The Journey of a Future CPA

As you may be aware, I took my first CPA exam today, August 31.  There are 4 parts, all of varying degrees of difficulty.  I decided to take the easiest one (BEC) first, but not for that reason.  I thought I’d start with the business section because I find it most interesting and because it’s what I do best.

You see, accounting has never been my strongest subject.  I have gotten easy A’s in classes like finance, economics, marketing, and management.  Not accounting.  Perhaps I study it because it challenges me.

My original plan was to take BEC on August 1^st, and to take another one on the 31^st(today).  But I had to wait forever before I got my “Notice to Schedule.”  For me, the NTS required filling out 2 hours worth of forms, paying $717, and sending transcripts from 2 different universities (because I did post-secondary in high school).  My application should have taken four weeks to process but there was an issue with my transcript.  Apparently, my summer classes hadn’t been posted yet, and the exam services said I was 2 credit hours short.  After 2 more weeks dealing with the CPA examination services and the BGSU Registrar’s office, I finally received my notice to schedule.

I had done two weeks of serious studying at the beginning of July.  But then I realized my NTS wouldn’t be ready when I wanted to take it.  I had no idea when it would be ready.  So I stopped for a while and relaxed.

My NTS arrived two weeks ago.  I didn’t think I would have enough time to prepare so I wasn’t going to take it until October.  Then my friend Jeff Koons told me that I could do it and that I should take it in August.  That was all the convincing I needed.  I signed up for the exam at 3:30 AM.

I only had two weeks to prepare.  Granted, I had already studied two sections, but that was a month ago and I barely remembered it.  In order to be ready for the exam, I had to complete three sections in the first week, and spent the entire second week reviewing and taking practice exams.  Each section took about 10 hours.

The last two weeks have been filled with constant studying.  When I thought I was finished for the day, I did a little more.  For about 10 straight days I studied. 

I took my first Becker practice exam on Saturday.  I was ecstatic to find that I had scored a 91%.  OMG!!  For the rest of the day, I was extremely confident.  The next day, I went to take another exam.  I scored a 72%.  I was stunned.  In order to pass, I need a 75%. 

Granted, the multiple choice questions are worth 85% and the writing is worth 15%.  I’ve always loved to write, so I was fairly confident in my abilities.  But I did some calculations and realized a perfect writing score wouldn’t have saved me from a 72%.  Then I realized that the writing portion can’t really make you, but it can break you.

By Tuesday, I had lost all motivation in studying.  I decided to relax because I wanted to feel refreshed on exam day.  I ate a healthy dinner and prepared for the next day.  After telling a few people my exam was in Stow, I realized it was in Niles.  I wasn’t really sure where either of them was but I knew it was far. 

According to Google maps, my testing center was an hour and twenty minutes away.  I had to be there at 8:30 and was worried about getting caught in traffic.  I decided to leave at 6:30 am so there wasn’t any room for error.  Once I got to the center, I would review flashcards in my car.

I woke up at 5:30 and showered.  I wanted to look my best so it would give me an extra boost of confidence.  My clothing choice was important, as I didn’t want to be cold, so I wore a pair of jeans and a sweater thing over a tank top.  I left at 6:45, and after a long drive on several different highways (listening to Lady Gaga of course), I made it to the testing center at 8:00 am.  I went through every flashcard at which point it was 8:30.  Thirty minutes to go.

After a high security sign-in process, complete with two forms of ID, a password, a picture, and fingerprints, I was allowed to take my exam.

I sat down, clicked through the opening prompts, and read the first question.  I didn’t even know it.  I shrugged, marked the question with a flag, and kept going.  I knew a lot of the answers but there were others that I swore I had never seen before.  I finished the exam 10 minutes early, with no idea if I passed or failed.

My MAcc cohort and future colleague lived 5 minutes from the testing center, so we met for lunch.  He had just taken FAR, the hardest CPA exam, two days before.  We exchanged horror stories about the whole process.

On the way home, I had a lot of time to reflect on the questions I was unsure of during the exam.  I think I got a lot of them right.  When I went home, I looked up a few answers and validated that belief.  However, I found a few other questions that I thought I got right that I actually got wrong.  So I really don’t know what that means.

My score on the exam will not be know for at least a month, probably more.  During that time, I will be studying for my next section—REG.  I may even take my second exam before I find out if I passed the first one.  After I take REG, I begin my career as an auditor at Grant Thornton.

These are my personal experiences relating to the CPA exam.  I’m sure it varies greatly between people who take it.  Statistics say less than 10% of individuals pass all 4 parts of the CPA exam on the first try.  My goal is to be one of them.  My other goal is to pass all 4 parts by next October.  It will be a great deal of work, but I know it will be worth it in the end.  If getting a CPA was easy, it wouldn’t mean nearly as much.

Martha Stewart: Insider Trading

© 2011 Emily Diepenbrock

An Inside Look on Martha Stewart

Introduction

Martha Stewart made her name as a prim, poised woman who always maintains the proper etiquette.  She is credited for her drive to succeed and her ability to build a mega-million dollar empire based around her image. Along with a highly successful business, Stewart has several investments.  It was her investment in ImClone, a pharmaceutical company owned by a friend of hers, which jeopardized her entire career and sent the proclaimed “domestic diva” to prison.  Charged with insider trading, obstruction of justice, and perjury, many thought this would be the end of Martha’s empire.

Background Information

            Martha Helen Kostyra was born in New Jersey in 1941, growing up in a working class neighborhood.  She began modeling at age 13 and studied various forms of history at Barnard College.  As a sophomore, she married Yale Law School graduate Andy Stewart and they had their only daughter, Alexis in 1965.

            For five years beginning in 1968, Martha was a successful securities broker for a boutique on Wall Street, before moving to Connecticut to be a homemaker and full-time mom.  She became heavily invested in gourmet cooking and launched her own catering business, A Catered Affair (Biography.com).  Her enterprise grew into a million-dollar business over the next decade, with a diverse line of offerings, including books, retail stores, and endorsements for Kmart.  By 2001, Martha, Inc. included 34 books, 4 magazines, a catalogue company, radio show, and a segment on CBS This Morning (Jennings). 

Insider Trading

      The start of Martha’s legal troubles began on December 27, 2001.  Stewart held a personal investment account at Merrill Lynch with Peter Bacanovic as her broker.  Dr. Samuel Waksal, CEO of ImClone (a pharmaceutical company), was also a client of his.  ImClone’s success was heavily involved around the marketing of Erbitux, a cancer-treatment drug that was pending FDA approval. 

Back in October, Bristol-Myers Squibb offered to purchase 20% of ImClone’s shares at $70 each.  At this time, Martha’s company, Martha Stewart Living Omnimedia, Inc. (MSLO) owned 51,800 shares in its pension fund, along with an additional 5,000 that she owned personally.  Since there had been rumors about Erbitux not receiving FDA approval, she took advantage of Squibb’s offer and sold off as many shares as she could.  After the trade was done, the remaining ownership amounted to 3,928 shares of personal stock.

By December 2001, it became more apparent to employees that Erbitux was not going to receive FDA approval.  At this time, Waksal ordered Bacanovic to start selling all of his and his family’s shares of ImClone right away.  Although the broker was on vacation, his assistant Douglas Faneuil alerted him of the situation.  During these conversations, Bacanovic abruptly stated that they needed to alert Martha right away (US v. Stewart).

Stewart was also vacationing at the time, but upon hearing this information from Bacanovic, she told Faneuil that she wanted to sell her remaining shares of ImClone stock.  On December 27, 2001, Stewart sold 3,928 shares for $58 a piece.  On December 28^th, the day the public became aware of the situation, the stock price had dropped to $45.  She saved $39,507 on a deal that ultimately sent her to prison (Jennings).

Lying to Investigators

            Although Stewart was obviously guilty of insider trading, her real downfall was in the fact that she tried covering it up.  Dr. Waksal was convicted by the federal government for his illegal activities, after which attention shifted to Stewart.  When questioned by internal investigators at Merrill Lynch, Bacanovic and Faneuil explained that her shares were sold for tax-loss purposes, as had been planned.  Faneuil knew that selling Martha’s shares did not coincide with this tax strategy but was coached by Bacanovic to say so.

            Days later, Faneuil was approached by the SEC and Stewart’s business manager, Heidi DeLuca.  The SEC questioned him on the sale of stock by Waksal’s family, while DeLuca complained that this ImClone transaction totally messed up Stewart’s tax-loss plan.  When he alerted Bacanovic of the situation, the senior broker advised him that Stewart’s sale of ImClone stock was actually related to a pre-existing agreement to sell if the stock fell below $60 per share, although there was no concrete evidence to support this.  Bacanovic repeated this story to the SEC (US v. Stewart).  At this point, Faneuil felt guilty about what was transpiring.  Bacanovic told him that his relationship with Martha was integral to his career, and that he was being selfish for bringing attention to it (Jennings).

            On February 4^th, 2002, Stewart spoke to the US attorney’s office, SEC investigators, and an FBI agent about ImClone. She told them she decided to sell her remaining stock if it fell below $60, that she did not speak to Faneuil, and did not want to be bothered on vacation.  Stewart and Bacanovic continued to lie to investigators, attempting more cover-ups in the process.  Faneuil was unable to bear lying anymore and came clean to Merrill Lynch and federal investigators.  He agreed to cooperate, while admitting guilt for “receiving money or things of value as a consideration for not informing against a violation of the law."  As a consequence, he was no longer able to work in trading securities (US v. Stewart).

            Stewart and Bacanovic were both convicted on four counts of perjury, conspiracy to obstruct justice, and making false statements, with Bacanovic receiving an additional charge for insider trading.  They were sentenced to five months in prison, with two years of supervised release (including five months on house arrest).  Stewart paid fines of $30,000 and Bacanovic had $4,000 (US v. Stewart).

Serving Time

            Stewart considered going through the long process of appeals, but instead elected to serve the time and move on.  She entered a minimum-security women’s prison in West Virginia on October 8, 2004, claiming that she wanted to get out in time to plant the spring garden (Jennings).  Martha described her time as calming and relaxing, due to the release of pressure brought on by legal and media demands.  Her job was to vacuum and clean machines for 12 cents an hour.  She said the prison food was terrible, and worked with other inmates to microwave “kale quesadillas, dandelion greens, and vegetable mélange” from the remnants of a shoddy garden. She worked out for an hour each morning, and taught yoga classes in the evening. 

However, the hardest part for Martha was being cut off from her work.  She met with certain advisors, who were allowed to tell her the happenings of the company, but she was not allowed to make any decisions.  In spite of this obstacle, Martha was constantly thinking of ideas to use upon release.  Although unable to run her company from the inside, MSLO still gained millions in revenue due to the success of “Desperate Housewives,” (which she helped develop) and a merger of Kmart with Sears.  Martha became $148 million richer while sitting in prison.

She began contributing to MSLO once again on house arrest.  The company did extensive marketing research, and determined that Martha’s unfavorable rating, at 21%, was much lower than other prominent women like Hillary Clinton (33%).  Working with her team, she expanded into Martha-branded houses, how-to videos, and her own version of “The Apprentice” (Sellers).  Though MSLO experienced some declines as well, Martha came back as strong as ever.

Ethical Lapses

            The root of Martha Stewart’s downfall is insider trading.  Using privileged information is hurtful to the public because it creates an unfair advantage.  All investors of the public stock exchange deserve to use the same data for decision-making and it is the stockbrokers’ duty to keep undisclosed facts confidential.  Without transparency, select traders would have all the power to succeed in securities, while the public would be helpless.  Prohibiting insider trading allows the market to remain in balance. 

At the beginning of this scandal, Bacanovic held the most blame for providing Martha with this information.  She did not ask for the privilege, but was given the temptation to save thousands.  Her decision to sell or stay would not have impacted her net worth materially, yet she conceded.   

Lying to investigators hurt Stewart and Bacanovic the most.  Once the ImClone investigation began, they thought they could get away with their actions by coming up with a good story.  This was not an effective strategy because documentation, forensics, and guilt by Faneuil uncovered the truth.  A better solution would have been to come clean immediately and endure a “slap on the wrist” or lighter penalty, like Faneuil did.

            They were seduced by hubris, performing unethical acts to get ahead.  Bacanovic valued Martha as one of his top clients and felt that telling her about ImClone would help forward his career.  Stewart acted on this information in order to protect a small portion of her net worth.  As a broker and former trader, both knew what they were doing was wrong.  They used a short cut to get ahead, although both would have prospered without this decision.

An Example

            Some (including Alexis Stewart) argue that Martha experienced an overly harsh punishment and that prosecutors wanted to set an example with her.  Perhaps they disliked her character and wanted to see her humiliated.  Whatever reason, it is not often that someone with Martha’s poise and success is charged with such serious crimes.  Sending her to prison sent a message to the public that these actions would not be tolerated, even for someone like her.

            The purpose of punishment is for deterrence, restitution, and reformation.  An appropriate penalty will improve a criminal’s morality, while a lesser one will not, and a harsher one will only create resentment.  Prison is generally associated with adequate punishment but only affects deterrence.  In this case, Martha’s crime amounted to approximately $40,000.  In order to achieve restitution, she could have paid millions in fines and avoided public humiliation. 

However, the federal government spent large quantities at the expense of taxpayers to take her case to court, which was embarrassing to her.  Sending Martha to prison did not benefit anyone.  Charging millions in fines might have made a larger impact on her and others considering insider trading (Kalman).  Whether her punishment was reasonable or not, Martha managed to handle the situation with the grace and composure she is known for.  Her empire continues to thrive despite the setback.  It remains unknown however if she feels guilty for her actions or if it just served as a deterrent.

Conclusion

Martha Stewart’s insider trading scandal surprised the nation and left many wondering whether she would be able to return to success.  Her presence on TV, in magazines, and at retail stores since prison has indicated that she was able to overcome her mistakes.  Although illegal trade triggered her downfall, it was the lying that led to her conviction.  Her case serves as a reminder of the seriousness of this crime and the possibility of incarceration for even the most elegant of people.  Unlike other notorious white-collar criminals, Martha managed to create success out of adversity and appears stronger.  However, it cannot be known whether this strength came from the guilt of her misdeeds or simply her implicit desire to succeed. 

WORKS CITED

"Martha Stewart." 2011. Biography.com. 14 Mar 2011. <http://www.biography.com/ articles/Martha-Stewart-9542234>.

Kalman, Israel. Martha Stewart and the Immorality of Prison. December 2004. 14 March 2011 <http://www.bullies2buddies.com/Martha-Stewart-and-the-Immorality-of-Prison>.

Sellers, Patricia, and Eugenia Levenson. "Remodeling Martha." Fortune 152.10 (2005): 100-122. Business Source Complete. EBSCO. Web. 14 Mar. 2011.

 U.S. v. Stewart, 433 F. 3d 272, 284-285 (2d Cir. 2005).

Obama Weighs Multi-Year Effort to Overhaul Tax Code

I found an interesting news article about Obama and his plans to simplify the corporate tax code in order to reduce the $1.3 trillion deficit.  So does this mean I can forget almost everything I learned in my corporate tax class?  Is it scary to anyone else to see the democrats in charge of tax reform??  Here it is:

President Obama has instructed his economic team to draft options to close loopholes and lower income-tax rates ahead of what would be a multi-year effort to overhaul and simplify the U.S. tax code, administration officials said Thursday.

Lowering corporate tax rates could give the administration the opportunity to build an alliance with business leaders, though it would likely depend on which tax breaks officials propose to eliminate.

White House aides cautioned that the effort was in its infancy. But in the wake of last week's report from his presidential deficit commission, a broad tax overhaul has been pushed toward the front of the discussion as members of both parties try to find a way to bring down the $1.3 trillion budget deficit with minimal pain.

"The president has long said that reforming the tax system is a priority, and the bipartisan fiscal commission recently made recommendations that he will consider as part of the budget process," said White House Deputy Communications Director Jen Psaki. "But he is not considering specific policy proposals, and no decisions have been made about whether this is a priority he will push for in the near future."

The debt commission proposed ending certain tax breaks, known as tax expenditures, that allow many corporations and individuals to minimize their tax burdens. By attacking such loopholes, the commission concluded tax rates could be lowered while still bringing in more revenue to the Treasury.

A White House official said Mr. Obama had asked members of his economic team to comb through the commission's report, as well as an earlier paper on tax-simplification options drafted by a presidential economic-recovery board. No deadline has been set, and no decision has been made on whether to put any proposals into the fiscal 2012 budget, which will be released in February.

Read more: http://www.foxnews.com/politics/2010/12/10/obama-weighs-multi-year-effort-overhaul-tax-code/#ixzz17horg4FR

Tax Crimes

Although this was an oral presentation, this is the outline I created relating to the Internal Revenue Code and Tax Crimes.

Tax Crimes

I.               Criminal Offenses

A.      Section 7201—Tax Evasion: Anyone who willfully attempts in any manner to dodge a tax or its payment

B.      Section 7202—Willful Failure to Collect or Pay Over Tax: Failure by employers to withhold federal wage and FICA taxes and pay them to the government

C.      Section 7203—Willful Failure to File Return, Supply Information, or Pay Tax

D.      Section 7206—False Returns and Preparers of False Returns: Willfully make any document that he does not believe to be true and correct or any tax preparer who willfully aids in preparation of fraudulent or false documents

E.      Section 7212(a) —Attempts to Interfere with Administration of Internal Revenue Laws: Threats or forcible endeavors designed to interfere with Internal Revenue employees

F.      Related Criminal Offenses:  Other offenses associated with tax crimes including conspiracy, false claims, money laundering and conspiracy

II.               Process of Tax Crimes Enforcement

A.     Administrative Process

a.     Criminal Investigation Division (CID)—investigates all tax crimes

b.     District Counsel—sets up a meeting

c.      Department of Justice—determines government’s likelihood to prevail

d.     Office of the US Attorney—transfers to judicial process

B.     Information Gathered by Investors

a.     Summons

b.     Third Party Summons

c.      John Doe Summons

d.     Corporate Summons

e.     Undercover Tax Investigations

f.      Grand Juries

g.     Search Warrants

C.     Defenses—such as good faith misunderstanding

D.    Burden of Proof—relies on circumstantial evidence

E.     Federal Sentencing Guidelines

a.     Guideline Section

b.     Base Offense Level

c.      Adjustments

d.     Criminal History

e.     Guideline Range

f.      Sentencing Options

g.     Departure from Guideline Range

Tax Memorandum

This is a tax memorandum that was done for my Corporate Taxation class, along with my partner, Matthew Morgan.

To:                   Dr. Lawrence Kowalski, Tax Professor

From:              Emily and Matthew Morgan, Tax Associates
Subject:           Travel and Entertainment Expense Deduction
Date:                December 3, 2010

I. Facts Presented

            The Internal Revenue Service (IRS) audited Winter Corporation’s current year tax return and disallowed the $10,000 of travel and entertainment expenses incurred by Charles, an officer-shareholder, as a result of inadequate documentation. The IRS claims the expenditure was a constructive dividend paid to Charles; however, he argued that he derived no personal benefit from the expenditure.
II. Issues Presented

            Can this $10,000 expenditure be deducted as travel and entertainment expenses?  Or rather, does it qualify as a constructive dividend and if so, what are the tax consequences? 

III. Conclusion

            Without adequate documentation, the IRS will continue to assert the $10,000 travel and entertainment expenditure Charles to be classified as a constructive dividend.  He must report this amount as income, rather than a deduction.

IV. Discussion

According to Internal Revenue Code section 274(d):

“No deduction or credit shall be allowed under section 162 or 212 for any traveling expense, for any item with respect to an activity which is of a type generally considered to constitute entertainment, amusement, or recreation, or with respect to a facility used in connect with such an activity, unless the taxpayer substantiates by adequate records or by sufficient evidence corroborating the taxpayer’s own statement (A) the amount of such expense or other item, (B) the time and place of the travel, entertainment, amusement, recreation, or use of the facility or property, or the date and description of the gift, (C) the business purpose of the expense or other item, and (D) the business relationship to the taxpayer of persons entertained, using the facility or property, or receiving the gift.”

The requirements to deduct a travel and entertainment expense include substantial adequate documentation.  Without this, the IRS will continue assert this $10,000 expenditure as a constructive dividend to Charles, even though he maintained it is business-related and claims no personal benefit.  Oral testimony is not enough—written substantial documentation is necessary.

The limitation of requiring substantiation of travel and entertainment expense deductions supersedes Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930).  In this court decision, if the taxpayer incurred travel and entertainment expenses, but could not readily determine exactly how much to deduct, then the taxpayer could make a close approximation. However, according to Treasury Regulation 1-274, “Section 274(d) contemplates that no deduction or credit shall be allowed to a taxpayer on the basis of such approximations or unsupported testimony of the taxpayer.”  Therefore, we may not deduct the travel and entertainment expenditure and Charles must pay ordinary income on the constructive dividend.

According to Gotcher v. United States, 5^th Circuit Court of Appeals, “The test for constructive dividends in such circumstances is two-fold; not only must the expenses be non-deductible to the corporation, but they must also represent some economic gain or benefit to the owner-taxpayer.” [U. S. v. Gotcher [68-2 ustc ¶9546], 401 F. 2d 118, 121-124 (5th Cir. 1968)].  Taxpayer must show to the court or IRS that they were not the primary beneficiary of the expenditure. The IRS ruled the expenditure as non-deductible, thus meeting requirement one.  They further stated it was a constructive dividend to Charles because he received an economic gain from the $10,000 expense to his name.  Although Charles contends he derived no personal economic gain or benefit, without proper documentation to substantiate how he spent the money and so forth, the IRS will contend that the expenditure is a constructive dividend.

To further support this stance on constructive dividends, court case Wortham Machinery Company v. United States states that, “a constructive dividend is paid when a corporation confers an economic benefit on a stockholder without expectation of repayment” (Wortham Machinery Company v. United States, 10 Cir., 521 F. 2d 160, 164).   If Charles creates a $10,000 travel and entertainment expenditure on the corporate account, without any substantial evidence of what he did, he is assumed to have derived some sort of economic benefit.

For next year, we strongly recommend creating a policy for all employees to follow regarding travel and entertainment expenses.  This will help alleviate the chance of this problem happening again.   Substantial documentation will provide to the IRS with the necessary information to prove the travel and entertainment expenditure qualifies as a 162(a) deduction. However, without adequate documentation proving it was within the scope and reach of IRC 162(a), the IRS will continue to disallow a deduction similar to this.

Local Woman Charged with Embezzlement

I found this story so interesting because it happened so close to home and sounds like a case study out of an auditing class.  This goes to show the need for internal controls, and how vacation revealed fraud.  It also goes to show that an audit can find areas of concern, but not necessarily be able to reveal anything.

OTTAWA — Massive credit card debt began amassing years before an area sheriff’s wife began taking money from her employer, according to a review of state investigative records.

Kathy Beutler told state investigators the household’s reliance on her income during her husband’s initial run for office in 2000 led to her eventual theft of more than $261,000 from the Ohio Farmers Union, according to records. The investigation also concluded Beutler’s husband, Putnam County Sheriff Jim Beutler, had no knowledge of the theft.

There was also a missed opportunity to catch the theft sooner, investigation documents show. An internal audit commissioned by the OFU discovered missing funds a year before the allegations against Kathy Beutler came to light. Officials at the union and the accountant who performed the audit, however, reconciled the discrepancies since the union added more counties into its insurance coverage.

The revelations come from the investigative files the Ohio Bureau of Criminal Identification and Investigation kept on Kathy Beutler. The Ohio Attorney General's office released the records to The Lima News following a public records request. By law, investigative records do not become public records until after the conclusion of the appeals process.

Kathy Beutler pleaded guilty in September to one count of aggravated theft, a third-degree felony. A special prosecutor said over the course of four years, from 2005 through 2009, Beutler made 86 transactions to embezzle $261,159 from the OFU, where she worked since December 2003. She is currently serving a three-year prison sentence at the Ohio Reformatory for Women in Marysville.

Campaign and credit cards

The road from law-abiding citizen to convicted felon for Kathy Beutler began with her husband’s campaign for sheriff, according to accounts from BCI&I reports.

In order to enter the 2000 campaign for sheriff, Jim Beutler resigned from the sheriff’s office after 24 years as a deputy. As the sheriff spent more time campaigning, he was able to devote less time to a construction company he operated as a side business.

In an October 2009 interview, Jim Beutler told Special Agent David W. Pauly, of the Ohio Bureau of Criminal Identification and Investigation, he thought between his wife’s job, his job and the construction business that household finances were on solid ground.

Kathy Beutler was responsible for the family’s finances. In August 2009, Kathy Beutler told Pauly her husband “didn’t have a clue.” She told investigators during Jim Beutler’s campaign in 2000 she assumed full responsibility for bringing in money to pay bills, and it put them “in a big hole financially.”

“Ms. Beutler stated that they had four kids in school and that was the start of once again utilizing credit cards to make ends meet,” Pauly wrote. “Ms. Beutler did not tell her husband that she was relying on credit cards to get them through financially at the time, primarily because she was afraid to do so.”

According to the reports, Kathy Beutler soon maxed out her credit cards, and interest rates climbed to 26 percent. She used a cash advance from one to pay off the fees of another. She told Pauly she took the money from the OFU to pay down the debt and that “it became a huge monster.”

A question of influence

As Kathy Beutler’s web of deception unraveled, she begged for mercy from the very agency she defrauded. Questions also arose on the part of OFU employees about whether the sheriff attempted to influence how they handled the situation.

With mounting suspicion and increasing evidence, officials at the OFU placed Kathy Beutler on paid administrative leave on June 3, 2009. Five days later, she sent an e-mail to Roger Crossgrove, the executive director of the OFU at the time. In the e-mail, Kathy Beutler begged Crossgrove not to go to the authorities.

“I am asking that you not take legal action against me, but let me make it right,” Kathy Beutler wrote. “OFU at this point does not need any more scandal, and I want to make this right with you. I will do or sign [whatever] you need.”

According to one investigative report, OFU officials were concerned the sheriff attempted to influence how things were handled.

In a June 2009 report by Pauly, Crossgrove told investigators, “the second time the Sheriff came in he wanted to make a deal with us to kind of keep it quiet. He wanted us to contact the prosecutor and put any investigation on hold and to not involve BCI agents.”

The sheriff adamantly denied ever attempting to influence how OFU officials ultimately decided to handle the situation or the official investigation. Jim Beutler said OFU officials invited him to talk about the situation and asked for guidance.

“They asked me, ‘What should we do with this?’” Jim Beutler said. “I said, ‘Look, I can not give you advice. There are two options: Either you can pursue it, or we can deal with it personally. How do you want it? Those are your options, but I can’t give you advice as sheriff as to how to handle this because it does involve my wife.’”

State investigators never opened an investigation into the sheriff’s actions.

The investigation by special agents from the BCI&I was strictly limited to Kathy Beutler, according to Ted Hart, a spokesman for Ohio Attorney General Richard Cordray’s office.

“It was a very thorough investigation,” Hart said. “We did not determine any wrongdoing by the sheriff.”

Kathy Beutler, in the e-mail seeking to avoid a legal proceeding, said she was “not a bad person, monster or a diabolical extortionist. I am a good person that fell into a terrible trap.”

She offered a plan.

“Roger, I would be willing to work for $10,000 a year to help make this up,” Kathy Beutler wrote to Crossgrove.

Officials at the OFU declined to comment. Laurie Pangle, a Toledo attorney representing the union, also declined to comment.

Missed opportunity

The revelation that Kathy Beutler, who served as secretary-treasurer of the OFU, took more than a quarter million dollars from the organization almost came to light a year earlier.

Questions about missing funds began after a 2008 internal audit conducted by a representative of Lentol, Violet, Kienitz and Co., a Lima accounting company. Colleen Diller, a certified public accountant with the firm, told Pauly her audit discovered a discrepancy of approximately $72,000 in one account.

“Ms. Diller advised that she does an analytical evaluation and ‘nothing blipped,’ raising her suspicion that something was wrong,” Pauly wrote. “Ms. Diller explained that they look for different things than what the agents may be looking at.”

Diller told agents she assesses the risk of fraud during her audits. In an agency the size of the OFU, management has the power to override the risk. Pauly wrote that OFU gave Kathy Beutler “all the power to make those transactions, with little or no oversight.”

Crossgrove told Pauly that OFU officials were less concerned with the discrepancies in the insurance account.

“Mr. Crossgrove stated that this was not his biggest concern, as he feels that the payroll account is [where] the majority money deficit is coming from,” Pauly wrote.

Pauly wrote Crossgrove said, “Everyone in the entire organization trusted Kathy [Beutler] one hundred percent.”

Officials at Lentol, Violet, Kienitz and Co. could not be reached for comment.

All is revealed

The series of thefts finally came to light after Kathy Beutler took some vacation time, investigative records show.

Crossgrove acknowledged in a June 2009 interview with BCI&I agents that there had been red flags that OFU officials missed. Crossgrove said some bills were not getting paid on time.

When Crossgrove questioned Kathy Beutler about the bills, she told him the agency didn’t have the money, but that the bills would be paid. Crossgrove said the union’s “bottom line” was always very low, and he decided to start looking at all the bank statements.

According to the investigative records, when Kathy Beutler took vacation the week of May 25, 2009, another OFU employee, who was searching for the agency’s bank statements on Crossgrove’s orders, found Union Bank statements in Kathy Beutler’s desk drawer. The Beutlers and the OFU both use the bank.

The employee inspected the statements and found they belonged to Kathy and Jim Beutler. The statements included multiple transfers from OFU accounts above and beyond Kathy Beutler’s regular paycheck, Crossgrove told investigators.

Even after she was placed on administrative leave, Kathy Beutler continued to hide the situation from her husband. Jim Beutler told investigators he didn’t learn about the investigation or the leave until days later.

“The sheriff advised that he didn’t know that she was actually laid off, as his wife lied to him and told him that she was taking some time off to enjoy the weather and get some things done around the house,” Pauly wrote. “The sheriff advised that he didn’t learn about the offense until six days later, when two of his staff, a detective and an office administrator, met with him in his office.”

Even as the investigation swirled around her, Kathy Beutler lamented the toll it could take on her husband.

“As of this, my dear husband and family are not aware of this situation. This will kill him and his career,” Kathy Beutler wrote in the e-mail to Crossgrove a day before Jim Beutler learned of the investigation. “He has worked so hard and is such a good man. If there is any mercy to be had, I am begging it of you now.”