Town of Cusick becomes a lesson in the importance of following audit recommendations

May 17, 2024

Five years ago, the Office of the Washington State Auditor advised the town of Cusick that it had inadequate controls over its payroll and credit cards. Had the small government followed its audit recommendations then, it likely could have avoided more recent, and much larger, losses.  

Among other issues identified in that 2019 audit, auditors found two unallowable transactions made with the town’s debit card: a personal purchase by an employee, and an ATM cash withdrawal with no documentation showing it was for a valid public purpose. 

In its response, the town said its clerk treasurer no longer had a credit card and it would work with Pend Oreille County to establish better controls over payroll. 

The town of about 150 people has a median income of $55,625 – 60 percent of the state’s median income – and nearly half the population lives in poverty, according to the U.S. Census Bureau. Its annual budget is less than $1 million. 

In a 2021 fraud report, the State Auditor’s Office identified $2,458 in misappropriations by the clerk treasurer, in addition to questioned spending. Again, auditors recommended the town have someone independent of the clerk treasurer review payroll and credit cards, ensuring draws and purchases were for legitimate town business. 

Just one year later, in the fall of 2022, a new clerk treasurer was unresponsive when auditors returned for a routine accountability audit. Auditors contacted the mayor seeking financial records, and the mayor and two town councilmembers requested records from their bank in March 2023. 

The town’s account balance had been $233,822 in August. 

Now it was $249. 

In a recently released accountability audit, the town is once again being advised to improve its internal controls. But the financial harm is far worse this time than last. A related fraud report found at least $277,570 in misappropriation between September 2022 and March 2023. 

“The people of Cusick have been through enough. They deserve the important services their town provides, yet this is the third time our Office has found the same basic weaknesses in its financial controls,” said State Auditor Pat McCarthy.  

“I hope this case offers a crystal-clear example of why small governments must implement the required financial checks and balances. Without proper safeguards, valuable public resources – the community’s money – is at risk.” 

On March 21, the U.S. Attorney’s Office for the Eastern District of Washington announced an indictment charging the former Cusick clerk treasurer with 25 counts of wire fraud, 26 counts of bank fraud and 25 counts of aggravated identity theft. 

The clerk treasurer was also a town councilmember, where he and his wife made up one of two married couples serving on the council. The town council had no documentation to show it reviewed and approved payroll and voucher payments from 2020 to 2023. 

The clerk used several misappropriation schemes, the most significant of which was the use of town credit cards. The clerk approved payments from the town’s bank account to its credit cards, building up large overpaid balances, then made personal purchases with the cards. 

In another scheme, electronic disbursements from the town’s bank account were made to appear legitimate. For example, $5,048 appeared to be paid to a vendor working on the town’s water system, but the money was instead deposited into the clerk treasurer’s personal bank account. 

“This case is consistent with three troubling trends we are seeing: misappropriation by small government employees, more brazen amounts taken, and governments failing to prevent or detect the fraud themselves,” said McCarthy. 

Other recent examples of small-government fraud reports include a bookkeeper misappropriating $9,151 from seven Yakima-area irrigation and drainage districts. In Springdale, north of Spokane, the mayor was responsible for more than $15,000 in misappropriated public funds using the town’s debit card. And in Tenino, south of Olympia, the utility clerk misappropriated $22,783. 

“Sadly, in many cases the ultimate cause for a loss of public funds is misplaced trust,” McCarthy said. “It is important for elected leaders to trust their staff, but it is just as important to verify public funds have been accounted for.” 

Trust, but verify” is a guide produced by the State Auditor’s Office, showing elected officials how even the smallest governments can establish effective controls and prevent fraud. Another resource, “Segregation of duties,” explains how even one-person accounting departments can implement appropriate reviews and controls. It is one of many resources the Office offers to assist governments in safeguarding public resources and meeting accounting requirements. 

Local governments with questions about establishing internal controls are encouraged to contact their local audit team.