Santa Cruz County is suing Arizona and the state's auditor general, claiming their inaction and "substandard" audits had devastating impacts after its former treasurer allegedly embezzled some $40 million of public funds.
The complaint was filed on Nov. 14 in Maricopa County Superior Court against the state and the Arizona Auditor General Lindsey Perry. In it, the county claimed the auditor general failed to notice former treasurer Elizabeth Gutfahr's actions to hide the alleged theft of funds from 2014 to 2024, including inflating daily warrant line items and fabricating bank statements.
"Gutfahr's scheme would have been detected many years ago had the Auditor General properly conducted its audits," said the county in its complaint, which seeks at least $40 million in damages.
The suit was filed three months after the county filed a civil lawsuit in Pima Superior Court against Gutfahr. Criminal investigations remain ongoing. The Arizona Attorney General's Office declined to comment on the suit. The Auditor General's Office did not respond to a request for comment.
Gutfhar is accused of stealing $39.4 million of public funds. The county said it is willing to settle that claim for $45 million, which also accounts for $1.3 million in lost interest and other fees and costs incurred in uncovering the missing funds.
The county said in its complaint the auditor general's "gross negligence" emboldened Gutfahr. The complaint alleges she stole smaller amounts early in the scheme before ramping up to embezzle as much as $11.3 million in one year.
The county called the state auditor's practices "substandard" and pointed to its failure to review a random sample of bank and financial statements. The agency only reviewed end-year bank statements from the months of June and July.
The county said this practice allowed Gutfahr to allegedly steal millions of dollars undetected.
"Had the Auditor General simply looked at almost any Savings Account bank statement in almost any other month ... Gutfahr's fraudulent wire transfers to Rio Rico Consulting would have stood out like a sore thumb," the county said.
The county also blamed Arizona for failing to analyze the daily warrants line item in annual audit reconciliation reports submitted to the state, the county said.
Gutfahr was responsible for preparing reports on the county's cash reconciliation process, which compares the general ledger against other accounts like bank and investments statements to ensure balances match.
During this process she allegedly misreported the daily warrants line item, payment due to vendors or third parties, to fill the gap between the amount reported in the general ledger and the actual amount in the county's accounts.
With the fiscal year ending on June 30, the county said there are sometimes minor discrepancies at the end of the fiscal year with payments cleared on June 30 that were not posted in the general ledge until July 1. The county said this allowed Gutfahr to claim the large discrepancy between the actual and reported cash balances in her treasurer reports was due to the timing of the warrants' posting in the general ledger.
"Had the Auditor General taken this step to actually confirm what Gutfahr was telling it about the daily warrants, the Auditor General would have seen that the various 'warrants' Gutfahr claimed were outstanding actually had, in reality, already been posted in the general ledger in June, not in July," the county said.
Treasurers in several counties have warned the state that it risks instances of fraud if it continues to only check end-of-year bank statements, the county said.
One such entity was the Coconino County Treasurer's Office, which asked the state to randomly select three months of bank statements to audit.
"Had this simple procedure been implemented as a standard practice to all Arizona counties, the Auditor General would have likely detected Gutfahr's theft," said the county.
The county also accused Gutfahr of fabricating bank statements to help hide the increasing amounts wired to her personal accounts.
Evidence of doctoring included using her business' mailing address in Tumacacori, and a Rio Rico address for UBS Financial Services Inc., instead of the bank's actual Phoenix address. The statements also changed the name of the financial advisor and the phone number assigned to the account, among other changes.
"The Auditor General, failing to exercise reasonable care, did not recognize the clear indications that they were fabricated," said the county.
In an August 26 report, the Auditor General's Office said it lacked the authority to independently obtain detailed County Treasurer's Office financial information directly from a financial institution and required the treasurer and county staff to help get that information.
The county pushed back noting in its complaint the auditing agency can contact bank representatives to verify the information provided by counties in their financial reports and to ask the county to authorize banks to provide information.
In 2023, Gutfahr allegedly authorized JPMorgan Chase to provide the state with financial documents for an ongoing audit. However, the state did not request any savings account bank statements for any month other than June, the county said.
The county discovered the loss of funds in April, blaming the state's lack of failure to comply with the "generally accepted and common auditing standards and practices" for not catching the embezzlement theft earlier.
The loss of funds was discovered after JPMorgan Chase, reported 11 fraudulent transactions for $375,000 to the county. The findings prompted Federal Bureau of Investigation, Department of Justice, Arizona Auditor General's Office, and Santa Cruz County investigations.
Following an investigation, the county filed a civil lawsuit against Gutfahr and her family on August 1.
The county alleged Gutfahr has several other companies that either helped her embezzle public funds or that own assets purchased with the county funds.
Also listed as defendants in the lawsuit are Gutfahr's husband, son and daughter-in-law, and their numerous businesses.
The investigation included consulting with Coconino County Treasurer Sarah Benatar, who visited Santa Cruz County several times. In one instance, she found the county treasurer's office was not authoring accurate reports, was failing to reconcile bank statements and was relying on screenshots of bank statements rather than original documents.
Gutfahr, a Democrat, was elected county treasurer in 2012 and reelected in 2016 and 2020. Before the embezzlement allegations came to light, she was running unopposed in the 2024 election.
Previously she worked in real estate in Santa Cruz County.
Reach the reporter at [email protected]. The Republic's coverage of southern Arizona is funded, in part, with a grant from Report for America. Support Arizona news coverage with a tax-deductible donation at supportjournalism.azcentral.com.