What Happened in Placentia?

The booking photo of Michael Nguyen, who is accused of embezzling $4.3 million from the city of Placentia.

As Placentia city leaders reckon with the arrest of a high-level finance manager on charges that he embezzled $4.3 million from city coffers through a series of wire transfers spanning a year, they are struggling to come to terms with how such a thing could happen on their watch.

Ongoing investigations by the city and the Orange County District Attorney’s office should ultimately provide a detailed answer to that question. But early indications are that the city lacked a strong system of checks that could have stopped large amounts of money from being fraudulently wired out of city accounts, according to local finance and auditing experts.

Known in auditing parlance as “internal controls,” they’re key to preventing fraud at any organization. And chief among them are measures to ensure multiple officials are needed to approve wire transfers and independently reconcile them in the city’s ledgers – no one person should have total control over wire transfers and bank statements.

The accused – 34-year-old Michael M. Nguyen – was able to be both the “initiator and approver of wire transfers,” City Administrator Damien Arrula wrote in an email to Voice of OC. Then, to cover up the fraud, he doctored the city’s bank statements, Arrula said.

Other council members confirmed that the city either didn’t have any segregation of duties in place, or Nguyen was able to circumvent the minimal segregation that did exist.

Eric Woolery, Orange County’s elected auditor controller, said such a system makes Nguyen “judge, jury and executioner…that’s not a good system.”

Arrula contends that the city did in fact have a system of “dual controls” in place – multiple employees were required to “complete a wire transfer” – but that Nguyen used his insider knowledge to manipulate the system to become the initiator and approver of wire transfers.

Still, the fact that Nguyen could sign off on wire transfers and then alter financial statements to hide them before other officials could notice indicates a lack of adequate segregation, Woolery said.

“The person writing the check shouldn’t keep the books,” he said.

How exactly Nguyen became the “initiator and approver” of wire transfers is unclear. Arrula said investigations of the situation remain ongoing and declined to go into specifics.

Contradicting Arrula’s claims, Mayor Jeremy Yamaguchi said the city did not have dual controls in place, and that going forward at least two independent approvals will be required for wire transfers. He compared it to the multiple sign offs required under the nation’s “nuclear launch codes.”

Gerry Riss, a general auditor who has worked with public agencies in Southern California, said internal employees are more easily able to perpetrate fraud because they have a sophisticated understanding of their organization’s controls.

This can happen in a number of ways. For one, someone who has earned the trust of their colleagues – such as Nguyen, who was reportedly a rising star in the finance department – can circumvent the usual controls because other workers view them as inconvenient and not worth the effort.

Another way, according to Riss, is that the fraudster knows the system so well he can skirt internal controls at key moments. For example, say a financial system or a check is due at 3 p.m., the fraudster can try to get it through at 2:57 p.m. – and his colleagues might just feel rushed enough to skip the extra sign off.

“Employees know the system best, have a lot more information, and therefore they’re the biggest group for fraud,” Riss said.

While Arrula didn’t specify how Nguyen circumvented the city’s internal controls, he denied that any other city employees were involved.

Councilman Scott Nelson was astounded at how $4.3 million could have disappeared without anyone noticing.

According to a news release from the Orange County District Attorney’s office, Placentia officials discovered unauthorized wire transfers and reported them to authorities. But other sources close to the situation say the city was actually notified by the IRS after a suspicious wire transfer to someone at a Las Vegas casino.

Nelson placed blame for the fraud at the feet of elected City Treasurer Kevin Larson and other council members who are former elected city treasurers – including council members Chad Wanke and Craig Green. Placentia is one of only five cities in the county to elect their city treasurer.

“I don’t see how you miss that much money out of this small of a budget,” Nelson said. “The disappointment I have here is unbelievable.”

Green didn’t return a reporter’s phone call for comment, and Larson couldn’t be reached for comment.

But Wanke disputed Nelson’s comments, saying his colleague doesn’t understand the role of the treasurer in municipal affairs and is using the embezzlement case for his own political ends. The city treasurer, who is a part-timer and not involved in day-to-day operations, prepares financial statements, but depends on the accuracy of information provided by city staff, Wanke said.

Wanke pointed out that Bank of America (where the city keeps its accounts), two outside audits and city staff all missed the embezzlement. If the city didn’t have proper segregation of duties, that’s something the auditors should have caught but didn’t, Wanke said, adding that the city finances aren’t conducted under “fly-by-night operations.”

Going forward, the city has already further segregated the duties around financial transactions, Arrula said.

“There will be a new 2-stage password encrypted process for future wire transfers, which will require multiple signatures, including one by an elected official (city treasurer) to avoid internal manipulation by anyone,” Arrula wrote in his email. “In addition, instead of one employee receiving bank statements, two employees will receive them in real time and each employee will receive hardcopies.

“This new system will prevent manipulation and create redundancy of the bank statements as each employee will now have their own independent version from the bank.”

The city has also hired a forensic auditor to make recommendations on how the city can implement more internal controls, Arrula said. And he said a presentation at Tuesday night’s City Council meeting will elaborate more on the situation.

Correction: A previous version of this story misspelled Councilman Chad Wanke’s last name. We regret the error.

Please contact Adam Elmahrek directly at aelmahrek@voiceofoc.org and follow him on Twitter: @adamelmahrek

  • Kevin Kigan

    He must have hired the financial auditor. For the auditor to keep thier client happy and keep the contract , they will do whatever to keep the business. Financial auditors must be hired independent of the City, otherwise it is a waste of money. They will tell you what the client wants them to say. I addition, who is really qualified to analyze their reports, no one reads them.

    • What Happens Larry.

      Regardless of who hired the small Brea accounting firm who ran the numbers during Nguyens employment, you are implying this Brea accounting firm committed professional malpractice, or worse malfeasance in order to secure their paycheck and protect Nguyen. Before you continue down this track of fairy tale accusations depicted in conspiracy documentaries, lets wait to see what the true analysis (KPMG’s report) of the books reveal.

      Last Tuesday 4/29/16, Placentia had a senior forensic Accountant from Global firm KPMG present at the city council meeting. She and her team will be reviewing all accounting related to Mello-Roos issues, On-Track Train Expenses (Scott Brady’s Mayor-ship) and the recent accounting flubs with Nguyen.

      This team of forensic accountants should shed light on what happened. Not to mention, the FBI is doing their own investigation…

      • Kevin Kigan

        Fairy Tail, really. The smaller the firm, the more they want to please!

  • astar2b

    Bad Feng Shui ?

    • BeeBee.BeeLeaves

      Crazy you would say that. Years ago, I was told that Orange County’s feng shui is all about material gain, spiritual loss. Don’t know how we would remedy that.

  • OCservant_Leader

    As Placentia tries to piece together “what went wrong” I would recommend they look at their HR practices as well as written financial policies.

    Was this “super-Nguyen” a political appointee with no real qualifications? Who is he related to? The County has operatives in each City as well. Were there years of manufactured performance appraisals used to push him to the top position?

    He was probably placed there by a crew to do one thing – (keep checks coming to certain businesses and consultants) and then started doing his own scam.

    Very rarely do people who are actually qualified in their job turn into criminals.

    It’s the political appointees (like at the County) who are running the scams.

  • LFOldTimer

    This is the general M.O. when the incompetent clowns in government play with ‘other people’s money’ (OPM).

    If an embezzlement crime of this magnitude occurred in a private company about a half dozen heads would roll right out the door.

    But in government even the most incompetent and reckless buffoons keep their jobs.

    The only ones who get fired in government are those who blow the whistle on wrongdoing or work too hard and make their colleagues look lazy.

  • OCservant_Leader

    This fraud set up was as easy as taking candy from a baby.

    If all the individuals (paid by the public) who are acting as the “checks and balances” of a local government-are in collusion…corruption is eminent.

    Small Cities are prime targets for organized crime to set up shop – Ala Bell – because the politicians and CEO can easily exert control in secret.

    What makes the County of Orange so unusual – is the large number of individuals – in all key positions-acting in collusion.

  • David Zenger

    Oh, Brother. “Going forward” the favorite phrase of government. Past sins are forgiven, let’s not dwell on the past, let’s look ahead.

    The most common expression at the County of Orange.

    Of course the City Manager should be fired and his pension garnished. But it won’t happen. Mistakes were made…going forward…

    No fault government.

    • BeeBee.BeeLeaves

      Very well said.

    • UnitedWeStand

      Definitely, the city manager should be fired!

      • David Zenger

        And the Finance Director.

        • Stirring the pot

          Lets take this back to Troy Butzlaf, hired May 2008. The man Scott Brady said, “…all the candidates had the qualifications, but it was Butzlaff’s personality that set him apart.” http://www.ocregister.com/articles/city-147322-butzlaff-allowance.html. Butzlaf came into the city when it was wrecked financially. Immediately after he stepped in, Butzlaf hired Nguyen as a 26 year old accounting prodigy from CSUF, (give me a break.)

          If my memory serves me right, between November ’14 and December ’14, Butzlaff was scheduled to receive increased pay, benefits, and vehicle improvements…etc… by Placentia. At this council meeting where proposed bonuses were discussed, numerous residents including my neighbors stood up and shamed him, for accepting increased benefits while he led the city further down the rabbit hole. (Watch the City Council Video). After every residents comments, his demeanor changed, he was angered, and he explained he never wanted any raises. Well guess what, at this point he had already hired his successor, and was simultaneously interviewing with other city’s. By January 2015 he was hired by Azusa and started his position in February, leaving Placentia high and dry, in the same financial doldrums that he found the city in when he was hired.

          Butzlaf used Placentia. He was never part of the community, he rented a single bedroom from a home down the street from me in order to comply with Placentia residency requirements. His permanent address, wife, and children are, and always have been in La Quinta. (Placentia Country club clearly was not up to Par for Butzlaf.)