A state audit report released Wednesday says Franklin County's first clue to embezzlement in its public works department was a "return to sender" notice in late 2010 when it tried to update tax information for all of its vendors.
The county auditor at the time, Zona Lenhart, had her staff trying to certify all vendors doing business with the county. And some of the notices sent to vendors came back undeliverable.
The state auditor's four-page investigative report does not identify the vendor that later was found to be Critzer Equipment of Spokane. Follow-up requests to that same vendor also were returned or unanswered, the report said.
More than a year later -- in late November 2011 -- Critzer Equipment was identified as the defunct company that had been receiving payments for road grader blades and other supplies supposedly delivered to the county's public works department.
The state audit concluded Franklin County lost $2.84 million in an embezzlement scheme dating back to 1996, and that the public works accounting manager, Dennis Huston, allegedly used at least two fictitious vendors to funnel the money to himself.
Huston, who was arrested last February and fired from the job he held for more than two decades, is charged with first-degree theft, money laundering and cocaine possession and is awaiting a trial early next year in Franklin County Superior Court. Prosecutors said the charges account for a "conservative minimum" of $1.8 million because officials only have records back to 2002.
State auditors are recommending the county try to recover that amount and related investigative costs from Huston or the county's insurance company. The county has filed a civil suit against Huston and his wife.
The state audit says that current county Auditor Matt Beaton's staff confirmed that Critzer was a bogus company after calling a phone number on one of the recent invoices, only to learn the number belonged to a trucking equipment company that bought out Critzer's assets in 2001.
Assuming the county had been paying for supplies to a company that had been out of business for a decade, Beaton's staff notified the state auditor and Pasco Police Department in early January.
According to the audit, police examined the bank account where payments were deposited, discovering it was set up in 1990, 10 months after Huston was hired by Franklin County, and that it was in the name of two fictitious companies, Critzer being one.
Police also interviewed Huston shortly after he was arrested in February, when he allegedly told them he created and submitted the phony invoices.
"Our investigation found 45 invoices on the former accounting director's work computer that were paid by the county auditor," the report said.
State auditors verified $1.77 million in misappropriated money by comparing county payment records with bank records from 2002 through 2012 for one vendor, and another nearly $23,000 with a second vendor.
State auditors also identified another amount, slightly more than $1 million, that they question as having been misappropriated and deposited in the bank account controlled by Huston.
The auditors could not prove that theft because the county did not keep the records from 1996 through 2001.
The auditors reported they reviewed all processes in the county's public works department and "systems to which the former public works accounting director had access."
They concluded, "We did not find additional misappropriation."
But the auditors found the county lacked internal controls necessary to safeguard public money, declaring:
-- No adequate oversight of the decentralized public works accounting department.
-- Huston's boss, the public works director, failed to adequately review expenditures.
-- No follow-through reports on inventory to match vendor payments for items purchased.
-- Payments processed through the county auditor's office were sent directly to the public works department, giving "the former accounting director the opportunity to take the vendor payments."
Since discovering the theft, the county has established better internal controls, including moving the accounting functions to the county auditor's office, the report said.
"Now that the auditor's report is in, now is the time to review the report and consider further disciplinary action," said County Commission Chairman Brad Peck.
In February, the commissioners placed eight county employees on leave and ordering an outside investigation to collect more information.
As a result, commissioners fired Huston's supervisor, public works Director Tim Fife.
"There is nothing in that report that changes our course of action," Peck told the Herald on Wednesday, adding that a majority of the board feels it is important to respect the county's attorney-client privilege and not release their independent investigator's report.
The Herald previously reported that in 2009 the FBI investigated allegations that Huston was taking money through a phony invoicing scheme. It was similar to an embezzlement that he was convicted of while working for a federal agency in Montana.
The 2009 FBI investigation found no evidence to support the rumor, and Huston remained employed in Franklin County.
Beaton said Wednesday that he has worked with county commissioners to create a new position of director of auditor service and institute a countywide "control environment" to double-check all vendor and invoicing practices.
Commissioners also have purchased new financial accounting software to ensure better accountability and reorganized the top positions for improved oversight.
Beaton said the county no longer sends payments back through the public works department, but mails them directly to vendors, and has a newly created "New Vendor Form," which will make it easier to verify legitimate vendors and address changes and identify potential problems.
-- John Trumbo: 582-1529; email@example.com