Special Investigation
Arizona Department
of Emergency and
Military Affairs
Theft and Misuse of Public Monies
Special Investigative Unit
Debra K. Davenport
Auditor General
February • 2012
A REPORT
TO THE
ARIZONA LEGISLATURE
The Auditor General is appointed by the Joint Legislative Audit Committee, a bipartisan committee composed of five senators
and five representatives. Her mission is to provide independent and impartial information and specific recommendations to
improve the operations of state and local government entities. To this end, she provides financial audits and accounting services
to the State and political subdivisions, investigates possible misuse of public monies, and conducts performance audits of
school districts, state agencies, and the programs they administer.
The Joint Legislative Audit Committee
Audit Staff
George Graham, Manager
Lindsey Perry, Senior and Contact Person
Erin Hager, Senior
Joseph Wagner-Corona, Senior
Copies of the Auditor General’s reports are free.
You may request them by contacting us at:
Office of the Auditor General
2910 N. 44th Street, Suite 410 • Phoenix, AZ 85018 • (602) 553-0333
Additionally, many of our reports can be found in electronic format at:
www.azauditor.gov
Senator Rick Murphy, Vice Chair
Representative Tom Chabin
Representative Justin Olson
Representative David Stevens
Representative Anna Tovar
Representative Andy Tobin (ex officio)
Representative Carl Seel, Chair
Senator Andy Biggs
Senator Olivia Cajero Bedford
Senator Rich Crandall
Senator David Lujan
Senator Steve Pierce (ex officio)
2910 NORTH 44th STREET • SUITE 410 • PHOENIX, ARIZONA 85018 • (602) 553-0333 • FAX (602) 553-0051
MELANIE M. CHESNEY
DEPUTY AUDITOR GENERAL
DEBRA K. DAVENPORT, CPA
AUDITOR GENERAL
STATE OF ARIZONA
OFFICE OF THE
AUDITOR GENERAL
February 23, 2012
Members of the Arizona Legislature
The Honorable Janice K. Brewer, Governor
Major General Hugo E. Salazar, Adjutant General
Arizona Department of Emergency and Military Affairs
The Honorable Tom Horne
Office of the Attorney General
The Office of the Auditor General has conducted a special investigation of the Arizona
Department of Emergency and Military Affairs for the period May 2003 through August 2011.
The investigation determined the amount of public monies misused, if any, during that period
and the extent to which those monies were misused.
The investigation consisted primarily of inquiries and examination of selected financial records
and other documentation. Therefore, the investigation was substantially less in scope than an
audit conducted in accordance with generally accepted auditing standards. Accordingly, the
Office does not express an opinion on the adequacy of the financial records or the internal
controls of the Arizona Department of Emergency and Military Affairs. The Office also does not
ensure that all matters involving the Department’s internal controls, which might be material
weaknesses under standards established by the American Institute of Certified Public
Accountants or other conditions that may require correction or improvement, have been
disclosed.
The accompanying Investigative Report describes the Office’s findings and recommendations as
a result of this special investigation.
After this report is distributed to the members of the Arizona State Legislature, the Governor, the
Adjutant General, and the Attorney General, it becomes public record.
Debbie Davenport
Auditor General
Attachment
In August 2011, the Arizona Department of Emergency and Military Affairs
(Department) requested that the Arizona Attorney General’s Office investigate
allegations of financial misconduct by James Burnes, the Department’s former
resources manager of state activities. After its investigation, the Attorney General’s
Office took criminal action against Mr. Burnes, resulting in his indictment on eight
felony charges for his conduct from January 2007 through August 2011 (see the
Conclusion on page 23 of this report).
The Office of the Auditor General became aware of these allegations and conducted
an investigation to identify any deficiencies in the Department’s internal control
structure that contributed to the financial misconduct perpetrated by Mr. Burnes.
Additionally, the investigation’s objective was to identify the total monies missing
from the Department and the total monies missing from a separate nonprofit
corporation named the Arizona National Guard Emergency Relief
Fund (AERF), for which Mr. Burnes was the comptroller. Our
investigation examined department and AERF records dating
back to 2002.
As a result of our investigation, we determined that from May
2003 through August 2011, Mr. Burnes embezzled monies
totaling $2,710,383 from the Department and AERF by withdrawing
cash, issuing checks to himself, and transferring money into his
personal account. Mr. Burnes then used these monies for his
gambling and personal tax-related expenses. These monies were
intended to support both the Department’s responsibility of
protecting Arizona’s citizens and AERF’s mission of providing
emergency financial assistance to Arizona National Guard and
other service members and their families.
Specifically, beginning in September 2005, more than 2 years after Mr. Burnes began
embezzling monies from AERF, he embezzled and misused at least $1,143,140 of
department monies, including state and federal monies, and other revenues received
by the Department. Mr. Burnes did so by taking possession of a $500,000 department
check before it could be deposited into a department account, and by improperly
directing his subordinates to issue 12 department checks totaling $643,140 to AERF.
Mr. Burnes then unlawfully deposited the $1,143,140 of embezzled department
monies into AERF’s bank accounts, which he also controlled.
Investigation Highlights
James Burnes, former Department of
Emergency and Military Affairs
Resources Manager for State Activities:
• Embezzled $2,710,383 from the
Department and AERF, using the
money for his gambling and
personal tax-related expenses
• Concealed his theft by creating false
audit reports and financial records
SUMMARY
page i
Office of the Auditor General
However, from May 2003 to August 2011, Mr. Burnes embezzled a total of $2,710,383
from the Department and AERF for his personal use. Because Mr. Burnes deposited
the embezzled department monies into AERF bank accounts and commingled these
public monies with AERF monies, auditors were unable to determine specifically how
much of the embezzled AERF deposits originally came from the Department’s
monies and how much originated from AERF sources. Finally, in order to conceal his
actions, Mr. Burnes created false documents including independent auditor’s reports
and financial activity records that he typically submitted to the AERF Board of
Directors.
The Department’s lack of internal controls, including inadequate oversight and lack
of policies, allowed Mr. Burnes to misuse and embezzle department monies for
nearly 6 years. In fact, a department official failed to take appropriate action when he
was initially notified in February 2011 that Mr. Burnes improperly directed his
subordinates to issue several department checks to AERF. Moreover, department
officials gave AERF donated tax refund monies totaling $471,714 to disburse to
Arizona National Guard members’ families. However, the Department should have
directly managed and disbursed these monies to these members’ families. Because
of the Department’s unlawful actions, it may have violated the gifting clause of the
Arizona Constitution. Although no internal control system can totally prevent
dishonest actions, there are measures the Department can take to help deter future
instances of misconduct such as those Mr. Burnes perpetrated (see Recommendations
on page 19 of this report).
page ii
State of Arizona
TABLE OF CONTENTS
1
5
11
13
15
17
19
23
8
10
2
9
Introduction & Background
Finding 1: Mr. Burnes embezzled department and
AERF monies
Finding 2: Mr. Burnes falsified documents to conceal
his improper actions
Finding 3: A department official failed to prevent further
misappropriations
Finding 4: Department officials failed to properly
administer the National Guard Relief Fund
Finding 5: Department officials failed to establish and
maintain adequate controls
Recommendations
Conclusion
Tables:
1 Misused & Embezzled Department Monies
September 2005 to August 2011
2 Embezzlement of Department and AERF Monies
May 2003 to August 2011
Figures:
1 Arizona Department of Emergency and Military Affairs
Governing Structure
2 Sources of AERF Deposits
May 2003 to August 2011
page iii
Office of the Auditor General
page iv
State of Arizona
INTRODUCTION
& BACKGROUND
Department of Emergency and Military Affairs
Established in 1972 pursuant to Arizona Revised Statutes (A.R.S.) §26-101, the
Department of Emergency and Military Affairs (Department) is responsible for
protecting and defending Arizona citizens’ peace, health, safety, and quality of
life. The Department has both emergency management and military responsibilities.
The Governor acts as the Department’s commander-in-chief and appoints the
Adjutant General, who serves as the Department’s Director for a 5-year term. The
Adjutant General must also meet federal guidelines to receive the appointment.
The Adjutant General is responsible for ensuring adequate management of the
Department, as prescribed by state laws and regulations. The Department is
financially accountable to Arizona’s citizens, in general, and to Arizona service
members and their families, in particular, for the state and federal appropriations,
donations, and other revenue it receives. The Department’s fiscal year 2011
revenues totaled more than $72 million (unaudited).
The Department has more than 530 employees and as shown in Figure 1 (see
page 2) is composed of five divisions: Arizona Air National Guard, Arizona Army
National Guard, Joint Staff Division, Division of Emergency Management, and
lastly, the Division of State Activities. Specifically:
• Arizona Air National Guard—supports the activities of the approximately
2,500 men and women serving in the Air National Guard, which form
Arizona’s reserve component for the United States Air Force.
• Arizona Army National Guard—supports the activities of the approximately
5,200 men and women serving in the Army National Guard, which form
Arizona’s reserve component for the United States Army.
• Joint Staff Division—is responsible for creating a joint task force during a
crisis response, and supervising the Arizona National Guard Counter-Drug
Program, the Weapons of Mass Destruction Civil Support Team, and the
State’s partnership program with Kazakhstan. Additionally, the Joint Staff
Division provides direct oversight for certain southwest border security
operations.
page 1
Office of the Auditor General
• Division of Emergency Management—helps state, county, and local agencies
prepare for and respond to disasters in an effort to reduce their impact on
persons and property. It maintains the State Emergency Response and
Recovery Plan, conducts emergency response and recovery exercises, and
assists communities to obtain federal and state assistance.
• Division of State Activities—is responsible for the Department’s support
functions including administrative services, purchasing and contracting, finance
and accounting (resource management), a legislative liaison, Arizona Project
ChalleNGe, and the Camp Navajo Industrial mission.
James Burnes was hired as the Department’s Resources Manager in June 2000,
after retiring as a colonel from the Arizona Army National Guard. In this position, Mr.
Burnes was responsible for the Department’s finance and accounting management
activities. Specifically, Mr. Burnes managed state and federal monies; prepared
budgets; oversaw cooperative agreements; supervised various staff members
including accounting, property management, and grants coordinators; and served
as the point of contact for various federal and state inspections, reviews, and audits.
As discussed on page 4, the Department terminated Mr. Burnes’ employment on
August 5, 2011.
page 2
State of Arizona
Governor
AdjutantGeneral
Divisionof
State
Activities
ArizonaArmy
National
Guard
JointStaff
Division
Administrative
ServicesOffice
Purchasing&
Contracting
Office
JamesBurnes,
Resource
ManagementOffice
Legislative
Liaison
Divisionof
Emergency
Management
ArizonaAir��
National
Guard
CampNavajo
Administrator
ArizonaProject
ChalleNGe
Administrator
Figure 1: Arizona Department of Emergency and Military Affairs
Governing Structure
Source: Auditor General staff review of department information and interviews with department
staff.
page3
Arizona National Guard Emergency Relief Fund
The Arizona National Guard Emergency Relief Fund (AERF) is a private, nonprofit
organization, which incorporated in the State of Arizona in June 1996 and is recognized
by the Internal Revenue Service as a tax-exempt organization.1 AERF’s mission is to
provide emergency financial assistance in the form of loans and grants to Arizona
National Guard and other military service members2 and their families. Typically, AERF
provides loans and grants for recipients’ rent, mortgage, food, utilities, transportation,
vehicle repair, emergency travel, funeral, and medical expenses.
The Department does not control or manage AERF since it is a separate entity.
However, since at least 2003, the Department and AERF have been closely aligned. In
fact, AERF’s mailing address is the same as the Department’s. Additionally, several
department and National Guard employees have simultaneously
served AERF in some capacity, including as members of the
Board of Directors, and as a board-appointed secretary and
comptroller. From 2003 until his termination from the Department
in 2011, Mr. Burnes functioned as AERF’s comptroller. Mr.
Burnes did not receive any additional compensation because he
performed AERF duties during his normal working day, at the
Department’s expense.
As AERF’s comptroller, Mr. Burnes had unmonitored access to AERF bank accounts
because he could withdraw and transfer monies, sign AERF bank account checks,
and make deposits without any oversight or approvals. Generally, Mr. Burnes made
AERF account deposits, transfers, and withdrawals. In addition, Mr. Burnes received
and reconciled bank statements, and compiled and reported financial activity to
AERF’s Board of Directors. Under Mr. Burnes or the Board of
Directors, other department employees maintained AERF loan,
grant, and donation information; generated and mailed donor
and collection letters; received donations and repayments;
prepared account deposits; and attended AERF board meetings
and took minutes.
Initial inquiry of James Burnes
In February 2011, a department official was informed by a subordinate that Mr. Burnes
had improperly directed his subordinates to issue department checks to the AERF. The
department checks were deposited into AERF’s bank accounts, which Mr. Burnes had
control over. However, the department official failed to take appropriate action and as
a result, Mr. Burnes continued to direct his subordinates to issue department checks
to AERF. Finally, in August 2011, after Mr. Burnes directed his subordinates to issue
1 From 1996 until 2006, AERF was named the Army Reserve Components Emergency Relief Fund Foundation. In 2006, it
changed its name to the Arizona National Guard Emergency Relief Fund. Other than this name change, AERF’s function
and purpose remained unchanged.
2 AERF supports other military service members including those from the United States (U.S.) Army Reserve, U.S. Marine
Corps Reserve, U.S. Navy Reserve, U.S. Air Force Reserve, and U.S. Coast Guard Reserve.
Office of the Auditor General
In addition to Mr. Burnes’ department
employment, he was also the comptroller
for the Arizona National Guard Emergency
Relief Fund, a closely aligned nonprofit
corporation.
Mr. Burnes had unmonitored access to
AERF bank accounts because he could
withdraw and transfer monies, sign
checks, and make deposits without any
oversight or approvals.
two more checks to AERF totaling $140,000, the department official discussed the
allegations with the Department’s Adjutant General, who then directed the department
official to contact the Arizona Attorney General’s Office to investigate these
allegations. Upon inquiry from the Attorney General’s Office, Mr. Burnes admitted to
transferring department monies to AERF. Mr. Burnes also admitted to taking money
from AERF’s bank accounts beginning in 2003 or 2004, and then using these monies
to gamble and to pay his personal tax-related expenses. Consequently, the
Department terminated Mr. Burnes’ employment on August 5, 2011.
page 4
State of Arizona
Mr. Burnes embezzled department and AERF
monies
From May 2003 to August 2011, James Burnes, former Department of Emergency
and Military Affairs (Department) resources manager, embezzled at least $2,710,383
of department and Arizona National Guard Emergency Relief Fund (AERF) monies
by withdrawing cash, issuing checks to himself, and transferring monies into his
personal account. Mr. Burnes then used these monies for his gambling and
personal tax-related expenses. These monies were intended to support both the
Department’s responsibility of protecting Arizona’s citizens and AERF���s mission of
providing emergency financial assistance to Arizona National Guard and other
service members and their families.
Mr. Burnes embezzled $2,710,383 in total from a combination of department and
AERF monies. Specifically, Mr. Burnes:
• Embezzled and misused $1,143,140 from department monies, including state
and federal monies, and other revenues received by the Department. See the
section titled “Sources of misused and embezzled department monies,” on
page 6.
• Deposited the $1,143,140 of embezzled department monies into AERF bank
accounts, thereby commingling these monies with AERF monies. It was
improper for AERF to allow Mr. Burnes to deposit these embezzled department
monies into AERF bank accounts, but because of Mr. Burnes’ unmonitored
access to AERF bank accounts, he was able to do so without any oversight or
approvals.
• Embezzled $2,710,383 in total from AERF. Because department and AERF
monies were commingled, and only $56,759 remained in AERF accounts
when Mr. Burnes was terminated, auditors were unable to determine specifically
how much of the embezzled AERF deposits originally came from the
Department’s monies, and how much originated from AERF sources.
Therefore, the $2,710,383 may include some or all of the embezzled
department monies. See the sections titled “Sources of AERF deposits” and
“Embezzlement schemes,” on pages 9 and 10.
page 5
Office of the Auditor General
FINDING 1
Sources of misused and embezzled department monies
From September 2005 to July 2011, Mr. Burnes embezzled and misused at least
$1,143,140 of the Department’s public monies, including state and federal monies,
and other revenues the Department received. Because of his position of authority, Mr.
Burnes was able to divert and deposit department monies into two AERF bank
accounts in two ways: 1) by misappropriating a $500,000 check before it could be
deposited with the Department and 2) by improperly directing his subordinates to
issue 12 department checks totaling $643,140 to AERF. Mr. Burnes then deposited
these monies into AERF bank accounts and withdrew monies from these bank
accounts for his personal use.
In addition, the Department unlawfully gave $471,714 in donated tax refund monies
to AERF. The Department did not have the authority to give these monies to AERF
and it should have managed these monies directly and disbursed these monies to
Arizona National Guard members’ families. Unlike the $1,143,140 of department
monies that Mr. Burnes misappropriated, he was not responsible for the initial
decision to give these monies to AERF, and therefore, this amount is excluded from
Table 1 on page 8.
As a public official, Mr. Burnes had a responsibility to prudently manage money
entrusted to him. However, by improperly directing and depositing public monies into
AERF bank accounts, Mr. Burnes caused these monies to be used for unauthorized
purposes; thereby misusing public monies. According to A.R.S. §35-301, it is a
felony for a person to appropriate public money for his own use or for use by others,
or, without legal authority, to deposit public money in a bank.
Misappropriated check—In September 2005, Mr. Burnes unlawfully deposited a
$500,000 title agency check payable to the Department’s Arizona National Guard
into one of AERF’s bank accounts (see Table 1, page 8). The check was issued in
connection with the sale of land adjacent to the Arizona National Guard’s open
firing range in Florence, Arizona. As part of the sale, the land seller requested that
the Department erect a fence surrounding its firing range to protect the public. In
return, it agreed to pay the Department $500,000, which was intended to cover
part or all of the associated expenses, including the cost of constructing the fence
and any necessary environmental or archaeological surveys.
On September 26, 2005, this check, which the Department should have deposited
to offset its costs in constructing the range fence, was hand-delivered to Mr.
Burnes. However, Mr. Burnes misappropriated the check and deposited it the next
day directly into one of AERF’s bank accounts. Once deposited, Mr. Burnes
withdrew monies from AERF’s bank accounts for his personal use.
Although the fence was constructed, sufficient records were not available to
determine the total cost or specific source of monies the Department used to build
the fence.
page 6
State of Arizona
Inappropriately authorized checks to AERF—From October 2007 to July
2011, Mr. Burnes inappropriately directed department staff to issue 12 checks total-ing
$643,140 payable to AERF. Mr. Burnes circumvented the Department’s disburse-ment
policies, instructing employees to use certain department monies and to give
the checks directly to him. He then deposited the checks into AERF’s bank accounts
and later withdrew monies from AERF’s bank accounts for his personal use.
Specifically, Mr. Burnes directed department staff to issue checks from two
department program areas:
• Program Income Fund—The Department established this fund in 1999 to
deposit miscellaneous income earned by charging fees for various department
programs. Mr. Burnes also improperly transferred state and federal grant monies
into this fund, including state matching monies intended for several federal
grants, and other unused grant monies that should have been returned to the
federal government. Mr. Burnes was solely responsible for managing this fund,
which enabled him to transfer monies into and out of this fund undetected. Once
Mr. Burnes transferred enough money into this fund, he directed his staff to issue
checks to AERF, which he then deposited and had immediate access to.
Specifically, from October 2007 to August 2010, Mr. Burnes misappropriated
$363,140 by directing employees to issue seven checks from this fund to AERF
(see Table 1, page 8).
• Arizona Project ChalleNGe—This program, established in 1993, is one of the
original 10 pilot programs created by the United States Department of Defense
through the National Guard Bureau (NG). Arizona’s Project ChalleNGe is designed
to help high-school dropouts improve their life skills, education levels, and
employment potential. The Department administers this program with funding it
receives from both state and federal monies. In fiscal year 2011, the Department
spent $1,628,818 in federal monies and $1,023,765 in state matching and
discretionary monies to fund Arizona’s Project ChalleNGe program. However,
from September 2010 to July 2011, Mr. Burnes misappropriated $280,000 of
these monies by directing employees to issue five checks from Project ChalleNGe
to AERF (see Table 1, page 8).
page 7
Office of the Auditor General
Income tax refund donations—As described in Finding 4 on page 15, in 2005,
the Arizona Legislature established the National Guard Relief Fund (relief fund),
which is composed of monies donated by Arizona taxpayers through their tax
returns to provide financial aid to families of Arizona National Guard members
when the member is mobilized in support of a contingency (military) operation or
a state emergency. The Department should have managed these monies directly
and disbursed these monies directly to Arizona National Guard members’ families.
However, separate and apart from Mr. Burnes’ misappropriations, the Department
unlawfully gave to AERF these tax refund donations totaling $471,714. Unlike the
$1,143,140 of department monies that Mr. Burnes misappropriated, he was not
responsible for the initial decision to give these monies to AERF. By giving these
tax relief fund monies to AERF, the Department relinquished its responsibilities for
and control over how AERF used these public monies. As a result, after these
monies were deposited into AERF’s bank accounts and commingled with other
AERF monies, Mr. Burnes withdrew monies from AERF bank accounts for his per-sonal
use.
page 8
State of Arizona
Year
Misappropriated
Check
Program
Income
Fund
Project
ChalleNGe�� Total
2005 $500,000 $0 $0 $500,000
2006 0 0 0 0
2007 0 100,000 0 100,000
2008 0 0 0 0
2009 0 194,588 0 194,588
2010 0 68,552 100,000 168,552
2011 0 0 180,000 180,000
Total $500,000 $363,140 $280,000 $1,143,140
Table 1: Misused & Embezzled Department Monies
September 2005 to July 2011
Source: Auditor General staff analysis of department and credit union records, and Arizona
Financial Information Systems (AFIS) data.
Sources of AERF deposits
AERF received monies from several sources for its operations, in addition to
department monies Mr. Burnes embezzled and deposited into AERF accounts. As
illustrated in Figure 2, from May 2003 to August 2011, AERF deposits totaled
$4,811,301:
• Monies from normal AERF operation: $3,196,447
◦ Donations from individuals, corporations, and programs such as United Way,
State Employees Charitable Campaign, and Combined Federal Campaign
◦ Service members repaying loans that provided them with emergency
financial assistance
◦ Interest and dividend income
• Monies from the Department: $1,614,854
◦ Monies totaling $1,143,140 misused and embezzled by Mr. Burnes as
described in Table 1 on page 8.
◦ Income tax refund donations totaling $471,714, as described on page 8 and
in Finding 4 on page 15.
page 9
Office of the Auditor General
Department
$1,614,854
AERF
$3,196,447
Fencing
payment
$500,000
Taxdonations
$471,714
Program
income
$363,140
Project
ChalleNGe
$280,000
Source: Auditor General staff analysis of department and credit union records, and Arizona
Financial Information Systems (AFIS) data.
Figure 2: Sources of AERF Deposits ($4,811,301)
May 2003—August 2011
As shown in Table 2 , Mr. Burnes perpetrated fraudulent schemes to steal $2,710,383,
over half of the money deposited in AERF accounts during that period, for his
personal expenses related to gambling and income taxes. Because the monies
shown in Figure 2 were commingled, and only $56,759 remained in AERF accounts
when Mr. Burnes was terminated, auditors were unable to determine specifically how
much of the embezzled AERF deposits originally came from the Department’s
monies, and how much originated from AERF sources.
Embezzlement schemes
During the time period May 2003 to August 2011, Mr. Burnes embezzled monies
from AERF accounts totaling $2,710,383 in four different ways:
• Withdrawing cash: On 675 occasions, Mr. Burnes withdrew cash totaling
$1,929,779 in amounts ranging from $200 to $5,000. Mr. Burnes visited the bank
often, withdrawing cash up to 20 times in 1 month.
• Writing checks payable to himself: On at least 169 occasions, Mr. Burnes
wrote and signed checks payable to himself totaling $403,605. The checks
ranged in amount from $400 to $5,000.
• Issuing cashier’s checks to himself: On 32 occasions, Mr. Burnes issued
cashier’s checks to himself totaling $336,999 and deposited them into his
personal bank account. These checks were for amounts ranging from $3,000 to
$40,000.
• Electronic transfer: In July 2011, Mr. Burnes electronically transferred $40,000
into his personal bank account.
page 10
State of Arizona
Table 2: Embezzlement of Department and AERF Monies
May 2003 to August 2011
Source: Auditor General staff analysis of AERF’s credit union records.
Theft Amount
Cashwithdrawals $1,929,779
Checkswrittentoself 403,605
Cashier'schecksissuedtoself 336,999
Electronictransfer 40,000
Total $2,710,383
Mr. Burnes falsified documents to conceal his
improper actions
From 2005 to 2011, Mr. Burnes concealed his thefts from the Arizona National Guard
Emergency Relief Fund (AERF) by creating various false documents including
independent auditor’s reports and financial activity records. Mr. Burnes presented
these documents during AERF Board of Directors (Board) meetings, falsely purporting
the information as true and the account balances accurate. Mr. Burnes also admitted
to submitting some of these documents to the Internal Revenue Service.
Mr. Burnes falsified five independent auditor’s reports dating back to at least 2005.
Specifically, Mr. Burnes stated that he took an original audit report from a Certified
Public Accounting firm, copied or retyped it, changed the dates, and signed it as the
firm’s representative. As an example, on March 11, 2010, Mr. Burnes created and
forged an independent auditor’s report that read in part, “In our opinion, the financial
statements referred to above present fairly, in all material respects,
the financial position of the Arizona National Guard Emergency
Relief Fund [AERF] as of December 30, 2009…” The firm’s
representative stated that the firm had never performed an audit for
AERF, the report signature was not his, and the logo Mr. Burnes
used for the audit report letterhead was most likely taken from the
firm’s business card.
Additionally, at the beginning of each year, Mr. Burnes provided the Board with a
summary of the prior year’s financial activity. From 2006 through 2011, Mr. Burnes
falsified six separate financial activity records to conceal his improper actions. For
example, during a January 26, 2010, AERF board meeting, Mr. Burnes stated that
AERF bank account balances totaled $586,989. However, AERF bank accounts
actually totaled only $18,883, a $568,106 difference.
page 11
Office of the Auditor General
FINDING 2
Mr. Burnes concealed his thefts by
creating at least five false independent
auditor’s reports and six financial
activity records, which he typically
submitted to AERF board members.
page 12
State of Arizona
A department official failed to prevent further
misappropriations
Although a Department of Emergency and Military Affairs (Department) official was
notified in February 2011 that Mr. Burnes had misappropriated department monies by
directing department employees to make several improper disbursements of Project
ChalleNGe monies, the official failed to take appropriate action, which allowed Mr.
Burnes to embezzle additional monies until he was finally terminated in August 2011.
In January 2011, a department employee discovered that Mr. Burnes had improperly
directed employees to disburse Project ChalleNGe monies to the Arizona National
Guard Emergency Relief Fund (AERF). The employee initially approached Mr. Burnes,
her supervisor, requesting that he reimburse Project ChalleNGe for the total she
believed it was owed. Mr. Burnes failed to reimburse the program and in February
2011, the employee escalated her concerns to Mr. Burnes’ supervisor, the State
Activities Director (Director). The employee provided documents to the Director
showing that from September 2010 to January 2011, Mr. Burnes had improperly
directed $140,000 of Project ChalleNGe money to AERF.
Although the Director knew, or should have known, that it was inappropriate to give
Project ChalleNGe monies to AERF, he failed to take any action to determine whether
the employee’s concerns were valid. As a result, Mr. Burnes
continued to direct employees to disburse Project ChalleNGe
monies to AERF. In fact, on April 8 and July 12, 2011, Mr. Burnes
instructed other department employees to issue two checks
totaling an additional $140,000 to AERF. These employees issued
the checks and then notified the Director that Mr. Burnes had yet
again diverted Project ChalleNGe monies to AERF.
Finally, after more than 5 months of inaction, the Director questioned Mr. Burnes about
his actions and contacted an AERF board member to seek a review of AERF bank
account records. Later, the AERF Board member determined that there had been
multiple, unexplained cash withdrawals and transfers made from its bank accounts,
which Mr. Burnes had unmonitored access to. The Director discussed the allegations
with the Department’s Adjutant General, who then directed him to contact the Arizona
FINDING 3
page 13
Office of the Auditor General
Because a department official failed to
promptly investigate an employee’s
concerns, Mr. Burnes was able to
embezzle and misuse an additional
$140,000 from the Department.
Attorney General’s Office. Four days later, the Adjutant General terminated Mr.
Burnes’ employment and more than 1 month later, the Director resigned from his
position, in lieu of termination.
page 14
State of Arizona
Department officials failed to properly administer
the National Guard Relief Fund
In 2005, the Arizona Legislature established the National Guard Relief Fund (relief
fund), which is composed of monies donated by Arizona taxpayers through their tax
returns to provide financial aid to families of Arizona National Guard
members when the member is mobilized in support of a contingency
(military) operation or a state emergency. In lieu of creating a
separate entity to administer the relief fund, the Legislature
specifically directed the Department of Emergency and Military
Affairs’ (Department) Adjutant General to manage it.
Separate and apart from Mr. Burnes’ misappropriations, from October 2007 to June
2011, the Department received $472,633 from Arizona taxpayers, which it should have
directly managed and disbursed to Arizona National Guard members’ families. Instead,
the Department gave nearly all of these monies, totaling
$471,714, to the private, nonprofit corporation Arizona
National Guard Emergency Relief Fund (AERF) to disburse.
The Arizona Constitution prohibits gifting of public monies,
including donating or loaning public money to private
individuals or organizations. The Department could not
provide evidence that it sought legal advice, or otherwise
discussed with its legal representative, the appropriateness
of giving the relief fund monies to AERF.
By giving the monies to AERF, the Department relinquished
its responsibilities for and control over how AERF used
these public monies. Once AERF received the relief fund
monies, it then disbursed the monies according to its own
will. In fact, AERF’s mission is to provide emergency
financial assistance in the form of loans and grants to not
only Arizona National Guard family members, but also to
National Guard members themselves, and other service
members and their families. AERF maintained one account
for monies received and disbursed to service members and
page 15
Office of the Auditor General
FINDING 4
The Department received $472,633
from Arizona taxpayers, which it
should have disbursed to the families
of National Guard service members.
Instead, it gave $471,714 to AERF.
The Arizona Constitution, Article IX, Section 7,
states: “neither the State, nor any county, city,
town, municipality, or other subdivision of the
State shall ever give or loan its credit in the aid of,
or make any donation or grant, by subsidy or
otherwise, to any individual, association, or
corporation, or become a joint owner with any
person, company, or corporation, except as to
such ownerships as may accrue to the State by
operation of provision or law.”
Attorney General Opinion I85-051 states in part:
“While public funds may not be loaned or given to
private individuals or entities, an incidental private
benefit is not prohibited by Article IX as long as
there is a public purpose served by the
expenditure or loan of funds and the value to be
received by the public is not far exceeded by the
consideration being paid.”
one account for monies received and disbursed to these groups’ family members.
However, because of Mr. Burnes’ control over these two accounts, he was able to
deposit the relief fund monies into both accounts, and then continuously transfer
these monies between accounts, thereby commingling these monies with other
AERF monies. AERF may have provided a portion of the Department’s relief fund
monies to National Guard members’ families through loans and grants, but because
relief fund monies were not accounted for separately, AERF may have also used the
relief fund monies for items unrelated to the monies’ authorized purposes. Specifically,
AERF awarded loans and grants to Arizona National Guard members themselves,
and to members and members’ families of other service branches including the
United States Army Reserve and United States Marine Corps Reserves. For
example, in December 2007 and January 2008, AERF granted over $30,000 to
National Guard members to pay for the cost of their airfare home for the holidays.
Further, as discussed in Finding 1 (see page 5), Mr. Burnes may have withdrawn
some or all of the relief fund monies to use for his personal purposes.
Public officials with oversight authority have a responsibility to prudently manage
money entrusted to them and to ensure that sufficient internal controls are designed
and implemented to protect those monies. However, by giving relief fund monies to
AERF, the Department effectively shifted its responsibilities for these public monies
to AERF and it failed to safeguard and ensure that these monies were used solely for
the National Guard members’ families, as the Legislature and taxpayers had
intended. Additionally, AERF is not subject to the laws and regulations imposed on
state agencies, it is not restricted to using these monies for the specific purposes for
which taxpayers initially donated them, and it does not have to comply with the state
rules providing for the protection of public monies. Because of the Department’s
failure to properly administer the relief fund and AERF’s failure to properly safeguard
these monies, Mr. Burnes was able to embezzle monies from the Department and
AERF, which may have included some or all of the relief fund monies after they were
transferred from the Department to AERF.
The Department continues to receive relief fund monies donated by Arizona
taxpayers; however, after September 2011, the Department discontinued its practice
of giving these monies to AERF.
page 16
State of Arizona
Department officials failed to establish and
maintain adequate controls
Public officials with oversight authority are responsible for ensuring that sufficient
internal controls are designed and implemented to protect public monies. At a
minimum, an internal control environment should allow management or employees,
in the normal course of performing their assigned functions, to prevent or detect
errors and fraudulent activity on a timely basis. Although Mr. Burnes overrode certain
existing controls at the Department of Emergency and Military Affairs (Department)
to perpetuate his actions, department officials also failed to exercise an appropriate
level of oversight over Mr. Burnes’ activities. Additionally, the Department failed to
implement an adequate system of internal controls for disbursing department
monies. In fact, the Department’s insufficient monitoring and lack of policies
weakened its control environment and allowed Mr. Burnes to embezzle and misuse
public monies without being detected for nearly 6 years.
Contrary to the Department’s standard, yet unwritten, process, Mr. Burnes was able
to instruct his staff to issue payments to AERF without any additional supervisory
approval and without providing any supporting documentation such as a receipt or
invoice. If the Department had required Mr. Burnes’ supervisor to review and approve
his disbursement requests, it could have prevented Mr. Burnes from diverting monies
from unauthorized sources, including federal and state monies, to the Arizona
National Guard Emergency Relief Fund (AERF), and, consequently, from AERF to
himself. The Department should determine the source of Mr. Burnes’ misused and
embezzled monies and then reimburse those sources accordingly. Additionally, the
Department should establish formal, written policies and procedures outlining the
approval process for all disbursement requests, including those requests made by
management-level employees, and it should also provide training to educate
department employees about this process.
Also, as discussed in Finding 4 (see page 15), the Department allowed its employees
to improperly give relief fund monies to AERF. In doing so, the Department created
a deficiency in its internal control structure, thereby allowing Mr. Burnes to freely
circumvent proper disbursement procedures when issuing checks to AERF. The
Department discontinued its practice of giving relief fund monies to AERF, and the
Department should not give these monies to any other external entity or person to
disburse on its behalf.
page 17
Office of the Auditor General
FINDING 5
In addition, the Department failed to implement controls over its Program Income
Fund. Unlike other department programs, this fund did not have a program manager,
thus allowing Mr. Burnes to authorize transfers to and from this fund undetected. As
a result, Mr. Burnes improperly disbursed to AERF state matching monies that were
intended for other grants, and unused grant monies that should have been remitted
to the federal government.
Further, department monies could be misappropriated because the Department
does not have a policy that restricts employees from receiving vendor checks drawn
on department accounts. Typically, department checks are mailed to vendors;
however, Mr. Burnes instructed his employees to deliver the department checks
directly to him. He then deposited the checks into AERF’s bank accounts and
withdrew monies from these bank accounts for his personal use. The Department
should establish policies restricting employees from withholding vendor checks from
the mail.
Finally, the Department failed to establish a formal process for reporting employee
misconduct. The Department should create formal, written policies and procedures
for reporting employee misconduct and it should provide training to educate
department employees about these policies and procedures.
State of Arizona
page 18
Office of the Auditor General
page 19
There are additional actions the Department could have taken and should take now
that may further help to deter future misconduct like Mr. Burnes’. To help ensure the
proper use of public monies, the Department should establish effective controls over
department disbursements including policies, procedures, and monitoring activities.
Specifically, department officials should:.
1. Institute policies and procedures that provide effective oversight over
management and address the risk of management override. For example,
department officials should strengthen their understanding of the business and
control climates, brainstorm potential fraud risks within the Department, cultivate
a strong whistleblower system, and consistently maintain an appropriate level of
objectivity and skepticism. In doing so, the Department increases the likelihood
of preventing, deterring, and detecting fraudulent activity.
2. Create formal, written policies and procedures governing the Department’s
disbursement request process, including those requests made by management-level
employees. These policies should outline the process for requesting,
approving, and disbursing department monies. Additionally, for any requests
made by management-level employees, the Department should outline the
process for supervisory oversight and review. Finally, the Department should
provide training and educate its employees about this process.
3. Ensure that expenditures are processed based on proper documentation. Such
documentation includes, but is not limited to, properly and timely approved
purchase orders, vendor invoices, vendor contracts, and claims requests.
Additionally, the Department’s normal practice is to mail vendor checks and
therefore, the Department should establish formal, written policies and
procedures restricting employees from withholding vendor checks from the
mail.
4. Ensure the proper use and control of monies entrusted to them, including those
monies deposited into the Department’s National Guard Relief Fund. The
Department continues to receive relief fund monies donated by Arizona
taxpayers and after September 2011, the Department discontinued its practice
of giving these monies to AERF. Additionally, the Department should not give
these monies to any other external entity or person to disburse on its behalf.
Instead the Department should directly manage and disburse these monies
according to state laws, including A.R.S. §26-183 and the statutory requirements
Recommendations
State of Arizona
page 20
for grant solicitation and awards established in A.R.S. §41-2701 et seq.
Specifically, the Department should:
a. Establish a formal grant process—Consistent with A.R.S. §41-2701 et
seq, the Department should develop and implement a formal grant
process to distribute relief fund monies for the benefit of Arizona National
Guard family members as outlined under A.R.S. §26-183. This strengthened
process, which should be followed for all relief fund expenditures, should
address and include all statutory requirements for grant solicitation and
awards. Elements of this grant process should include the following
◦ A request for a grant application that includes: (1) a description of the
nature of the grant project, including the funding source and total
amount of available monies; (2) the criteria or factors under which
applications will be evaluated and the relative importance of each
criteria or factor; and (3) the due date for application submittal and the
anticipated time the awards may be made;
◦ A public notice of the request for grant applications at least 6 weeks
before the application due date, and a requirement to publicly receive
grant applications at the time and place designated in the request; and
◦ A requirement that applications be reviewed by at least three evaluators,
based solely on the evaluation criteria or factors set forth in the request
for grant applications. Specifically, the evaluators should make written
recommendations regarding awards to the Department’s Adjutant
General, who may affirm, modify, or reject these recommendations. If
the Adjutant General does not affirm the evaluators’ recommendations,
he should provide a written explanation for this decision.
5. Ensure the proper use and control of public monies including state and federal
monies, by properly monitoring program activities to ensure required policies
and procedures are consistently followed. Additionally, the Department should
strengthen its controls over its Program Income Fund by assigning an employee
and a supervisor to manage the fund. The Department should segregate the
following employee duties: requesting disbursements, authorizing expenditures,
performing monthly reconciliations of revenue and expenditure documents, and
reporting monthly financial activity to management.
Office of the Auditor General
page 21
6. Determine the source, if possible, of Mr. Burnes’ misused and embezzled
monies, whether it is from federal or state matching monies, and then reimburse
those sources accordingly.
7. Establish formal, written policies and procedures governing internal employee
investigations to ensure that employee misconduct complaints are properly
investigated and documented. These written policies and procedures should
include the following information: assigning the parties responsible for managing
the initial complaint, maintaining appropriate documentation, conducting
interviews, and preparing a final conclusion report; instituting a general response
time frame; and outlining the process for employees to submit formal complaints.
State of Arizona
page 22
Office of the Auditor General
page 23
Arizona citizens, in general, and Arizona service members and their families, in
particular, were deprived of proper and prudent management of public monies by
the former Arizona Department of Emergency and Military Affairs Resources
Manager, James Burnes, who misused and embezzled monies from the Arizona
Department of Emergency and Military Affairs and the Arizona National Guard
Emergency Relief Fund (AERF), a nonprofit corporation for which he acted as
comptroller.
As a result, on October 19, 2011, the Arizona Attorney General’s Office took criminal
action against Mr. Burnes through the State Grand Jury. This action resulted in the
indictment of Mr. Burnes on eight felony counts related to theft, fraudulent schemes,
and forgery for the time period of January 1, 2007 through August 24, 2011.
Further, on February 15, 2012, as part of a plea agreement, Mr. Burnes pled guilty to
two felony counts related to theft and fraudulent schemes. In addition, Mr. Burnes
agreed to serve a term in the Arizona Department of Corrections, which will be
determined by the Maricopa County Superior Court during sentencing procedures.
Finally, Mr. Burnes was ordered to repay $2,095,325 in total restitution to the
Department and the AERF.
Conclusion
