Small city of Morton lost more than $900,000 over a decade, audit finds

The clerk-treasurer of a small city in the Cascades misappropriated more than $900,000 in public funds over nearly a decade, despite warning signs that improper activity was occurring, the Office of the Washington State Auditor found in a fraud report issued today.

During a financial audit of Morton, a city of about 1,100 residents in Lewis County, auditors noticed more than $10,000 in ATM cash withdrawals from the city’s bank account, an uncommon and questionable activity in government. The subsequent fraud investigation uncovered a variety of misappropriation schemes dating back nine years, ultimately totaling $937,584.

“What is so incredible in this case is that the leadership of Morton took no action when they had been informed of two different problems with the clerk-treasurer. We say, ‘trust but verify,’ for a reason,” said State Auditor Pat McCarthy. “Blind trust doesn’t protect the public’s money. Proper controls do.”

The State Auditor’s Office released four audits of Morton today: one fraud investigation report on the clerk-treasurer's activity, a second fraud investigation report on a smaller misappropriation, an accountability audit and a financial statement audit.

The clerk-treasurer was hired in 2012, and the following year authorized a $2,400 city check to herself. Auditors questioned the payment in 2014, but the then-mayor described it as an approved personal loan. The audit, published in 2015, took exception to this, and recommended the city require repayment and refrain from loaning public funds.

In 2019, the clerk-treasurer reported to the state Department of Retirement Systems that she had left the city and withdrew her retirement funds. The next year, the state agency discovered she was still working at the city and questioned city management about the withdrawal.

Despite these warning signs, the city council and mayor did not detect these misappropriations. Auditors found the clerk-treasurer was solely responsible for processing payments, writing checks and reconciling bank accounts. This allowed her to initiate payments without approvals, then process those payments without management oversight.

Exploiting the lack of independent reviews of her work, the clerk-treasurer hid her activities since 2013, including taking customer cash payments that she did not deposit at the bank and writing checks to herself, then recording them as payments to legitimate vendors.

The full fraud investigation report, including the city’s response, can be found on the State Auditor's Office website: Fraud Investigation Report (July 1, 2012, through March 31, 2022). 

In a separate fraud investigation report, auditors investigated concerns regarding the former police chief’s credit card purchases. The police chief also had maintained access to a bank account that was outside the city’s control but had been holding donations for police-related activities. Auditors found the police chief made $199 in personal purchases on a city credit card, as well as additional questionable purchases.

That report can be found here: Fraud Investigation Report (May 1, 2016, through August 1, 2023). 

 “This case is an important reminder that the first line of defense against public fraud is having strong financial controls in place today, not having an audit after the fact,” said McCarthy. “I sincerely hope this painful experience inspires other governments to double-check their statements and insist on reviewing payments.”

The accountability and financial audits that first detected the misappropriations can be found here: Accountability Audit Report and Financial Statements Audit Report.

Morton’s is the third six-figure loss of public funds reported by the State Auditor’s Office this year. The others involved the state Office of Administrative Hearings and the town of Cusick.

The State Auditor’s Office offers dozens of resources to help governments safeguard public resources and meet accounting requirements. A key guide – “Trust, but verify” – shows elected officials and other oversight personnel how to establish effective controls and prevent fraud. In a post on its website, the Office explains why reviewing bank statements is important, and what government leaders should look for. Another resource – “Segregation of Duties” – explains how accounting departments of all sizes can implement appropriate reviews and controls.

Media questions: Assistant Director of Communications Adam Wilson, Adam.Wilson@sao.wa.gov, 564-999-0799