Fighting More Than Fire: A Look into Fire Departments’ Struggle with Fraud
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By Nicolette Smith, Jay Kim, Peiyao Lyu, and Professor John E. "Jack" Little, CPA, CFE
Cornell University
Cornell University
Albert Melin was a respected community member who joined the volunteer Patterson Fire Department in Putnam County, NY in 2012. The following year, he was elected treasurer, a position where he was entrusted with handling financial records and paying department expenses. Melin seemed to be a suitable candidate for the position. He ran his own chiropractic practice in nearby Middletown, NY, and his wife was a teacher at the local high school. By anyone’s standards, they were a typical family with three children, not different from many families in Patterson.
However, within a few months of being elected treasurer, Melin began writing unauthorized department checks to two businesses he owned and operated. According to court records, this eventually included 130 fraudulent transactions over nearly two years for a total of $1.2 million, an amount greater than the department’s annual budget as allocated by the town of Patterson, according to court documents. Melin’s misappropriation of department funds is not the only case of a volunteer fire department in New York state being defrauded by an elected treasurer. Why does this occur so frequently? Volunteer fire departments, generally trusted and respected establishments within communities, often lack internal controls secure enough to prevent or detect the perpetrator of fraud. This lack of oversight has spawned fraud cases in volunteer fire departments across New York state, including the Mahopac, Spencer, and Monterey Fire Departments – three more examples of this all too common occurrence.
Volunteer fire departments are funded through taxes allocated annually by the municipality they serve. In New York alone, more than $730 million in taxes was generated to fund 886 volunteer fire districts in 2015, according to data from the New York State Comptroller’s Office. Unfortunately, the funding is not always properly safeguarded by those who handle the department financing. More than 140 arrests and more than $37 million in restitution have resulted from occupational theft from volunteer fire districts in New York state in the last six years.
Although volunteer fire departments and other not-for-profit organizations may not have as many financial resources as many for-profit companies, not-for-profit organizations are still the victims in more than 10 percent of all cases of fraud, with a median loss of $100,000, according to the 2016 Global Fraud Study conducted by the Association of Certified Fraud Examiners. In fire departments, an elected treasurer is given all of the organization’s fiscal responsibilities and reports to the board of fire commissioners (in some cases a board of directors). As is too often the case, a lack of oversight and basic internal controls allows the treasurer, or those working closely with the treasurer, to abuse their position of trust for monetary gain.
How the Fraud Was Carried Out
Beginning in December 2013, Albert Melin launched his fraud scheme by writing department checks to two businesses he operated that provided chiropractic and consulting services. Melin also perpetrated fraud by using the fire department debit card to pay personal expenses and expenses for his businesses. It would take more than 23 months before the fraud was discovered.
Melin used the stolen money to lease cars, make mortgage payments on his house, and take his family on vacations. He had no trouble concealing the fraud. Melin would simply not record the checks he wrote or the charges he made on the department debit card. He would then fabricate more reasonable bank balances at the monthly department meetings and budget hearings. This went on for so long because nobody was overseeing his work, verifying the bank reconciliations, or checking the accounting records, according to court records.
How the Fraud Was Discovered
In October 2015, at a Patterson Town Board Meeting, Councilman Kevin Burns reported that a concerned citizen had emailed the board about looking into the fire department’s finances. The citizen contacted the town board after reading a newspaper story about the discovery of $5 million stolen from the Mahopac Fire Department, also in Putnam County. "We were entitled to an annual audit anyway," Burns said in an interview. "We really just pushed harder in getting the independent audit back."
According to New York State’s General Municipal Law, fire companies with revenues of more than $300,000 a year are required to submit to an independent audit annually. Although this is both a deterrent and a potential way to detect fraud, the required audit conducted in 2014 did not catch Melin’s fraudulent activity. It was not until the 2015 audit, as requested by the concerned citizen, that problems with the finances were first discovered. As the magnitude of the fraud was revealed, the FBI and IRS stepped in to lead the investigation.
The federal indictment resulted in Melin pleading guilty in November 2016 to one count of wire fraud and two counts of subscribing to false tax returns. Melin is serving 33 months in federal prison and also agreed to pay back the money stolen plus more than $197,000 in taxes he dodged by falsifying his tax returns.
Other Cases of Fraud in Fire Departments
In Mahopac, the former treasurer of the fire department, Michael Klein, was arrested in June 2016 and charged with embezzling nearly $6 million from the department. Klein wrote 275 checks to himself over a 13-year period and then purchased items including a 1931 American LaFrance antique fire engine, a 55-foot yacht, and a $2.5 million second home in Florida. In his scheme, he wrote department checks to two businesses he owned and altered the transaction when it was recorded in the books of account. He plead guilty to one count of wire fraud, six counts of subscribing to false tax returns, one count of obstructing a grand jury investigation, and one count of making false statements to the U.S. Attorney. He was sentenced in June 2017 to six years and five months in federal prison and is liable for $5.7 million in restitution.
In the Monterey Fire Department located in Schuyler County, Kimberly and Larry States served as the treasurer and fire chief, respectively. Kimberley States was able to purchase personal items and pay personal bills using the department’s debit card. Just as Melin did in Patterson, she also issued fire department checks to herself and made ATM cash withdrawals of fire department funds. Her husband, the chief of the department, used the department’s account to make purchases for his contracting business.
The Monterey Fire Department lacked appropriate controls over purchasing, audit claims, monthly financial reports, and reconciliations with bank statements. These poor internal controls allowed the States to perpetuate their fraud for years, until the New York State Comptroller randomly audited the department in 2013 to evaluate its financial operations for the previous five years. The audit uncovered more than $100,000 of personal purchases and cash withdrawals.
The States both pleaded guilty to third-degree larceny. In 2014, Larry States was sentenced to 1.3 to 4 years in state prison and Kimberley States was sentenced to one year in county jail.
In Tioga County, Jennifer Grier was elected as treasurer of the Spencer Fire Department in December 2005 and served in the position until 2014. Her responsibilities included receiving, keeping, disbursing funds, and reporting to the board. As treasurer, Grier committed fraud in two ways – cash larceny and check tampering. First, she misappropriated cash receipts by failing to deposit money collected at fundraising events, which were given to her. Second, she transferred money from the department’s two savings accounts to its checking account, wrote checks to herself, to her husband (who was the department’s fire chief), and to cash. According to the State Comptroller's audit, Grier pocketed about $51,000 from the cash larceny scheme and misappropriated $19,000 of unapproved disbursements in the form of checks and cash withdrawals during her nine-year term. In January 2014, the board asked Grier to provide bank records for the annual review, which she failed to deliver until April 2014. The board soon discovered irregularities involving altered bank statements, cash receipts, and disbursements, and promptly fired Grier. When New York State Police Investigator Michael Myers then interviewed Grier, she admitted her embezzlement, "Yes, I took money intending to pay it back... To pay heat, buy food."
Ed Brown, past president and treasurer of the Spencer Fire Department, reflected on some of the internal control problems in the organization in a phone interview. "Our financial controls were woefully inadequate," he said. "There was no control over the disbursement processes, no dual signature procedure, no independent verification of bank records. We made a common mistake that most small, rural organizations do – we gave duties to an individual we trusted and expected her to carry out those duties. It always does not occur to folks that there needs to be controls over disbursements."
In 2015, Grier pleaded guilty to a charge of fourth-degree grand larceny, and was sentenced to 90 days in jail and five years of probation. She was also ordered to pay restitution of nearly $52,000 to the Spencer Fire Department and its insurance carrier, court documents show.
Deterring and Detecting Fraud in Fire Departments
In all of these cases, a lack of oversight of the treasurer provided the opportunity for someone to misappropriate money from the departments. While these volunteer departments did not have adequate financial controls in place, they later changed their procedures after the fraud cases were uncovered.
The Spencer Fire Department, for example, developed a voucher-based expense program that required a member to fill out a form to justify the expenditure before the funding could be approved. Those vouchers are double-signed by the purchaser and by a trustee. Brown said the department now has an annual audit, and every month, a trustee reviews the original bank statements and bank reconciliations for each cash account. In small volunteer fire departments, the comfortable atmosphere makes it easy to neglect supervisory responsibilities without realizing the seriousness of such inaction. Concentration of many important duties to one person or a couple also poses great threats to the safety of financial resources.
The town of Patterson responded to the Melin fraud by beginning to disburse the department’s operating budget on a quarterly basis, rather than the previous annual lump sums granted at the beginning of each year. Although this can help prevent a large-scale theft of funds, Melin was "taking out of capital funds, less so than the day-to-day operating expenses," according to Burns, so this measure alone would not have been enough to prevent that fraud.
Another control that could help prevent fire department fraud is having separation of duties in financial roles. Although the treasurer is responsible for accounting for the department’s funds, it would be better to have one person in charge of handling checks and another person for the bank reconciliations to mitigate the opportunity to commit fraud.
Without another person overseeing the finances, it is easy for the treasurer to conceal any fraudulent activity. All disbursements should be supported by documents indicating legitimate business purposes and approved by someone other than the treasurer. Patterson has learned its lesson and, "Has put tighter controls into place so no one person has complete control over the financing," Burns said.
Nevertheless, the size of a community’s fire department often limits efforts to separate administrative duties. In a small volunteer fire department with only a small number of members, there may not be enough people to make separation of duties possible. However, fire departments can implement compensating controls, a measure that can counteract absence of internal controls. For example, a supervisor from the board could examine bank statements before the treasurer gets hold of the financial records. Requiring dual signatures when disbursements reach a certain threshold can also help safeguard financial assets.
The board of fire commissioners overseeing volunteer fire departments should request periodic reports about finances from the treasurer, in which they examine and reconcile original documents of bank statements and invoices. Since Melin was able to lie to the board at meetings and nobody ever verified the accuracy of his statements, it is necessary that the boards examine original documents instead of blindly trusting what the treasurer tells them. In light of this problem, the Patterson Fire Department now requires a second signature on all checks it issues as a way of monitoring the treasurer’s actions. Volunteer fire departments should also prepare an annual budget, outlining any expected and forecasted costs, and present it to the board prior to the start of each year. Not only would departments be able to improve financial operations, but they would also be more likely to detect any excess spending and peculiar purchases not presented on the budget.
Finally, buying a fidelity bond for volunteer departments can offer additional protection against fraud. Fidelity bonds are insurance policies that cover losses as a result of fraudulent actions and can provide monetary protection as a last resort when prevention and detection measures fail.
Although most volunteers look out for the best interest of their communities, fire departments cannot always trust that volunteers will always do the right thing. Volunteer fire departments must develop and enforce clear written policies, strong internal controls, and analytical procedures to prevent financial misappropriation from continuing. In order to best serve their communities, they must be proactive in preventing and detecting fraudulent activities that could potentially limit available resources and negatively impact how fire departments carry out their duties.
Access a podcast from the authors discussing fraud here.
About the Authors:
Nicolette M. Smith is a sophomore concentrating in accounting at the Charles H. Dyson School of Applied Economics and Management in the Cornell SC Johnson College of Business at Cornell University. Jay J. Kim is a junior at Cornell’s SC Johnson School of Business majoring in applied economics and management with concentrations in finance and accounting. Peiyao Lyu is a junior concentrating in business administration at IE University in Madrid, Spain. She is an exchange student at Cornell University. John E. "Jack" Little, CFE, CPA is the director of the masters of professional studies in accounting at Johnson Graduate School of Management and a professor of practice, accounting, at the Dyson School of Applied Economics and Management in the Cornell SC Johnson College of Business at Cornell University. Professor Little can be contacted via email.
Volunteer fire departments are funded through taxes allocated annually by the municipality they serve. In New York alone, more than $730 million in taxes was generated to fund 886 volunteer fire districts in 2015, according to data from the New York State Comptroller’s Office. Unfortunately, the funding is not always properly safeguarded by those who handle the department financing. More than 140 arrests and more than $37 million in restitution have resulted from occupational theft from volunteer fire districts in New York state in the last six years.
Although volunteer fire departments and other not-for-profit organizations may not have as many financial resources as many for-profit companies, not-for-profit organizations are still the victims in more than 10 percent of all cases of fraud, with a median loss of $100,000, according to the 2016 Global Fraud Study conducted by the Association of Certified Fraud Examiners. In fire departments, an elected treasurer is given all of the organization’s fiscal responsibilities and reports to the board of fire commissioners (in some cases a board of directors). As is too often the case, a lack of oversight and basic internal controls allows the treasurer, or those working closely with the treasurer, to abuse their position of trust for monetary gain.
How the Fraud Was Carried Out
Beginning in December 2013, Albert Melin launched his fraud scheme by writing department checks to two businesses he operated that provided chiropractic and consulting services. Melin also perpetrated fraud by using the fire department debit card to pay personal expenses and expenses for his businesses. It would take more than 23 months before the fraud was discovered.
Melin used the stolen money to lease cars, make mortgage payments on his house, and take his family on vacations. He had no trouble concealing the fraud. Melin would simply not record the checks he wrote or the charges he made on the department debit card. He would then fabricate more reasonable bank balances at the monthly department meetings and budget hearings. This went on for so long because nobody was overseeing his work, verifying the bank reconciliations, or checking the accounting records, according to court records.
How the Fraud Was Discovered
In October 2015, at a Patterson Town Board Meeting, Councilman Kevin Burns reported that a concerned citizen had emailed the board about looking into the fire department’s finances. The citizen contacted the town board after reading a newspaper story about the discovery of $5 million stolen from the Mahopac Fire Department, also in Putnam County. "We were entitled to an annual audit anyway," Burns said in an interview. "We really just pushed harder in getting the independent audit back."
According to New York State’s General Municipal Law, fire companies with revenues of more than $300,000 a year are required to submit to an independent audit annually. Although this is both a deterrent and a potential way to detect fraud, the required audit conducted in 2014 did not catch Melin’s fraudulent activity. It was not until the 2015 audit, as requested by the concerned citizen, that problems with the finances were first discovered. As the magnitude of the fraud was revealed, the FBI and IRS stepped in to lead the investigation.
The federal indictment resulted in Melin pleading guilty in November 2016 to one count of wire fraud and two counts of subscribing to false tax returns. Melin is serving 33 months in federal prison and also agreed to pay back the money stolen plus more than $197,000 in taxes he dodged by falsifying his tax returns.
Other Cases of Fraud in Fire Departments
In Mahopac, the former treasurer of the fire department, Michael Klein, was arrested in June 2016 and charged with embezzling nearly $6 million from the department. Klein wrote 275 checks to himself over a 13-year period and then purchased items including a 1931 American LaFrance antique fire engine, a 55-foot yacht, and a $2.5 million second home in Florida. In his scheme, he wrote department checks to two businesses he owned and altered the transaction when it was recorded in the books of account. He plead guilty to one count of wire fraud, six counts of subscribing to false tax returns, one count of obstructing a grand jury investigation, and one count of making false statements to the U.S. Attorney. He was sentenced in June 2017 to six years and five months in federal prison and is liable for $5.7 million in restitution.
In the Monterey Fire Department located in Schuyler County, Kimberly and Larry States served as the treasurer and fire chief, respectively. Kimberley States was able to purchase personal items and pay personal bills using the department’s debit card. Just as Melin did in Patterson, she also issued fire department checks to herself and made ATM cash withdrawals of fire department funds. Her husband, the chief of the department, used the department’s account to make purchases for his contracting business.
The Monterey Fire Department lacked appropriate controls over purchasing, audit claims, monthly financial reports, and reconciliations with bank statements. These poor internal controls allowed the States to perpetuate their fraud for years, until the New York State Comptroller randomly audited the department in 2013 to evaluate its financial operations for the previous five years. The audit uncovered more than $100,000 of personal purchases and cash withdrawals.
The States both pleaded guilty to third-degree larceny. In 2014, Larry States was sentenced to 1.3 to 4 years in state prison and Kimberley States was sentenced to one year in county jail.
In Tioga County, Jennifer Grier was elected as treasurer of the Spencer Fire Department in December 2005 and served in the position until 2014. Her responsibilities included receiving, keeping, disbursing funds, and reporting to the board. As treasurer, Grier committed fraud in two ways – cash larceny and check tampering. First, she misappropriated cash receipts by failing to deposit money collected at fundraising events, which were given to her. Second, she transferred money from the department’s two savings accounts to its checking account, wrote checks to herself, to her husband (who was the department’s fire chief), and to cash. According to the State Comptroller's audit, Grier pocketed about $51,000 from the cash larceny scheme and misappropriated $19,000 of unapproved disbursements in the form of checks and cash withdrawals during her nine-year term. In January 2014, the board asked Grier to provide bank records for the annual review, which she failed to deliver until April 2014. The board soon discovered irregularities involving altered bank statements, cash receipts, and disbursements, and promptly fired Grier. When New York State Police Investigator Michael Myers then interviewed Grier, she admitted her embezzlement, "Yes, I took money intending to pay it back... To pay heat, buy food."
Ed Brown, past president and treasurer of the Spencer Fire Department, reflected on some of the internal control problems in the organization in a phone interview. "Our financial controls were woefully inadequate," he said. "There was no control over the disbursement processes, no dual signature procedure, no independent verification of bank records. We made a common mistake that most small, rural organizations do – we gave duties to an individual we trusted and expected her to carry out those duties. It always does not occur to folks that there needs to be controls over disbursements."
In 2015, Grier pleaded guilty to a charge of fourth-degree grand larceny, and was sentenced to 90 days in jail and five years of probation. She was also ordered to pay restitution of nearly $52,000 to the Spencer Fire Department and its insurance carrier, court documents show.
Deterring and Detecting Fraud in Fire Departments
In all of these cases, a lack of oversight of the treasurer provided the opportunity for someone to misappropriate money from the departments. While these volunteer departments did not have adequate financial controls in place, they later changed their procedures after the fraud cases were uncovered.
The Spencer Fire Department, for example, developed a voucher-based expense program that required a member to fill out a form to justify the expenditure before the funding could be approved. Those vouchers are double-signed by the purchaser and by a trustee. Brown said the department now has an annual audit, and every month, a trustee reviews the original bank statements and bank reconciliations for each cash account. In small volunteer fire departments, the comfortable atmosphere makes it easy to neglect supervisory responsibilities without realizing the seriousness of such inaction. Concentration of many important duties to one person or a couple also poses great threats to the safety of financial resources.
The town of Patterson responded to the Melin fraud by beginning to disburse the department’s operating budget on a quarterly basis, rather than the previous annual lump sums granted at the beginning of each year. Although this can help prevent a large-scale theft of funds, Melin was "taking out of capital funds, less so than the day-to-day operating expenses," according to Burns, so this measure alone would not have been enough to prevent that fraud.
Another control that could help prevent fire department fraud is having separation of duties in financial roles. Although the treasurer is responsible for accounting for the department’s funds, it would be better to have one person in charge of handling checks and another person for the bank reconciliations to mitigate the opportunity to commit fraud.
Without another person overseeing the finances, it is easy for the treasurer to conceal any fraudulent activity. All disbursements should be supported by documents indicating legitimate business purposes and approved by someone other than the treasurer. Patterson has learned its lesson and, "Has put tighter controls into place so no one person has complete control over the financing," Burns said.
Nevertheless, the size of a community’s fire department often limits efforts to separate administrative duties. In a small volunteer fire department with only a small number of members, there may not be enough people to make separation of duties possible. However, fire departments can implement compensating controls, a measure that can counteract absence of internal controls. For example, a supervisor from the board could examine bank statements before the treasurer gets hold of the financial records. Requiring dual signatures when disbursements reach a certain threshold can also help safeguard financial assets.
The board of fire commissioners overseeing volunteer fire departments should request periodic reports about finances from the treasurer, in which they examine and reconcile original documents of bank statements and invoices. Since Melin was able to lie to the board at meetings and nobody ever verified the accuracy of his statements, it is necessary that the boards examine original documents instead of blindly trusting what the treasurer tells them. In light of this problem, the Patterson Fire Department now requires a second signature on all checks it issues as a way of monitoring the treasurer’s actions. Volunteer fire departments should also prepare an annual budget, outlining any expected and forecasted costs, and present it to the board prior to the start of each year. Not only would departments be able to improve financial operations, but they would also be more likely to detect any excess spending and peculiar purchases not presented on the budget.
Finally, buying a fidelity bond for volunteer departments can offer additional protection against fraud. Fidelity bonds are insurance policies that cover losses as a result of fraudulent actions and can provide monetary protection as a last resort when prevention and detection measures fail.
Although most volunteers look out for the best interest of their communities, fire departments cannot always trust that volunteers will always do the right thing. Volunteer fire departments must develop and enforce clear written policies, strong internal controls, and analytical procedures to prevent financial misappropriation from continuing. In order to best serve their communities, they must be proactive in preventing and detecting fraudulent activities that could potentially limit available resources and negatively impact how fire departments carry out their duties.
Access a podcast from the authors discussing fraud here.
About the Authors:
Nicolette M. Smith is a sophomore concentrating in accounting at the Charles H. Dyson School of Applied Economics and Management in the Cornell SC Johnson College of Business at Cornell University. Jay J. Kim is a junior at Cornell’s SC Johnson School of Business majoring in applied economics and management with concentrations in finance and accounting. Peiyao Lyu is a junior concentrating in business administration at IE University in Madrid, Spain. She is an exchange student at Cornell University. John E. "Jack" Little, CFE, CPA is the director of the masters of professional studies in accounting at Johnson Graduate School of Management and a professor of practice, accounting, at the Dyson School of Applied Economics and Management in the Cornell SC Johnson College of Business at Cornell University. Professor Little can be contacted via email.
