Accounting firm has a $53 million dollar mess on its hands.

Saw a very interesting article in this week’s Crain’s Chicago Business about the lawsuit the city of Dixon, Illinois filed against accounting firm CliftonLarsonAllen LLP [“Clifton“]. The lawsuit, filed by Chicago firm Powers Rogers Smith alleges that Clifton, then known as Clifton Gunderson, had been auditing Dixon finances, but somehow managed to miss a $53 MILLION dollar embezzlement scheme carried out by former Dixon comptroller Rita Crundwell.

Crundwell embezzled the funds over a 20 year period and authorities now acknowledge her theft amounts to the biggest municipal fraud in US history. Dixon is demanding that it be fully reimbursed, and that Clifton missed clear signs that something was very, very wrong.

And Clifton could probably handle a large adverse verdict. It employs over 1,500 accountants and boasts $570 million dollars in annual revenue.

The article detailed some of the facts that should have tipped Clifton off that perhaps Ms. Crundwell was cooking the books. Consider that although Crundwell’s annual salary was $57,000, she somehow managed to purchase hundreds of horses and 14 cars. Additionally, her 2007 tax return showed receipts of $700,000. Ironically, that particular tax return was prepared by a Clifton partner, Ronald Blaine. And when quizzed about that return at his deposition, Blaine, now retired, could not remember asking for or receiving any documentation to support those figures. Finally, Ms. Crundwell was submitting Illinois Department of Transportation invoices for payment. But the invoices lacked any IDOT logos or headings. And one of the invoices was dated November 31, 2004 – a date that does not exist. I thought accountants were supposed to pay attention to those types of things.

Clifton says that it resigned as auditor in 2005 in order to maintain other duties after Dixon received federal funds and was required to hire an independent auditor. And Clifton claims that as a result of its resignation, it was unable to perform the type of investigation necessary to uncover the fraud. Dixon however, says that Clifton continued doing the audits, and just had an unrelated CPA sign off on the documents. Additionally, despite Clifton’s resignation as auditor, payments to the firm dipped only slighty, and by 2008 were substantially higher. Hmmmmm…..

Crundwell, for her part, pled guilty to wire fraud and faces up to 20 years in prison. Federal marshalls have already sold off some of her ill-begotten property and have collected approximately $8 million dollars.

The Powers Rogers firm has some legendary trial lawyers. Clifton would be very, very wise to resolve this quickly. It is only going to get much, much worse.