You've asked two different questions: the answers are 1) in order to grant a power of attorney you need to have capacity to understand what you are doing. A diagnosis of dementia is not in and of itself clear evidence of lacking such capacity, however, it is a strong indication that may be the case. The witnesses notary and attorney who drafted the paperwork would be the 'go to' people to discover whether or not capacity existed at the time the paperwork was signed.
2) Whether or not the paperwork was valid, the implication here is that the money was spent not for your mother's interest but it was misappropriated by the agent. That is improper, however, the level of proof required is not 'we didn't know about this' but 'the money was dissipated from her account and she received no benefit from it. If your mother is NOT capable of understanding and managing her finances, she should probably NOT 'regain' her control, but someone -- either through a power of attorney or through a court ordered conservatorship -- should be managing them for her.
In any event, the 'proof' mentioned above is useful because it will either lead you to the 'trail' of where the money went, and allow you to recover it if possible, or show you that the money was not inappropriately handled. The sheriff and prosecutor will be able to guide you and let you know whether or not they determine there is a basis to file charges.
As I've implied here, there is another possibility here. Your brother may have just 'moved' money from one form of investment to another and you are being suspicious over something that is not inappropriate. Again, the officials will be able to flesh this out, and determine what you can do to help your mother if that is needed.
Bottom line is that although things look suspicious, you need to be sure what is really going on here before jumping to conclusions. If you do have questions after the investigation, I would encourage you to consult with a local attorney to be sure you don't do or say anything that will cause you or your mother further problems. Good luck.