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James Eugene Burnes, a retired colonel, was ultimately responsible for embezzling more than $2.7 million from an emergency fund for Arizona National Guard members during an eight-year period, but an inattentive supervisor and inadequate oversight played a role in allowing Burnes to carry on his scheme, according to a report from the Arizona auditor general.
A department employee raised concerns to a supervisor in February 2011 about Burnes' handling of money, but the supervisor failed to take any action for five months, according to the report. During that time, Burnes steered an additional $140,000 away from a fund to help high-school dropouts and into an account to which he had almost unfettered access.
The department's own handling of donated tax refunds that were intended for the families of service members that ended up in the account Burnes could access also could have violated the gifting clause of the Arizona Constitution, according to the audit released last week.
Burnes' former supervisor, Edward Flinn, resigned last year before he could be fired, according to the audit.
Burnes pleaded guilty to theft and fraud charges in Maricopa County Superior Court earlier this month and is scheduled to be sentenced on March 28.
Prosecutors claim Burnes embezzled the money to support his gambling habit.
According to auditors and prosecutors, Burnes began siphoning the money out of an emergency-relief fund in May 2003, about three years after he retired as a colonel from the Arizona Army National Guard and began working as resources manager for the Arizona Department of Emergency and Military Affairs.
Burnes' new position gave him access to funds donated to the Arizona National Guard Emergency Relief Fund, a non-profit organization established in 1996 to provide financial aid to Guard members and their families.
During the eight years that auditors examined, the fund collected $4.8 million through donations from programs such as United Way, service members repaying loans, income-tax-refund donations, and other measures. Investigators believe Burnes embezzled more than half of that money, nearly $2.8 million, "for his personal expenses related to gambling and income taxes."
The donated funds steadily flowing into the account and the amount of trust that supervisors placed in Burnes' gave him almost unfettered access to the money, according to investigators.
Auditors found that:
• Burnes withdrew more than $1.9 million in cash from the account during 675 separate visits to the bank. The withdrawals were typically in amounts ranging from $200 to $5,000. "Mr. Burnes visited the bank often, withdrawing cash up to 20 times in one month," auditors wrote.
• Burnes wrote himself at least 169 separate checks totaling more than $400,000. The check amounts ranged from $400 to $5,000, according to auditors.
• Burnes wrote himself 32 more cashier's checks from the account, totaling more than $335,000, in amounts ranging from $3,000 to $40,000, according to auditors.
• In July, one month before he was fired, Burnes electronically transferred $40,000 into his personal account, according to auditors.
Investigators believe Burnes was able to cover up his scheme by producing false financial statements and creating forged audits to give his supervisors the impression that the emergency fund was in good standing.
But early last year, one of Burnes' employees told an administrator that Burnes had misappropriated money by directing his subordinates to take money out of a fund designed to help high-school dropouts and into the emergency fund, where Burnes had easier access.
Burnes' supervisor, Flinn, failed to act, despite the fact that Burnes' employee produced records showing the misappropriation had gone on for months, according to auditors. Twice more, in April and July, Burnes ordered his employees to transfer money totaling $140,000 from the dropout-assistance fund to the emergency fund, according to the report.
"Finally, after more than five months of inaction, the director questioned Mr. Burnes about his actions and contacted an AERF (Arizona National Guard Emergency Relief Fund) board member to seek a review of AERF bank account records," the auditors wrote.
The bank records confirmed the suspicions of Burnes' employees and Burnes was fired within days. Flinn resigned from his position about a month later, in lieu of termination, according to the audit.
Maj. Gen. Hugo E. Salazar, the adjutant general and commander of the Arizona National Guard, released a statement late last week that said he took quick action after the fraud was uncovered and has instituted new "checks and balances" in addition to a "strong whistle-blower policy" to prevent similar situations.
"My top priorities continue to not only include good fiscal responsibility, but also service-member welfare and mission readiness," Salazar said. "I will continue to welcome outside agency input and audits which highlight the transparency by which we conduct the agency's business."