This report is being issued pursuant to a letter dated July 9, 2002, in which

the Prosecuting Attorney for the Fifth Judicial District of Arkansas

(Prosecuting Attorney) requested a review of disbursement records at the

City of Ozark Water Department (Water Department). The request

resulted from an Arkansas State Police investigation when Todd

Timmerman, former Mayor of the City of Ozark, admitted to paying for

carpet in his residence with Water Department funds.

OBJECTIVES

Our objectives in conducting this review were as follows:

Determine if funds were misappropriated from the Water Department

and report to the Prosecuting Attorney;

Review internal controls in the area of disbursements; and

Present findings to the Legislative Joint Auditing Committee for

certification to the Governmental Bonding Board for their consideration

of reimbursement to the Water Department.

SCOPE AND METHODOLOGY

As a part of our review, we examined selected Water Department and City

operating disbursements over $500.00 during the period January 1, 2000

through July 31, 2002. Other accountants were engaged to perform the

Water Department 2001 audit and in the course of the audit, they prepared

a list of questionable disbursements which we included in our review. Our

examination included analyzing supporting documentation, inspecting

cancelled checks for proper endorsement and reviewing microfilm of Mr.

Timmerman’s bank transactions to identify the source of each deposit.

Also, we interviewed Water Department personnel and reviewed previous

audit reports, applicable Arkansas Code Annotated (ACA),

City Council meeting minutes and ordinances. We

submitted our preliminary findings to the Prosecuting

Attorney and State Police for further inquiry and, once they

completed their investigation, we reviewed their case files.

City of Ozark

Water Department

Legislative Joint

Auditing Committee

172 State Capitol

Little Rock, AR 72201

Phone: 501-683-8600

Fax: 501-683-8605

www.legaudit.state.ar.us

ARKANSAS

DIVISION OF

LEGISLATIVE

AUDIT

MAY 27, 2003

Investigative Report

REVIEW RESULTS

Misappropriated Funds

Our review revealed Mr. Timmerman,

former Mayor, used the following fraud

schemes to divert funds for his personal

use:

1) Falsified invoices or other

documentation for goods and

services allegedly furnished to the

Water Department. These invoices

were used to support city checks for

personal purchases;

2) Altered invoices from a construction

company to support checks issued

for hand-delivery to the contractor.

Mr. Timmerman then forged the

contractor’s endorsement, second

endorsed and deposited these

checks into his personal checking

account; and

3) Created false vendor invoices,

claimed he personally paid the

vendors and then submitted the

fictitious invoices to support

reimbursements from the Water

Department.

The Prosecuting Attorney filed twentyseven

(27) criminal charges against Mr.

Timmerman for misappropriating funds

totaling $40,178.22 as detailed in Exhibit I.

On Mr. Timmerman’s behalf, the Water

Department was partially reimbursed

$39,477.30. On March 4, 2003, a jury

sentenced Mr. Timmerman to three (3)

years in the Arkansas Department of

Correction and five (5) years probation, with

sentences to run concurrently. The checks

involved in the criminal charges are

detailed in Schedule 1 on page 4.

In addition to the misappropriation of the

$40,178.22 in Water Department funds for

which Mr. Timmerman was criminally

charged, our review revealed Water

Department disbursements of $29,239.85

(Schedule 1 on page 4) that were not

adequately documented. The legitimacy of

these disbursements is questionable based

on the following:

State Police interviews with vendors/

individuals indicated Water Department

checks were used to pay Mr.

Timmerman’s personal debts at their

business or were cashed and the

proceeds returned to Mr. Timmerman,

and

Water Department checks issued to

other individuals were deposited into

Mr. Timmerman’s personal checking

account.

We recommend the City be reimbursed

$29,239.85 unless adequate documentation

is furnished to prove the disbursements

are obligations of the City.

Internal Control Weaknesses

During the course of our review, the

following additional issues came to our

attention.

Paid-out slips were not used to support

the expenditures and replenishment of

the Water Department petty cash funds.

ACA 14-237-107 states, in part, “… paidout

slip … be prepared for each …

expenditure … shall be maintained ... and

Source: Circuit Court of Franklin County, Arkansas-Ozark

District Criminal Division I, Case File No. CR-2002-95.

Crime Counts Amount

Theft of Property:

Class C Felony 14 19,590.91 $

Class B Felony 6 20,312.31

Class A Misdemeanor 1 275.00

Forgery II-Class C Felony 6

Totals 27 40,178.22 $

Exhibit I

Criminal Charges Former City of Ozark

Mayor Timmerman Pled Guilty to in

Circuit Court on March 3, 2003

utilized as invoice support … replenishing

petty cash.”

The petty cash fund has been discontinued.

A cash count revealed that $1,000.00 of

drug buy monies were in Mr. Timmerman’s

personal possession.

Mr. Timmerman relinquished custody of the

drug buy monies to the Ozark Police Chief

and the funds are now kept in a secure

location.

A Water Department employee was

contracted for City landscaping projects.

We noted several instances where the

employee had purchased landscaping

supplies, charged these to a personal credit

card, and the Water Department paid the

credit card bill directly.

We recommend the Water Department

prohibit third-party payments. Contractors

should be required to submit an invoice for

labor and supplies to receive payment.

ACA 14-58-303 and 14-58-305 allow the

City Council to establish, by ordinance, the

procedures for purchases less than

$10,000.00. City Ordinance No. 1995-12

requires the Mayor to secure price quotes

for purchases between $2,000.00 and

$10,000.00. The Mayor authorized several

disbursements without obtaining required

price quotations.

We recommend the City Council review the

disbursement journal periodically to ensure

the Mayor follows the applicable laws and

ordinances.

Additional internal control weaknesses

noted in the Water Department

disbursement process were as follows:

Access to the invoice approval

stamp was not restricted to the

employee responsible for approving

invoices;

The bank reconciliation process did

not include a procedure to review

cancelled checks for proper

endorsement; and

The duties of disbursement

approval, check signing, general

ledger post ing and bank

reconciliation were not properly

segregated.

We recommend internal controls be

segregated to the extent possible in the

Water Department disbursement process.

Necessary steps to improve internal

controls include requiring an original invoice

or other adequate support ing

documentation before a check is issued;

securing and limiting access to the invoice

approval stamp; reviewing cancelled

checks to ensure endorsements match the

payee; and having someone independent

of other disbursement procedures

reconcile the Water Department bank

statements monthly.

Ozark

City of Ozark - Water Department

City Population: 3,525

2001 Customers: 1,666

2001 Operating Revenues: $1,248,345

2001 Operating Expenses: $1,053,113

Source: City of Ozark – Water Department

Schedule 1

Payee Description Amount

J & E Construction Deposited into Timmerman's checking account 4,950.00 $

J & E Construction Deposited into Timmerman's checking account 3,600.00

Todd Timmerman Deposited into Timmerman's checking account 3,515.17

Todd Timmerman Deposited into Timmerman's checking account 2,793.60

Security Center Payment on Timmerman's credit card debt 2,753.54

J & E Construction Deposited into Timmerman's checking account 2,700.00

J & E Construction Deposited into Timmerman's checking account 2,350.00

United Bank of Springdale Payment on Timmerman's bank loan 1,900.00

Todd Timmerman Deposited into Timmerman's checking account 1,875.00

Todd Timmerman Deposited into Timmerman's checking account 1,850.00

Todd Timmerman Deposited into Timmerman's checking account 1,488.60

Todd Timmerman Deposited into Timmerman's checking account 1,300.00

J & E Construction Deposited into Timmerman's checking account 1,250.00

J & E Construction Deposited into Timmerman's checking account 950.00

Vision Golf Cars of Ozark Purchase of Timmerman's golf cart 900.00

Lane's Discount Carpet Install carpet in Timmerman's residence 778.85

Overhead Door, Inc. Purchase of garage door for Timmerman's residence 579.55

Franklin County Title Payment of closing cost on Timmerman's bank loan 568.91

New Wave Termite & Pest Termite treatment for Timmerman's rent house 275.00

Total Misappropriated and Inadequately Documented Expenditures 40,178.22 $

Dickerson Excavation, Inc. No documentation available 7,000.00 $

Clint Johnson No documentation available 4,000.00

Clint Johnson No documentation available 3,800.00

Todd Timmerman No documentation available 2,874.00

Greg Warden Individual cashed check and returned to Timmerman 1,825.00

Greg Warden Individual cashed check and returned to Timmerman 1,800.00

Herman A. Timmerman Deposited into Timmerman's checking account 1,600.00

Greg Warden Deposited into Timmerman's checking account 1,350.00

Warden, Inc Payment on Timmerman's personal account 1,183.03

Todd Timmerman No documentation available 793.32

Lakeside Food Mart Payment on Timmerman's personal account 685.42

Greg Warden Deposited into Timmerman's checking account 550.00

Les Myers No documentation available 500.00

Warden, Inc Payment on Timmerman's personal account 485.00

Lakeside Food Mart Payment on Timmerman's personal account 419.08

Lakeside Food Mart No documentation available 375.00

Total Questioned and Inadequately Documented Expenditures 29,239.85

Total Misappropriated, Questioned and Inadequately Documented Expenditures 69,418.07

Amount Reimbursed on Timmerman's Behalf (39,477.30)

Total Funds Due 29,940.77 $

Source: City of Ozark-Water Department, Arkansas State Police case files and bank microfilm

Criminal Charges Former Mayor Timmerman Pled Guilty to in Circuit Court on March 3, 2003

Criminal Charges Were Not Filed Involving These Transactions

City of Ozark - Water Department

Misappropriated, Questioned and Inadequately Documented Expenditures

For the Period January 1, 2000 through July 31, 2002