Washington State Auditor’s Office

Fraud Report

Washington Counties Risk Pool

Thurston County

Report No. 1001789

Issue Date

July 20, 2009

Washington State Auditor

Brian Sonntag

July 20, 2009

Board of Directors

Washington Counties Risk Pool

Thurston County

Olympia, Washington

Report on Government Fraud Investigation

Attached is the official report on a misappropriation at the Washington Counties Risk Pool. On

July 28, 2008, the Risk Pool’s attorney notified the State Auditor’s 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 investigation of misappropriation of real property occurring

in January 2003. The purpose of our investigation was to determine if a misappropriation had

occurred.

Our investigation was performed under the authority of state law (RCW 43.09.260) and included

procedures we considered necessary under the circumstances.

Questions about this report should be directed to Fraud Manager Jennifer Forsberg at

(360) 480-1103, or Director of Special Investigations Jim Brittain at (360) 902-0372.

BRIAN SONNTAG, CGFM

WASHINGTON STATE AUDITOR

BS: lcb

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

Investigation Summary

Washington Counties Risk Pool

Thurston County

January 1, 2001 through September 30, 2008

ABOUT THE POOL

The Washington Counties Risk Pool was established to provide its member counties

with programs and services, including self insurance, purchasing of insurance and

contracting for or hiring personnel to provide administrative services, claims handling

and risk management. The Risk Pool is governed by a Board of Directors consisting of

one director designated by each member county.

Director administers day-to-day operations with oversight from an 11-member Executive

Committee and the Board. The Risk Pool has an annual operating budget of

The Board-appointed Executive

approximately $1.7 million and nine employees.

ABOUT THE INVESTIGATION

On July 28, 2008, the Risk Pool contacted our Office and the Mason County Sheriff’s

Office regarding a potential loss of public funds and we began an investigation.

Along with the Risk Pool, we reviewed dozens of real property files and payment records

to determine whether the misappropriation, which occurred through a real property

transfer, was an isolated occurrence.

We did not find evidence of further

misappropriation. However, our review was only able to go back seven years because

the Risk Pool is not required to keep documentation any longer under the state records

retention schedule.

During the Risk Pool’s regularly scheduled audit of 2008, we reviewed current internal

controls over safeguarding of public resources. No significant concerns were noted as

the Pool has begun using new procedures for these types of transactions.

The Mason County Sheriff’s Office also performed an investigation into the property

transfer. We reviewed the investigation and agreed with its results and conclusions.

RESULTS

Our review found a former employee of the Risk Pool circumvented internal controls and

misappropriated real property that the Risk Pool had obtained through a lawsuit.

Without the knowledge of Risk Pool administrators, the former employee transferred the

property, valued at $231,229.43, to a relative for $12,500 in January 2003. The former

employee did not have the authority to act on behalf of the Risk Pool to transfer real

property owned by it. Records related to the property damage lawsuit and settlement

are missing. In addition, we reviewed the Risk Pool’s bank records but were unable to

locate receipt of the $12,500 payment that was due for the property.

Washington State Auditor's Office

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The former employee pleaded guilty to first-degree theft in Mason County Superior Court

on May 26, 2009. Sentencing is scheduled for August 3, 2009.

RECOMMENDATION

We recommend the Risk Pool continue to follow internal controls, including oversight

and monitoring, over real property to adequately safeguard public resources.

We recommend the Risk Pool seek recovery of the real property from the former

employee. Any compromise or settlement of this claim must be approved in writing by

the Attorney General and State Auditor as directed by RCW 43.09.260.

Assistant

Attorney General Traci Friedl is the contact person for the Attorney General’s Office and

she can be reached at (360) 586-1912 or tracif@atg.wa.gov. The contact for the State

Auditor’s Office is Jan Jutte, Director of Legal Affairs and she can be reached at

(360) 902-0363 or juttej@sao.wa.gov

Bond coverage for Pool employees is as follows:

Insurance Company:

Type of Policy:

Policy Number:

Travelers

Commercial Crime

105221544

Amount of Coverage:

Period of Coverage:

$3,000,000

January 11, 2009 until cancelled

POOL’S RESPONSE

Thank you for the opportunity to respond to the government fraud investigation recently

conducted by your office. The efforts your investigative team put forth and the

assistance, guidance and understanding that they have provided since this matter arose

are appreciated. While we could take exception with a few minor details conveyed in the

Investigation Summary compiled by your office, the breach of trust and authority on the

part of a former employee of the Washington Counties Risk Pool ("Pool") that led to a

substantial theft of real property noted in the Summary did in fact occur and must not be

ignored.

The Mason County Prosecuting Attorney, as you are aware, pursued the former

employee with criminal charges. The former employee has already pled guilty and is

awaiting sentencing, the hearing for which has unfortunately been continued more than

once and is now scheduled August 3rd at 8:30 AM. At the hearing, we will ask on behalf

of the Pool, its Board of Directors, its staff, and the citizenry and taxpayers that they

serve, that the Court give great weight to the breach of trust by a public official

demonstrated by the former employee's crime in setting the sentence to be imposed.

The Pool submitted a restitution request to the Court seeking recovery of the large

amount paid by the Pool to settle the dispute and acquire the property, or for

reconveyance of the real property that was fraudulently conveyed by the former

employee without (fair market) payment. The Pool's restitution request was recently

amended to include the approximate $7,500 in costs it has incurred from the special

investigations into this matter. The Court has set the Restitution Hearing concurrent with

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the Sentencing Hearing noted earlier. If the payment or reconveyance being sought is

not forthcoming from the criminal proceedings, the Pool is poised to address recovery

through civil legal actions.

This incident will impact the Pool for years, probably forever, but certainly longer than

the sentence that will be imposed by the Court upon the former employee. This is due to

the need, both expressed and perceived, for the Pool to change its operations and/or

establish better controls now that this incident has happened. Not only does that impose

even more direct costs on the Risk Pool's operations which will ultimately be a cost to

taxpayers, but it is already resulting in an obvious degradation of the trust that formerly

existed among the Pool's member counties, its Board, and its employees. More simply

put, when those who were associated with the Pool operated in a professional, honest

and trustworthy manner, its operations were more efficient, friendlier, and less

expensive.

Now the Pool must adopt, implement and monitor more bureaucratic

controls that will further burden its operations. We must be suspicious of everyone and

double-check their conduct. As a result, there will be greater costs and with obviously

less trust. These are losses beyond those of the theft which are the result of the former

employee's conduct.

Again, we appreciate the investigative efforts of your office and staff. And thank you for

this opportunity to comment on the Investigation Summary your office has produced.

STATE AUDITOR’S OFFICE REMARKS

We thank Risk Pool officials and personnel for their assistance and cooperation during

the investigation.

Washington State Auditor's Office

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Contacts

Washington State Auditor

Brian Sonntag, CGFM

sonntagb@sao.wa.gov

brittaij@sao.wa.gov

(360) 902-0360

(360) 902-0372

(360) 725-5352

(360) 902-0377

Director of Special Investigations

Jim Brittain, CPA

Deputy Director of Special Investigations

Kim Hurley, CPA

hurleyk@sao.wa.gov

Whistleblower and Hotline Program Coordinator

Julie Cooper

cooperj@sao.wa.gov

Investigators

Sandy Miller

Cheri Elliott

Tracy Aga

millers@sao.wa.gov

elliottc@sao.wa.gov

agat@sao.wa.gov

(360) 902-0378

(360) 725-5358

(360) 725-5336

Director of Communications

Mindy Chambers

chamberm@sao.wa.gov

leiderm@sao.wa.gov

(360) 902-0091

Public Records Officer

Mary Leider

(360) 725-5617

(360) 902-0370

(866) 902-3900

www.sao.wa.gov

Main phone number

Toll-free hotline for reporting government waste, efficiency

Web site

To receive electronic notification of audit reports, visit:

https://www.sao.wa.gov/EN/News/Subscriptions

Americans with Disabilities

In accordance with the Americans with Disabilities Act,

this document will be made available in alternate formats.

Please call (360) 902-0370 for more information.