I bring many years of experience auditing to this project and that is how I approached the Denardo payroll fraud story. Before an auditor can assess individual transactions, professional standards require gaining an understanding of the internal control environment surrounding the transaction stream. Internal controls are the policies and procedures an entity uses to conduct business, in this case being the policies and procedures Bay St Louis used to generate payroll. Auditors gain this understanding by reviewing written policies and procedures, interviewing people involved in the internal control process along with a walk-through. It makes sense because to breathe life into financial transactions it helps greatly to understand the process that creates them. I relied on interviews with two former employees that have requested anonymity who have a detailed knowledge of the City’s payroll processes dating to the time Chief Denardo took his own life and what follows is directly based on those interviews.
The first step to being able to draw a paycheck is being listed on the annual payroll ordinance and I examined those going back to the year ended September 30, 2013 and sure enough Patricia Denardo was listed as a reserve police officer without fail. With that basic step understood the payroll process at Bat St Louis consists of two major parts.
Part 1 – Departmental time keeping:
1. The Employee turns in a time sheet to their supervisor, in the case of the Bay PD that would have been the Patrol Captain.
2. After approval the time sheet was sent to the Records Clerk for entry.
3. The Chief of Police approves and sends to City Hall for payment.
Part 2 – Finance Department
1. The time is received by finance, balanced, prepared for payment and sent to the Mayor for Approval.
2. Once approved by the Mayor, the payroll is generated including a direct deposit file which sent to the bank for payment.
In the case of the paychecks that I scheduled for Patricia Denardo, no less than 5 people would have been involved in the processing. The checks and balances are such that no one person can generate a paycheck. It is why the mechanics of the fraud required collusion, or in this case collusion by silence thus the audit finding in part 1.
Beyond those 5 positions that would handle the periodic payment of payroll, to the extent paychecks for holiday pay was issued to Ms. Denardo along with accompanying benefits such as Mississippi PERS also implicates Human Resources (think health insurance, vacation time accruals, overtime etc etc etc.) and the City Clerk’s office (salary ordinance, supervision of payroll, etc etc.). All told at least seven people would have handled matters involving a ghost employee and that does not count at least one other person that knew exactly what was happening and that particular person confirmed to Slabbed New Media that:
1. Ms. Denardo moved to the east coast after Super Storm Sandy struck in September, 2012.
2. She was given a going away party that was well attended.
3. Practically everyone knew Ms. Denardo had moved on.
What we’re left with is the specter of an employee that separated employment and was left on the payroll to continue receiving paychecks, with the money ostensibly diverted to her ex-husband’s account. Here is the 2013-2014 Payroll Ordinance:
Like most embezzlement schemes, the amounts started out small and grew over time.
What caused the growth was the increase in hourly wage rate for patrol officers, which began at $8.50, growing to $15.17 by the time of the last paycheck issued in Patricia Denardos’s name. The spikes in the above chart were caused by overtime variances, with the largest paycheck issued in July, 2015:
Folks this is minutiae but it is important because it shows the mechanics of the Denardo payroll fraud had to involve collusion and beyond the silence it had to be sanctioned in order for it to be perpetrated. The one thing everyone I interviewed agreed was that it was common knowledge Patricia Denardo had left the area after divorcing her husband, the police chief. What happened after are the stuff of Machiavellian schemes and those inescapable, highly troubling conclusions I mentioned in the first part of this series.