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City of Bell
Fraud & Corruption Analysis
April 17, 2016
Professor Diana Hinton
Bryan Ruley
April 17, 2016
Professor Diana Hinton
Bryan Ruley

City of Bell Background

In 1876 The City of Bell was founded by a pioneer named George Bell and his wife. Bell was incorporated as a city in 1927. The city is located in Los Angeles County California. With a population of 36,664. Here’s some background on the City of Bell’s City Council members and perpetrators.
Robert Rizzo hired as City Manager in September 1994 is the accused as master mine behind the fraud. Angela Spaccia, Assistant City Manager hired in March 2003 is considered to be second in command to Robert Rizzo. Randy Adams, City of Bell Police Chief. Oscar Hernandez, Mayor for the City of Bell. City Council members who were part of the fraud are George Cole, George Mirabal, Luis Artiga and Victor Bello.

Fraud Detection:
In 2010 two Los Angeles Times reporters were investigating possible malfeasance in Maywood California. During their investigation they revealed that the Bell City Council members were receiving extremely large salaries. These salaries were the highest in the United States. According to our textbook Fraud Examination 4e, the fraud triangle examines the potential, opportunity, and rationalization to commit fraud. The above concepts will be used to exam the fraud perpetrated by City of Bell Chief Administrative officer Richard Rizzo, his Assistant CAO Angela Spaccia and the members of Bell’s City Council. The charges allege the officials misappropriated more than $5.5 million, including being paid for phantom meetings. The fact that the CAO for all intent and purposes had complete control and discretion of all administrative functions. Gave him access to the necessary documents and accounts to commit embezzlement using the city’s general fund and Measure A bond proceeds. Robert Rizzo is identified as the primary suspect as a result of his control over all operating functions for the City of Bell. There was no oversight by members of the Bell City Council, most of whom received additional compensation and/or loans as a result of actions authorized by the CAO. This autocratic environment created a system of waste, fraud, and misappropriation of public funds.
The Fraud Triangle
Pressure:
Motivation, another aspect of the fraud triangle, is a financial pressure or a need felt by the person who commits fraud. It might be a real financial or other type of need, such as high medical bills or debts. Or it could be that the perpetrator is greedy, such as a person who has a desire for material goods but not the means to get them. Motivators can also be nonfinancial. There may be high pressure for good results at work or a need to cover up someone's poor performance (Albrecht, Albrecht, Albrecht, and Zimbelman, 2011). Mr. Rizzo was an honest employee until he realized he had the autotomy that he needed to commit fraud. Having complete control over all financial decision for the City of Bell gave him the access and power to falsify records, rig elections and recruit people to participate in his scheme. He had no real need to steal the monies that he did. He appeared to be a normal hard working city government official. Underneath was an individual motivated by greed and selfishness. Those reasons compelled him to commit fraud.
Opportunity:
The opportunity to commit fraud is possible for Mr. Rizzo since he has access to the city’s bank accounts. He has control of all financial transactions and decisions. With this control he has over ridden all established internal controls. He successful recruited the Mayor, Chief of Police, Assistant City Manager and the City Council to be part of his embezzlement scheme. By recruiting important city officials to be part of his scheme, he destroyed the structure of the organization. Those three factors allows him and his accomplices to both commit and conceal fraud.
Key officers or employees are given access to records and valuables in the ordinary course of their jobs. Unfortunately, that access allows people to commit fraud. Given Mr. Rizzo’s ability to exert control over other key individuals within the city government, it is safe to presume that he did use his position as Chief Administrative Officer to acquire material items, and commit fraud with the City of Bells financial resources. (Albrecht, Albrecht, Albrecht, and Zimbelman). His awareness that he had could exert influence over key city officials and his ability to override key controls provided him and his cohort the opportunity to cover his their tracks. Due to Mr. Rizzo’s control over the all functions. The City of Bell lacked proper modeling and proper labeling within the city’s government. Also, most residents of the Bell are not formally educated. This hindered the citizen’s ability to fully understand their rights. Had the people of Bell understood their right to have access to information. The fraud wouldn’t have continued for as long as it did.
Rationalization:
Common rationalizations include making up for being underpaid or replacing a bonus that was deserved but not received. An employee considering fraud may convince himself or herself that they are just borrowing company assets and will pay them back. Embezzlers tell themselves that the corporation doesn't need the money or won't miss the assets. Others believe that their companies deserve to have assets stolen because of negative acts or lack of respect toward them or fellow employees (Albrecht, Albrecht, Albrecht, and Zimbelman).
Mr. Rizzo most likely rationalized that he deserved the money and material items. He probably felt elite in comparison to the people of Bell. He figured, since the citizens of Bell lacked formal education he could do whatever he desired with the city’s public funds and no one would question him. Common rationalizations include the organization owes it to me or I deserve more due to my high position. (www.aicpa.org/InterestAreas/ForensicAndValuation/Resources/FraudPreventionDetection). It is likely that he committed this fraud because he may have felt that he wasn’t making sufficient salary to support his lifestyle. As the Chief Administrative Officer he would take it upon himself and increase his unfavorable salary. In this sense, he was trying to justify his embezzlement due to his low salary.

Identifying the Possibilities of Fraud: With the known facts it’s easy to conclude that Mr. Rizzo wasn’t the only individual guilty of committing fraud at the City of Bell. Mr. Rizzo ordered his Assistant City Manager to increase their salaries and pensions on an annual basis by as much as 14%. They wrote their own employment contracts that were never approved by the City Council. For part in the scheme council members were busy enriching themselves for collecting money for meetings that never occurred. Mr. Rizzo had secretary’s modify or create fake council meeting minutes so that it would appear that meetings were being held. He mismanaged the city’s voter approved Measure A bond funds. He also illegally raised property taxes and deposited the money in the General Fund instead of in the a Debt Service Trust account as specified by the city’s paying agent agreement with U.S. Bank National Association. With the assistance of The Bell City Council the assessment for Sanitation and Sewerage was increased without voter approval. At the direction of Mr. Rizzo the city improperly used funds from four assessments districts to pay for portions of payments to himself and Mrs. Spaccia for regular and holiday pay in lieu of vacation. The City of Bell had all of its key controls overridden by city officials, in particular Mr. Rizzo. Consideration must be given to all these individuals in the beginning stages of the investigation. However, the easiest symptom to identify is the irrefutable fact that a key official of the City of Bell who had access to sensitive information has fit all concepts in the fraud triangle. The change in Mr. Rizzo and members of his embezzlement group’s behavior is another red flag that fraud has taken place within the company, along with their change in lifestyle. Lifestyle changes are often the easiest symptom for coworkers or management to detect fraud by another employee. However since all key officials were involved in the scheme. There wasn’t anyone to report any suspicions. Purchases of new homes and vehicles should have been an indicator that fraud had taken place. These activities should have deemed it necessary for someone to question how this purchases could be possible. Someone or a people should have monitored these individuals by attending the City Council meetings and asking questions. By doing that this fraud would have been prevented or detected in the early stages. Mr. Rizzo’s autocratic style of leadership should have been a red flag that other employees noticed. Frequently guilty individuals are seen through an individual's recognizable behavior pattern to attempt to cope with the stress. Their guilt leads to fear, fear leads to stress, and stress leads to behavior changes. In my opinion, it was Mr. Rizzo’s narcissist personality and elitism that led to his new behavior. Albrecht, Albrecht, Albrecht & Zimbleman (2011) point out that changes in lifestyle are usually the easiest for management or examiners to deduct.
Symptoms:
The first symptom are the City’s control deficiencies appear to be serious and pervasive. It appears the City of Bell’s internal control system is non-existent. All of the city’s financial activities and transactions evolved around one individual. The former Chief Administrative Officer (CAO). Who for all intents and purposes had complete control and discretion over how city funds were to be used. There’s no evidence of any oversight by members of the Bell City Council, most of whom received additional compensation and or loans as a result of actions authorized by CAO. Under this environment, the potential for waste, fraud, abuse and misappropriation of public funds is extremely high. Controls missing were lack of physical safeguards, a lack of independent checks were missing, and a lack of segregation of duties. Also auditor negligence played a key role in the fraud. The audit firm Mayer Hoffman McCann P.C. of Irvine, California committed repeated acts of negligence on more than one occasion in the 2009 audit of the City of Bell and the Bell Community Redevelopment Agency (Bell CRA) that departed from professional standards and insufficiently documented its audit for Bell and the Bell CRA for the year ending June 30, 2009. The California Board of Accountancy suspended MHM's CPA Corporation License for six months stayed, with two years' probation, and imposed on it an administrative penalty among other enforcement actions, effective June 2012
Preventive and Detective Controls:
In order to eliminate some opportunities for fraud. The city should have appointed an oversight committee independent of all key city officials and boards. Appropriate controls to ensure that the financial transactions were in place and being monitored. Furthermore, there should have been a Code of Conduct and clear standards set, in writing, requiring employee review and signature. "One of the best ways to help safeguard a business is to set clear standards. A Code of Conduct can be helpful in establishing the principles and values to guide your organization” (www.theiia.org/media/files/fraud-white-paper/fraud). The external auditors and or an independent committee member should also have monitored the council meeting minutes and financial transactions. Election votes should have been counted by an independent agency or person to verify the results. These recommendations may not have prevented the fraudulent activity; however, it would have made them easier to detect. It was the external auditors, the Mayor and City Council’s responsibility to take the necessary measure to safeguard from these occurrences.
Possible preventive controls:
The city needs all new officials to get regain the trust of the public. This will also restore confidence that the city’s financial dealings are in accordance with necessary accounting standards. A new City Council was elected and a temporary Chief Administrative Officer was brought in as well. The city’s formal written internal policies and procedures should be evaluated. A monthly review of the city’s documentation and supporting financial records should be performed. On a limited basis perform tests of transactions to ensure adherence with prescribed policies and procedures and to validate and test the effectiveness of controls.
SEC Involvement:
The Securities and Exchange Commission issued subpoenas involving the issuance of Measure A bonds in 2003. The bonds were issued to provide financing for a sports complex that was never developed. On February 24, 2015 the commission closed its investigation into the bonds that were issued. No action was taken against Richard Rizzo or any of the seven other officials involved in the fraud scandal.
Conclusion:
Currently all members involved in the City of Bell California fraud scheme have been prosecuted and sentenced. Only one member was acquitted. Mastermind behind the fraud Robert Rizzo was sentenced to 12 years in state prison and nearly $9 million in restitution. Rizzo can never hold public office again. Angela Spaccia was sentenced to 11 years and 8 months in state prison and ordered to pay $8.2 million in restitution. According to a report in Daily News Former Police Chief Randy Adams agreed to testify against the culprits. Adams was not charged, but agreed to reimburse the city for $214,000. Also, his pension was drastically reduced as part of his deal. Former City of Bell Mayor Oscar Hernandez was ordered to spend one year in jail and five years’ probation, perform 1,000 hours of community service and pay more than $241,000 in restitution to the city of Bell. Victor Bello who was paid nearly $100,000 for his part-time duties as a councilman was sentenced to a year in jail and five years' probation. Oscar Hernandez and George Mirabal, each received one-year jail terms. Teresa Jacobo received two years in state prison while George Cole was given home confinement. This case is a good example that fraud is usually committed by first time offenders. Whom from the outside would never be suspected of a crime. It also shows all frauds are always exposed. Listed below in Appendix 1 are the fraudulent salaries of the conspirators.

References

Gottlieb, Jeff (2010-07-15) Is a City Manager Worth $800,000 Latimes.com www.latimes.com/.../bell/la-me-bell-scandal-a-times www.cnn.com/2010/Crime/California.bell arrests.
Albrecht, Albrecht, Albrecht, and Zimbelman Fraud Examination (4ed) Mason: South-Western College
Pub. (2011). www.reuters.com/article/us-usa-municipals-bell www.huffingtonpost.com/news/bell-salary-scandal http://www.dailynews.com/general-news/20140410/former-bell-police-chief-to-reimburse-city-for-over-200000-in-tentative-settlement Appendix 1 Annual Compensation For Fraud Participants.