SEQUIM — State Auditor Brian Sonntag, speaking before the Concerned Citizens of Clallam County, criticized the loss of more than $600,000 from the Clallam County Treasurer’s Office over five years, ending in 2009.

“You have to make sure you have good internal controls and transfer and management systems, and they did not,” Sonntag told an audience of about 100 at the Sequim unit of the Boys & Girls Clubs of the Olympic Peninsula on Monday night.

“That’s what keeps it covered up,” he said, citing the discovery of the missing money as an example of the agency’s whistle-blower program.

The theft from the Treasurer’s Office — the fifth-largest theft of public funds in the state in a decade — has not prompted any changes in how Sonntag’s office conducts its annual reviews of government finances, including those of treasurer’s offices, Sonntag said in a Peninsula Daily News interview Monday before his presentation.

“It’s so hard to prevent something like that,” he said of the fraud scheme.

“First off, we don’t manage the Treasurer’s Office or any other public entity,” he added.

Former Treasurer’s Office cashier Catherine Betts, 46, is scheduled for a May 24 trial in Clallam County Superior Court in connection with the checks-for-cash fraud. The trial was rescheduled from its original Jan. 10 date in January.

Betts has pleaded not guilty to money-laundering, first-degree theft and 19 counts of filing false or fraudulent tax returns in connection with the scheme.

She has been released on her own recognizance and lives in Shelton in Mason County.

At Sonntag’s office’s insistence, checks are no longer being cashed by the county Treasurer’s Office, said new Treasurer Selinda Barkhuis, who won her bid for the post against incumbent Judy Scott in November.

That was key to the scheme, Barkhuis said Tuesday.

Betts allegedly took checks from people paying their real estate excise taxes and exchanged those checks for cash from the office’s cash drawer, she said.

The state Auditor’s Office investigation showed that check-cashing activity in the Treasurer’s Office dropped noticeably when Betts was on vacation.

The case was unusual in that it allegedly involved just one person who was responsible for multiple financial transactions, including writing and recording checks.

“That person is well-positioned to avoid detection,” Sonntag said in the interview.

After Betts was fired, Scott took away sole discretionary responsibility for the transactions that Betts conducted and spread the responsibility among office employees.

Barkhuis said Tuesday that Scott’s safeguards have been kept in place.

In addition, a machine that skipped numbers when processing transactions — a major component in the fraud — was replaced.

Later Monday at the gathering of the group also known as FourC, Sonntag said that during yearly audits of 2,700 governments and agencies, “we check to make sure they have good internal control systems and processes in place so they can account for and safeguard the public’s money.”

If those systems and processes are not in place, “we make recommendations on ways they might do that,” Sonntag said.

A state Auditor’s Office investigation revealed the theft of $617,467 through the manipulation and destruction of records.

The investigation concluded that more may have been stolen but was unable to determine a precise total because records were unavailable.

The money has never been recovered. Clallam County accepted a $597,516 insurance settlement to cover the missing funds, not including a $10,000 deductible amount.

The theft was discovered May 19, 2009, by a Treasurer’s Office employee who was reviewing office transactions.

At the Concerned Citizens meeting, Sonntag also recited a litany of bad news on the statewide financial front:

■ State tax revenues decreased by $1 billion in 2010 compared with 2009.

■ The state general fund cash balance March 1 showed a $1.7 billion deficit, more than twice the $626 million of just nine months ago in June.

■ The risk management fund has $116 million set aside to pay future estimated claims of $727 million.

Sonntag called for the elimination of state programs and departments to address the budget crisis. He did not suggest specific programs and departments for elimination.

But he placed hope in the effectiveness of his department’s performance audits, through which he said nearly $1 billion in potential savings have been identified.

Sonntag also recounted tales that show, as he put it, that “when stupid and greedy collide, bad things happen.”

Sonntag, first elected state auditor in 1992, said in the interview that he has not decided whether to seek re-election in November.

“I haven’t decided that for certain yet,” he said.

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Senior Staff Writer Paul Gottlieb can be reached at 360-417-3536 or at paul.gottlieb@peninsuladailynews.com.

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