The city of Cortez has been digging into a recent embezzlement case, but a 2016 software switch makes it hard to determine how long the fraud was happening.
The city says an undisclosed city employee stole about $25,000 from Cortez in 2017, but investigators have not determined the full extent of the fraud, because data was lost when Cortez switched from AS400 to the Casselle financial system three years ago.
The City Council approved a contract for an IT specialist Tuesday night to try and recover this data. The contract amount ranges from $4,000 to $20,000, based on the accessibility of the data.
Councilors did not approve the extra $5,000 the finance department requested in case the work exceeded the projected range.
“We can’t keep supplementing a new magic bullet,” said Councilor Jill Carlson. “We’ve just got to get it fixed. And I don’t feel comfortable authorizing $25,000, knowing that we might only recover $25,000.”
Even if the city gets reimbursed, she added, “it doesn’t seem to me like a good use of our funds.”
The vote was 6-1. Councilor Ty Keel as the lone dissenter.
Over the summer, City Manager John Dougherty announced that it had been discovered that a former city employee had embezzled from the city. The case is being investigated by the Colorado Bureau of Investigation along with forensic auditors from Baker Tilly Virchow Krause LLP.
Finance Director Ben Burkett said that the city’s insurance plan covers the fraud loss and forensic auditors. He declined to share the name of the alleged embezzler at this time.
But the investigation poses some issues for the city. Back in April, city officials discovered a faulty software conversion in 2016 led to inadequate financial documentation, preventing Cortez from receiving proper audits for the past three years. The backlog of audits means that property taxes and Conservation Trust Funds – Colorado Lottery proceeds directed to municipalities across the state – have been withheld, and the city hasn’t been able to apply for grants from the Colorado Department of Local Affairs.
The city’s bond rating was removed earlier this year, Burkett told The Journal. Once the audits are in order, they will be able to submit the appropriate documentation to hopefully receive a new rating, he said.
The city was working to fix the situation, and the 2016 financial audit was nearly completed, but the discovery of embezzlement halted its progress, since CBI told Cortez to stop cleaning up its accounts while the investigation was ongoing.
Burkett said that once the audits are complete and successfully submitted to the state, both the property taxes and CTF monies from 2018 and 2019 will be remitted to the city – about $170,000 for each. The proposed 2020 budget includes these remittances, with property tax revenues budgeted at $280,000 and CTF funds at $255,000.
Burkett said forensic auditors discovered that about $25,000 was stolen in 2017. They believe the embezzlement goes back farther, though.
“It’s well known, in talking with the CBI and with the forensic auditors, fraud doesn’t usually start and stop,” Burkett said Tuesday night. “It goes on.”
The problem is that auditors haven’t been able to review reports from before 2016, when the city converted from AS400 to Casselle.
“Financial reports from the previous financial system, AS400, for previous years were printed off in hard copy format,” Burkett wrote in a staff report. “Regrettably, city staff have found some reports were destroyed; directly in violation with financial retention policies.”
While the city hasn’t been able to recover the reports in-house, staff hope that an IT specialist can. Two sets of backups are available: one on local servers and another on AS400 8 mm tape.
If restored, the forensic auditors will be able to analyze data from farther back in time, which could strengthen the city’s insurance claim, Burkett said. However, it was unknown whether the data would be available on the backups.
At Tuesday night’s meeting, Burkett asked councilors to approve a contract with IT specialists from Kroll Cyber Security LLC. The contract ranged from $4,000 to $20,000, since fees are charged on an hourly rate, and the data’s accessibility is unclear – the process may be exceptionally lengthy to access data on the 8 mm tape.
He also asked for the ability to increase the IT specialist contract up to $25,000 if needed, so staff wouldn’t have to return to council for permission if their work exceeds the $20,000 limit.
Councilors debated the value of approving more funds to solve the question of how far back the embezzlement goes.
“I don’t think there’s anyone up here that does not want to have some conclusion to that question,” Keel said. “The thing is, it’s beginning to be a really expensive question.”
Burkett agreed that it was a “gamble” but felt that searching for the missing data was worthwhile and could help the city’s insurance claim.
“If it’s there, it only increases our insurance claim, it increases the potential of our insurance claim,” he said. “If it’s not there, all it does is really offset whatever claims we would get back from those insurance organizations.”
He emphasized that the audits backlog is separate from the fraud.
Mayor Karen Sheek also was hesitant about approving $25,000 for an uncertain result, although she added that they had known early on this would be a “costly endeavor.”
“We all knew this was going to be expensive,” she said.
The specialists are expected to begin work soon, Burkett said.