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School Says Auditors Missed Embezzler

CLEVELAND (CN) - Accountants allowed the theft of more than $4 million by a school employee by ignoring numerous compliance problems, the district claims in court.

Though the Cuyahoga Heights Local School District says its former coordinator of technology services, Joseph Palazzo, engineered the massive embezzlement scheme, that individual is not named as a defendant to the action filed Thursday in the Cuyahoga County Court of Common Pleas.

Palazzo was sentenced in 2013 to 11 years and four months in federal prison for fleecing his former employer of $3.4 million, local news sources reported.

Prosecutors also reportedly filed charges against Palazzo's alleged co-conspirators who are accused of operating shell companies that invoiced the school for nonexistent technology hardware, software and services.

In its complaint against Rea and Associates and accountants Dan Watson and Brian Huff, the school district says Palazzo's embezzlement began in 2007 but went undetected until 2011 after a special audit conducted by the state.

Palazzo got kickbacks from his co-conspirators, and many of the tangible goods that he arranged for the school district to buy were "diverted for improper and unlawful personal use," the complaint states.

When Rea audited the school's financial statements for the year July 1, 2007, - June 30, 2008, it promised to "be a good steward" and "take [the district's] work personally" because "quality counts," according to the complaint.

But Cuyahoga says the auditors "failed to obtain a sufficient understanding of the School District and its environment, including its internal controls, in order to assess the risk of material misstatements due to error or fraud and to design further audit procedures."

A failure by the accountants to identify or report weaknesses "permitted the fraud to occur and continue," according to the complaint.

"If Rea had properly performed its audit for FY 2008, the scheme perpetrated by Joseph Palazzo, and others, would not have occurred or would have been discovered shortly after commencement and the School District would not have suffered very specific damages, including the loss of millions of dollars," the complaint states.

The school district seeks punitive damages for accounting malpractice and breach of fiduciary duty. It is represented by Andrew Kabat of Haber, Polk and Kabat. The district filed a similar complaint in 2013.

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