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The slow leak: Junaluska Sanitary District rocked by embezzlement

No one knows for sure what motivated Scarlette Heatherly the first time she skimmed a little cash off the top of a customer’s water bill.

But once she figured out she could get away with it, she couldn’t seem to stop. Heatherly stole $210,000 from the Junaluska Sanitary District over a six-year period.

“She had designed a very difficult-to-detect system. It withstood six audits,” said Burton Smith, the attorney for the Junaluska Sanitary District. “It was a slow leak.”

Heatherly worked in the front office for two years before she began stealing. But when a co-worker retired in 2008, Heatherly assumed sole responsibility for the billing, finances and banking of the sanitary district. Soon after, the fraud began, and it didn’t stop until the day she was caught.

The fraud and constant cover-up must have been an all-consuming part of Heatherly’s work day, carried out hundreds of times in $10 or $20 increments.

Junaluska Sanitary District has 1,850 water and sewer customers in Haywood County, and most paid by check, of course. But not all.

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Heatherly concocted an elaborate scheme to skim a little off the top when customers came by to pay in cash, something she carried out in plain view from her post in the front window of the office.

“She was smart. Well, not smart enough because she got caught, but she was very good at her deception practices,” said sanitary district board member Jim Francis.

The scheme involved dummy deposit slips — the real one that she would later shred and a fake one kept as the official record. She also had to alter customer billing records in the computer, so there wouldn’t be a discrepancy on the collection side. She also timed the movement of deposits between bank accounts to cover up her trail, according to both Smith and an independent auditor.

Her top year, Heatherly stole $70,000, and another year she took $65,000. That accounts for nearly 4 percent of the total $1.7 million in water and sewer bills the sanitary district collected those years.

But board members had no reason not to trust Heatherly.

The way she dressed, the jewelry she wore, the car she drove — none of it changed. Board members trusted her, so much so that Heatherly’s name was the only one on the sanitary district’s bank accounts.

The accountant who conducted an annual audit for the sanitary district — a requirement for any public entity — eventually felt something wasn’t right.

“She became suspicious that something was going on,” Smith said.

The auditor made a surprise visit to the office one day last summer to look through paperwork as part of the routine annual audit process. But unbeknownst to Heatherly, the auditor set a trap, making tiny inconspicuous marks on financial records in the files. 

When the auditor made a return visit in October, she looked back at those same records. The marks she’d made weren’t there anymore, confirming her suspicions that the real financial records were being supplanted along the way with a doctored version.

The embezzlement was a wake-up call for members of the Junaluska Sanitary District board. 

“We got taken advantage of. I’ll never forget when I was called out here that morning to meet with the auditor and the sheriff was here and we locked all the doors and whew…,” said Dan McCracken, chair of the sanitary district board. “I was as surprised as anyone.”

Heatherly had grown comfortable with her scheme. The morning the auditor showed up and called the sheriff’s office, Heatherly’s trash can was still full of shredded deposit slips from the day before. And she was letting more and more time lapse before swapping out the real financial records with her dummy versions, confident no one would be checking.

Once the fraud was detected, Heatherly voluntarily came in to the sanitary district office with her attorney and admitted to the fraud, detailing how she did it and how much she’d taken. An account of the meeting in board minutes notes that she apologized to all the board members on her way out.

The amount she confessed to taking — $210,000 — was later confirmed by an in-house audit conducted by a sanitary district board member, who sifted through seven years of payment receipts, deposit slips and bank transactions.

Heatherly paid full restitution — including an additional $15,000 for costs incurred by the sanitary district as a result of the fraud — and pleaded guilty to criminal embezzlement charges earlier this year. She did not, however, serve any active jail time.

“We learned a lot last October but we made changes to prevent it from happening again,” said McCracken, who was personally shaken up by such a violation of trust.

The auditor who first detected the fraud, Elizabeth Keel of Asheville, pointed out deficiencies in the board’s financial oversight.

“The opportunity to take cash existed because monitoring procedures were not performed,” Keel wrote in her annual audit report to the sanitary board. “Oversight of the internal control system is a crucial component of board responsibilities.”

The fraud led the board to overhaul its accounting systems. For starters, two signatures are now required on checks.

“The state statue says to have two signatures on checks. We had not been following that, I’ll be honest with you,” Francis said.

Until now, the sanitary district only had one signature on checks. After the embezzlement, they switched their process, but not immediately. First, they used up the stash of existing checks that had just one signature line — it took about three months to run out. After that, the next batch of checks they ordered had a two-signature format.

There’s other changes as well, like counting the cash drawer daily — something Francis does — and making bank deposits daily — something else Francis does.

“There were tremendous amounts of cash left in the cash drawer at different times that we didn’t know about,” Francis said. “We are making every effort to comply with all the state rules and regulations.”

Another flaw in hindsight: Heatherly was the only person authorized to access the sanitary district’s bank accounts, make transactions and write checks out of the account.

One of the first things the board had to do — after changing the locks on the building and firing Heatherly — was to get two of the board members added to the bank accounts as authorized agents.

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