Inside the investigation: Following a 13-year money trail of deception

Q&A with Kentucky State Auditor Adam Edelen

COVINGTON, Ky. – Kentucky State Auditor Adam Edelen released his report to the city of Covington last week, detailing how nearly $800,000 was stolen from city coffers under the leadership of former finance director Robert Due.

A team of four investigators spent more than 1,400 hours over a five-month period methodically combing through tens of thousands of documents in the case, which also lead to theft charges against Due. Due, 63, has pleaded not guilty to charges, and remains jailed.

In this Q&A, WCPO takes you inside the investigation, with the step-by-step on how it was conducted, who will pay the bill for the probe and why the state auditor said it's likely even more money was taken.

Q: How did Covington find out about the possibility of embezzlement?

A: Mr. Due forgot to delete the check history of two printed checks from the printer spool, which led an employee to begin asking questions.

Q: Tell me when and how you were first notified about Covington’s financial woes.

A: Obviously media reports of his arrest were brought to my attention, but (Kenton County Attorney) Rob Sanders contacted me in the early days to ask for assistance, as did city officials.

Q: Can you detail for me the step-by-step of your office’s investigation?

A: The assistant state auditor and another manager first went into Covington to conduct high-level interviews with city leaders.

-Two auditors began conducting interviews with finance department staff.

-Two additional auditors were brought in solely to review PDFs of 66,553 canceled checks, while the other two auditors focused on reviewing the internal controls.

-Other documents, such as invoices, bank statements and personnel files were provided by the city and reviewed by the four auditors.

-Written confirmations and inquiries with vendors and banks also were conducted. 

-Auditors established an outline of findings and recommendations and then pulled it together as a draft report.

-The draft was reviewed by high-level staff in the auditor's office, including the communications director, general counsel, assistant auditor and myself.

-It is then shared with city leaders, who are given an opportunity to ask questions and provide a written response.

-Upon receipt of the response, the auditor's office finalized the report.

Q: How many pieces of documentation did you sort through?

A: 66,553 checks, plus an unknown number of documents such as bank statements, invoices, personnel files and any policies and procedures that existed on paper.

Q: With each piece of documentation, what did you do?

A: Two auditors focused strictly on analyzing PDFs of canceled checks on their computers. They attempted to find a way to automate the process, but that was unsuccessful because the information wasn’t available to facilitate an automated data matching process.

They then had to manually review each check, looking at the endorsing signatures and vendors the checks were made out to.

A database was created listing those vendors’ names. Those names were then analyzed using city records and Google to establish whether they were legitimate or fictitious. 

Documents like personnel files and policies and procedures were used to determine the findings related to lack of controls and lack of properly trained individuals.

Q: How many hours and people were involved in the investigation?

A: Roughly 1,400 hours among a core team of four, over a five-month period. Additional staff such as the communications director, general counsel, assistant auditor and myself, reviewed the draft report.

Q: What does this investigation cost? And who pays that bill?

A: The auditor's office will bill the city approximately $85,000, which is obviously a small percentage of the amount the exam found (was stolen). It is anticipated that the city, through claims with its insurers and civil suits against Mr. Due and others, will be able to recover much of that money.

Q: What was the most challenging part of investigating Covington’s finances?

A: The manual review of the 66,000+ checks was obviously quite tedious.

Additional challenges included:

  • Complete records of the city were not maintained for the entire time period.
  • Access to Mr. Due's bank records was limited.
  • Access to his family's bank records was not available since they are not public records and therefore, outside the scope of our office.
  • Although the city identified specific methods for misappropriating funds, which were reportedly acknowledged by the former finance director, auditors detected at least one additional method in which funds were misappropriated, and also identified additional significant weaknesses in internal controls that could have permitted fraud to occur without detection. There is significant risk that additional funds were stolen, that have not been identified.

Q: What was it in your investigation that made you realize that it was the city, in part, to blame for the alleged embezzlement?

A: When we began reviewing internal controls and discovered they were insufficient, specifically when we realized he was the IT administrator and had total access to the financial software. Also, when we discovered employees were not sufficiently trained on internal controls and when we requested written policies and procedures and job descriptions and discovered they were largely nonexistent.

Q: What should the public know about your investigation and the resulting report?

A: The examination was conducted by professional auditors who have extensive training in accounting standards and forensic auditing. All findings are supported with multiple sources of evidence, such as documents and interviews. Any findings that could not be sufficiently supported are not contained in the report.

Q: What can other cities learn from your report to the city of Covington?

A: I truly hope that local governments take a good, hard look at this report and specifically, the recommendations we made for improving internal controls. Those recommendations would provide any government entity with a checklist of accounting standards they most certainly should have in place to prevent and deter this kind of fraud.

Q: Does this case rank in the top most-embezzled that you’ve investigated?

A: Yes.

Q: What are the top five takeaways for concerned citizens?

  • Be engaged. 
  • Attend meetings.
  • Ask for pertinent documents.
  • Ask questions.
  • Demand accountability.

 

For more stories by Jessica Noll, go to www.wcpo.com/noll. Follow her on Twitter @JessicaWCPO.

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