By J.B. Smith

Tribune-Herald staff writer

Downtown Waco Inc. records suggest that former executive director Margaret Mills set up credit and debit card accounts her board never authorized, funneled members’ dues into her own bank account and cashed agency checks for tens of thousands of dollars — right under the noses of some of the savviest financial minds in Waco.

Board members and city of Waco officials say it’s all too easy now to see how better accountability measures might have prevented the financial scandal that has brought the 50-year-old institution to the brink of destruction.

Waco police are continuing their investigation into the alleged misuse of funds at Downtown Waco Inc., and the agency’s board is still seeking restitution from Mills even after receiving a $70,000 check on her behalf.

Board and city officials say they were diligent in reviewing Downtown Waco Inc.’s monthly financial reports, which were prepared by a leading Waco accounting firm. What they didn’t consider was that the source of that data was a single trusted staff person: Margaret Mills.

A regular outside audit not only might have detected improper spending and deposits but also could have revealed weaknesses in the agency’s internal controls, Downtown Waco and city officials said. But the board never asked for such an audit. And the city of Waco, which gave Downtown Waco Inc. up to $386,138 a year, didn’t require one. That omission baffles Waco’s mayor and council members, who only found out about it last month.

“That’s what would have caught this,” Mayor Virginia DuPuy said. She has asked for a review of all city contracts to ensure that recipients of city funds have adequate financial controls, including audits for larger recipients.

City Councilman Randy Riggs, a certified public accountant who first served on the council in 2000, said he had assumed that Downtown Waco was required to be audited, the same as the three local chambers of commerce that receive city funding.

“I was floored. Amazed,” he said. “It was my understanding that they had to have one.”

Perhaps more remarkable is how long the irregularities appear to have gone on under the watch of some of Waco’s most respected leaders in business, banking, higher education and nonprofit management. In a report to her board in June, Mills admitted using agency accounts for cash, high-end clothing and other personal uses as far back as fall 2003.

The board also has learned that Mills opened and used several credit and debit card accounts it was never told about and that she wrote thousands of dollars worth of checks on the account of RiverCity, a Downtown Waco nonprofit spinoff that has been inactive in recent years, board president Scott Felton said.

Board members this week said they never hunted for irregularities and never discussed an audit because they trusted Mills’ integrity and competence.

“Why is an appropriate question now, but when you’re dealing with an ongoing business, and you have full trust in your staff, then the focus is not there,” said Felton, who also is president of Wells Fargo Bank in Waco. “There’s policies and procedures that might have been lacking, but it takes an individual to make things like this happen. I don’t think we ought to take our eye off the real cause of this.”

Board member Mark Boyd, former board treasurer of the organization, said Downtown Waco Inc. was so successful during Mills’ 18-year tenure that no one thought to doubt her.

“We all feel betrayed, angry and sad — the full range of emotions,” said Boyd, senior vice president of Community Bank and Trust. “We trusted her to the nth degree. That’s why we feel so betrayed.”

Longtime civic leader

As Downtown Waco Inc. executive director, Mills, 65, one of Waco’s best-known civic leaders, worked with business and property owners, city and county leaders, and others to increase downtown property values, boost its workforce and spark economic development through downtown and the Brazos River corridor. Board members and others had credited her with much of the area’s revitalization.

For its part, Downtown Waco’s board possessed a level of financial literacy that any nonprofit group could envy.

Besides Felton and Boyd, it includes Tejas Logistics Systems president Gaylan Beavers, Wells Fargo executive Pat Millar, Insurors of Texas president George Chase, American Football Coaches Association executive director Grant Teaff, MCYC executive director Doug McDurham, Baylor University economist Tom Kelly, Quinn Campus executive director Jewel Lockridge, David Hicks of Compass Bank, Stewart Kelly of Kelly Realtors, McLennan Community College executive Danny Uptmore and Baylor’s vice president for finance and administration, Reagan Ramsower.

“Those are some heavy hitters,” said Baylor accounting professor Bill Thomas, an expert on fraud prevention and detection. “They have a board that could have been very effective. I know nothing about what went on down there, but it seems to me the fact they opted not to have an audit was a critical mistake.”

He said that in an audit, a certified public accountant would normally do spot checks on an organization’s financial activities, perhaps reviewing a month’s worth of expenditures or examining all checks over a certain amount.

Just as important, an auditor can pinpoint weaknesses in an organization’s internal controls. That would ensure adequate record-keeping and a proper system for approval of expenditures, Thomas said.

Also crucial is a “segregation of duties” so that “the person who handles the cash is not also doing the books,” Thomas said.

“That’s a deadly combination,” he said. “If the director ever got her hands on the books, she could take the cash and fix the books to look like she wants.”

Felton said that in retrospect, that segregation of duties was lacking at Downtown Waco Inc.

Access to checks

The agency had an accounting firm — Jaynes, Reitmeier, Boyd & Therrell — that was supposed to sign the agency’s checks. But Mills had access to incoming dues checks, a few of which appear to have gone into Mills’ personal bank account, Felton said. Those include a $3,000 dues check from the Tribune-Herald in 2004.

In addition, Mills had access to “paper checks” that were intended for small but urgent expenses, Felton said. Those checks were supposed to have two signatures, but agency records show that Mills signed many checks alone.

Mills also charged what appear to be personal expenses to debit and credit cards she secretly opened on Downtown Waco and RiverCity accounts, Downtown Waco officials said.

The accounting firm would have received records of those check and card transactions but couldn’t be expected to catch irregularities, Felton said.

“We wouldn’t expect them to be responsible for that,” he said. “They were there to add and subtract.”

The accounting firm also generated monthly financial reports for review by the board and the city of Waco. Those reports itemized expenditures into 20 categories, which were based on codes that Mills placed on the checks she forwarded to the accountant, Downtown Waco officials said. So ultimately, Mills controlled how the expenses were categorized.

“The question is whether those numbers were correct,” City Manager Larry Groth said. He said his staff reviewed those reports monthly and he met every two weeks with Mills for an update on downtown projects, so he believed the city was well-versed on Downtown Waco Inc.’s finances.

Audit exemption

Groth, who was hired as assistant city manager in 1999 and city manager in 2003, said he didn’t know until this summer that Downtown Waco was exempt from audit requirements. He said he’s trying to find out the reason. Groth said other economic development partners, such as the Greater Waco Chamber of Commerce and the Cen-Tex Hispanic Chamber of Commerce, have had those requirements since at least 2000.

Toni Herbert, Linda Ethridge and Randy Riggs, all of whom were on the city council in 2000, said they don’t remember any discussion of the audit exemption. Neither does Mike Morrison, who was mayor in the late 1990s and part of 2000.

“I think I would have remembered that,” he said. “If that had been presented, I wouldn’t have been supportive of it . . . I honestly can’t imagine anyone on the council discussing that and saying, ‘Let’s not audit them, but let’s audit something that’s getting $40,000 a year.’ ”

Groth’s predecessor at City Hall, Kathy Rice, could not be reached for comment this week in Surprise, Ariz., where she is assistant city manager.

Groth said his staff is reviewing its other funding contracts to insure accountability measures are in place. He said larger agencies such as Downtown Waco Inc. should be required to have audits, but examining the agencies’ internal controls is more important.

John Alexander, executive director of Waco Habitat for Humanity, said he believes the Downtown Waco Inc. scandal will cause more nonprofit groups to consider audits even if they’re not required. His board paid for annual audits even before Habitat’s national organization required them.

“Awareness has been heightened at Waco nonprofits, and that’s a service to me,” he said. “I tell my board, people need to be able to ask you as a board member, ‘How do we know our donations are going to a good use?’ To say, ‘We trust John Alexander,’ is not a sufficient answer. It should be ‘Because XYZ systems are in place before there’s a problem.’

“In my opinion, all nonprofits should have a culture on the board where it’s OK to ask questions about finances. Board members should understand it’s their role. As an executive director, I’m not offended when they ask those questions.”

‘Management override’

Thomas, the accounting professor, said fraud cases often start with a pattern of “management override” in which trusted leaders are allowed to circumvent the usual controls.

“As in so many cases, when you deal with people who have stellar reputations in the community, you just develop an attitude of trust in people’s integrity,” he said.

“The tragedy of this is that an upstanding citizen, a person who is loved in this community and revered in this community now has a tarnished reputation with little likelihood of living it down. Reputations are years in the making and can be lost overnight . . . Nobody is above accountability.”

The Downtown Waco Inc. crisis has been a painful learning experience, said Toni Herbert, the former city councilwoman who served on Downtown Waco’s board before succeeding Mills as interim executive director at the end of July. She said boards need to ask hard questions about finances and not assume that an accountant will catch any irregularities.

“This is a real important lesson,” she said. “If anything good comes out of this, it’s that boards and staff people need to ask themselves, ‘Who’s minding the store?’ ”

jbsmith@wacotrib.com

757-5752