Sunday, January 19, 2003

Epling usurped duties of mail clerk

Accountants say allowing practice is inviting trouble

By Karen GutiÈrrez
and Patrick Crowley
The Cincinnati Enquirer

[photo] Ron Epling (right) talks with his lawyer, Burr Travis, in Boone District Court in December.
(Patrick Reddy photo)
| ZOOM |
FLORENCE - At the old city hall, mail was sorted in a glorified closet - not the sort of place you'd expect to find a high-ranking official with multiple degrees.

But Florence Finance Director Ron Epling had an unusual interest in the mail. City employees would sometimes find him in the tiny room, placing just-delivered parcels in the appropriate slots and carrying others back to his office.

"I always used to wonder, `Why on earth is he sorting the mail?' " says Mary Jane Lucas, Florence's receptionist from 1995-98. "No one else in the building ever offered to help me sort the mail. And he didn't offer. He just did it."

An ongoing criminal investigation may help explain why.

In one of the largest public corruption cases in Tristate history, Mr. Epling, 51, was charged last month with stealing about $1.2 million from the city of Florence over the past two years. He has pleaded not guilty and is being held in the Boone County Jail.

Police say Mr. Epling's embezzlement began as many as 10 years ago, shortly after he came to Florence as its first finance director.

In an elaborate scheme, the soft-spoken accountant would stash away miscellaneous checks written to the city, a state police detective has testified. Authorities say Mr. Epling would then improperly deposit those checks in a city account called "capital improvements." He did this to cover up the heart of his alleged scam: periodic thefts from the city's general fund, in which he intercepted checks written to capital improvements and put them instead in his personal bank accounts, police say.

Police: How Epling fleeced Florence
Mr. Epling spent the money in part on gambling trips to Las Vegas and houses for his girlfriend and his estranged wife, an FBI agent has testified.

As the scope of his alleged deception becomes clear, questions focus now on how he could have managed to scam the city for so long.

Through interviews with accounting experts and former and current city officials, the Enquirer has identified several practices that may have opened the door to fraud:

Mr. Epling had early, undocumented access to the mail, including incoming checks written to the city of Florence.

Authorities haven't yet identified all the miscellaneous checks he used in his scam, nor have they said how Mr. Epling grabbed them without anyone noticing. But loose mailroom procedures are a classic way for internal theft to occur, says Ray Whittington, director of the school of accountancy at DePaul University in Chicago.

Florence's finance director "shouldn't have had access to the cash before it was controlled," Mr. Whittington says.

In fact, mail control is so important as a guard against fraud that it formed the basis of a 1976Supreme Court case still studied by accounting students today.

In that case, Ernst & Ernst v. Hochfelder, a national audit firm was sued for failing to uncover a weak mailroom policy that allowed the president of a securities company to scam investors. The audit firm eventually prevailed, but the case set important precedents in securities law.

Within the past year, Mr. Epling arranged for certain incoming revenue checks to be given directly to him, instead of to the employee who normally logged them into the computer. This created another opportunity to hoard checks, and police have confirmed that at least one of those checks was incorporated in the embezzlement scheme.

Contrary to the ideal situation, Florence's finance director did not just prepare annual budgets, analyze city investments or oversee staff. Mr. Epling also dabbled in lowlier aspects of the accounting system - depositing checks at the bank and making computer entries to keep the books balanced, in addition to opening some of the mail.

Such multitasking flies in the face of an accounting principle known as "segregation of duties," in which no one person has the opportunity to both handle money and manipulate the books.

Because they have small staffs, many cities are not able to maintain strict segregation at all times, says Greg Engelman, chief financial officer for the city of Newport. In the end, officials have little choice but to count on the integrity of employees.

Still, it would be unusual for a finance director to regularly make bank deposits, Mr. Engelman says. And according to staff members, Florence did have a solid procedure for handling incoming payments.

Clerks in the finance department would log checks into a computer and prepare receipts. At the end of each day, a different person counted the money and made sure it matched the amounts recorded. Yet another finance employee made the bank deposit.

Top supervisors, however, can find ways to get around such controls. In accounting terms, this is known as "management override," and as a matter of course, auditors should determine a city's risk for it, says the American Institute of Certified Public Accountants.

It's not clear whether auditors examined that risk in Florence.

For at least 25 years, the city's books have been reviewed by Rankin Rankin & Co., a well-regarded Northern Kentucky firm. Senior Partner Richard Rankin declined to comment on his company's work for the city.

This winter, it was a Rankin auditor who noticed an accounting irregularity - authorities won't say exactly what - that led to the finance director's downfall.

So far, police have charged Mr. Epling with depositing general fund money in his own accounts on 18 occasions since January 2001, court records show.

The allegations have shocked Florence officials, who knew Mr. Epling as a soft-spoken, hard-working bean counter with a side business doing income tax returns for city police officers and others.

Jeff Koenig, the city manager, says he expected Mr. Epling to help with the daily workload in the finance department. Thus, when miscellaneous checks landed on the city manager's or mayor's desk by mistake, they often were given to Mr. Epling to be taken care of.

"I was at his condo. I know his family. I felt like I knew him. I conversed with him daily," Mr. Koenig says. "Yeah, I gave him checks. And yes, I've seen him open the mail before."

"We never thought of it as being unusual," Mayor Diane Whalen says

In part, Mr. Epling's scheme took advantage of Florence's growth and Kentucky's complicated tax-collection system.

Twenty years ago, this was a small community best-known for the quaint "Florence Y'all" emblazoned on its water tower. Now it's a regional center for retail stores such as Home Depot, Meijer and Target.

Florence's population has grown 26 percent over the past 10 years, to 23,500 people, and its annual budget jumped from $7 million to $16 million during Mr. Epling's tenure. Three years ago, Florence built a new city hall, and a multimillion-dollar aquatic center is expected to open this spring.

The city's largest sources of revenue are payroll and property taxes, which brought in $9.9 million in fiscal year 2001. Ninety percent of these payments are relatively immune from theft, because citizens and businesses mail them directly to the bank through a post office box.

The bank makes the deposits and sends Florence a record of them, which is downloaded into the city's accounting software, acting Finance Director Valerie Bowman says.

But other kinds of payments are dropped off or mailed directly to city hall, and these are more vulnerable to interception.

For instance, once a month the city gets a check for fire services it provides to unincorporated Boone County. The money comes from taxes paid by citizens on property, cars and business inventory, and it's passed to the city through a separate entity called the Florence Fire Protection District. In fiscal year 2001, the city received $974,000 in this way.

Until about a year ago, protection district Treasurer R.G. Bidwell dropped off Florence's monthly check to Sue Sprague, a supervisor in the finance department.

"Then Ron (Epling) says, `What I want you to do is give it to me,' " Mr. Bidwell recalls.

So that's what he did. If Mr. Epling wasn't around, Mr. Bidwell passed the envelope to other staff members with the instruction, "This is for Ron."

A Kentucky state police detective has since testified that at least one of those fire checks was incorporated into Mr. Epling's alleged embezzlement scheme.

Investigators also are looking at the finance director's possible diversion of other types of taxes, including one paid on insurance premiums.

Every quarter, as many as 630 insurance companies mail these payments to Florence, which received a total of $2 million from the companies in fiscal year 2001. The tax is collected on premiums paid for life, health, car and homeowners' insurance.

It has always been difficult for cities to track the premium tax, says Ms. Whalen, the mayor. It is self-reported by insurance companies, and state officials have not offered to help cities determine whether they're getting the right amount, she says.

Bottom line: If Mr. Epling had fished some of the insurance checks out of the incoming mail, no one would have missed them.

Ms. Lucas, the city of Florence's former receptionist, says she used to grumble to fellow workers about the finance director's mail-sorting, because her job was supposed to include that duty.

But she never dreamed of complaining to higher-ups.

"You don't question superiors," she says.

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