances and set the stage for her massive fraud.

Occasionally, Dixon employees or leaders would question Crundwell about financial shortfalls. She would respond that the state of Illinois was late with payments to the city. The excuse was believable because the state sometimes was as much as a year late with payments. The problem was that no one independently verified Crundwell’s story. City officials relied on annual audits by independent audit firms as well as annual reviews by the state of Illinois. The town’s finances were given the OK in those reviews, and Crundwell continued to move city money into her accounts.

“Raising questions is a start, but making sure these questions are answered appropriately is key,” said Kelly Paxton, a licensed private investigator for Denver-based Financial CaseWorks LLC.

Crundwell built trust with the community by building a large quarter horse breeding operation that employed many residents and through her interactions with her neighbors and co-workers. People asked to describe Crundwell often said things such as:

• She was sweet as pie;
• You couldn't find a nicer person on the face of the planet to talk to;
• She was the nicest person in the world to work for;
• If you needed something, she'd give it to you; and
• If you thought something needed to be done, she did it.

The lesson painfully learned by Dixon was that trust without verification is a recipe for disaster. CPAs can learn from that mistake as well as a couple of fraud red flags that warranted, but failed to receive, closer scrutiny.

Red Flag No. 1: Failure to segregate duties
The segregation of duties is a critical aspect of any organization’s internal control program. In Dixon, Crundwell controlled too much of the financial reporting process. She was able to receive, sign, and deposit checks with little oversight from any other city official. Under the Dixon commissioned government, the mayor and four part-time officers oversee their own divisions, which enabled Crundwell to oversee the majority of city financial functions. Crundwell balanced the checkbook, made deposits, and obtained all financial statements sent to the city of Dixon mailbox, over which she had full control. While the city of Dixon was suffering through yearly budget deficits and spending cuts (see “The Dixon Fraud Timeline”), Crundwell had the opportunity to embezzle amounts as large as $5.8 million in 2008.

Dixon’s failure to segregate duties allowed Crundwell to set up and operate a fairly simple fraud scheme. In December 1990, Crundwell opened the aforementioned RSCDA bank account in the name of the city of Dixon, with the city of Dixon as the primary account holder and “RSCDA c/o Rita Crundwell” stated as the second account holder. Between December 1990 and April 2012, Crundwell transferred funds from Dixon’s money market account to various other city bank accounts and transferred city funds into her RSCDA account. The Illinois Fund, a money market mutual fund available to Illinois municipalities, contained revenues from taxes, fees, and federal grants that were deposited by each city. Crundwell would regularly wire money from the Illinois Fund into several city accounts and then transfer money from the accounts into the Capital Development account.

With the increase in Capital Development funds, Crundwell would write checks made out to “Treasurer” and deposit the funds into the RSCDA account. Crundwell created 159 fictitious invoices purported to be from the state of Illinois to show the city’s auditors that the funds she was fraudulently depositing into the RSCDA account were being used for legitimate purposes. She repeatedly transferred city funds into the RSCDA account and used the money to pay for her personal and private business expenses, including horse farming operations, personal credit card payments, real estate, and vehicles.

Red Flag No. 2: Lavish lifestyle
Exactly what prompted Crundwell to start stealing from Dixon has not been revealed, but she spent much of her ill-gotten gains in building a quarter horse breeding operation that produced 52 world champions as recognized by the American Quarter Horse Association (AQHA). The AQHA named Crundwell its breeder of the year eight consecutive years before her arrest in 2012.

Crundwell poured millions of dollars in stolen funds into RC Quarter Horses LLC, building a large ranch in Dixon, traveling to competitions, and buying horse trailers with price tags in the six figures and motor homes with price tags north of $1 million. She was willing on several occasions to spend well into the six figures to buy individual horses. The total she spent on her operation is not known, but when federal authorities seized Crundwell’s assets after her arrest, she owned 400 horses.

After the asset seizure, the U.S. Marshals Service was in charge of maintaining the care of her quarter horses. Jason Wojdylo, chief inspector of the Asset Forfeiture Division of the U.S. Marshals Service, said that the government spent approximately $200,000 per month caring for the horses before they were sold at auction.

Crundwell’s spending was not limited to her quarter horse operation. She lived an extravagant lifestyle for someone who received an $80,000 annual salary. In addition to the horse farm, she owned several family residences, including one in Florida, approximately 80 acres of land, and numerous impressive personal vehicles. In addition, she shelled out tens of thousands of dollars for jewelry purchases.

Some Dixon residents raised questions about Crundwell’s lavish living, but they were answered by a number of rumors that explained her income, including one that Crundwell had an investor in her horse business and another that her family was in the satellite business and her family owned all of the cellphone towers in Illinois. 

Crundwell pleaded guilty to the fraud and on Feb. 14 was sentenced to 19 ½ years in prison. The 60-year-old must serve at least 16 ½ years, or 85%, of her sentence, which was slightly less than the maximum 20 years sought by prosecutors. Crundwell, who also was ordered to repay the nearly $54 million she stole, is appealing the sentence. The town is unlikely to see more than a fifth or so of that money returned, according to prosecutors on the case.

The Dixon fraud timeline
A timeline of major events in the Rita Crundwell fraud scheme.

• 1983: The city of Dixon, Ill., names Rita Crundwell comptroller and treasurer.
• 1990: Crundwell opens a secret bank account in the name of the city of Dixon.
• 1991: Crundwell steals $181,000 from the city of Dixon. She spends $18,728 in July to buy a 28-foot Suncruiser Pontoon boat with a deluxe buggy top, wet bar, propane grill, and playpen cover. She also spends more than $3,000 on diamond stud earrings and other jewelry.
• 1992: Crundwell steals $121,367.
• 1993: Crundwell steals $225,287. The city of Dixon reports a deficit of nearly $415,000 and makes budget cuts totaling $195,000.
• 1994: Crundwell steals $117,281. Dixon cuts more than $150,000 from budget.
• 1995: Crundwell steals $103,664. Dixon reports a deficit of $322,214 and slashes the budget by more than $185,000.
• 1996: Data not available.
• 1997: Crundwell steals $328,622 and uses stolen funds to pay for a custom saddle, enclosed golf cart, and a horse named Two Thumbs Up. The city reports deficits as high as $232,600 and makes more than $100,000 in budget cuts.
• 1998: Crundwell steals $767,487 and uses stolen funds to buy a motor home for $100,000, a deck boat for $50,000, and a 1998 Chevy pickup truck for $28,000.
• 1999: Crundwell steals nearly $1.1 million and buys a horse named Can’t Fool Patty for $125,000.
• 2000: Crundwell steals $1.9 million and spends $450,000 to remodel and expand her home in Dixon. The city reports a deficit of $370,674 before making tens of thousands in budget cuts.
• 2001: Crundwell steals $2.6 million and buys three horses for a combined $525,000. The city reports a deficit of $730,576 before another round of budget cuts.
• 2002: Crundwell steals a shade under $3 million and uses stolen funds to buy a motor home for $400,000, purchase a horse for $200,000, and buy her boyfriend a 1967 Chevy Corvette for $56,000. The city of Dixon institutes a hiring freeze due to budget deficits.
• 2003: Crundwell steals slightly more than $3 million. The city reports a deficit of nearly $1.3 million blamed in large part on state funding cuts.
• 2004: Crundwell steals almost $3.5 million and buys a new motor home costing $1.7 million. Dixon reports a deficit of $1.6 million before additional budget cuts are made.
• 2005: Crundwell steals $4.6 million and builds a horse ranch facility in Dixon, writing checks to construction companies totaling about $650,000. She also trades in the motor home she bought 11 months earlier and pays a $235,000 balance to buy a new motor home for $1.82 million.
• 2006: Crundwell steals $4.4 million. The city reports a deficit of $1.7 million and announces a budget freeze plus $700,000 in cuts from the capital equipment budget.
• 2007: Crundwell steals $4.75 million. She trades in the motor home she bought in 2005 and pays a balance of $545,000 to buy a new motor home costing $1.96 million. The city reports a deficit of more than $1.1 million.
• 2008: Crundwell steals $5.8 million. She spends $425,000 and trades in the motor home she bought the previous year to purchase a new motor home costing $2.1 million.
• 2009: Crundwell steals $5.6 million. She spends $335,000 to buy a pair of horses and $260,000 to buy a new horse trailer. She also wires $105,097 for the purchase of a home in Englewood, Fla.
• 2011: A Dixon city clerk opens the mail while Crundwell is on vacation, discovers the RSCDA account and immediately alerts the mayor, who then contacts the FBI.
• 2012: Crundwell is arrested and pleads guilty to fraud charges.
• 2013: A judge sentences Crundwell to 19 years, 7 months in prison.

Source: U.S. Attorney’s Office, Northern District of Illinois.