Finding and Preventing Fraud in Local Governments
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The presentation discusses various methods of fraud occurring in local governments in Georgia, identifying key perpetrators and common schemes such as payroll fraud and theft of funds. It highlights the risks associated with decentralized accounting processes, suggesting preventative measures like segregation of duties, regular audits, and strict controls on financial transactions. The document emphasizes the importance of proactive fraud prevention strategies to mitigate risks and enhance accountability within local government operations.
Finding and Preventing Fraud in Local Governments
- 1. A PRESENTATION BY MCNAIR, MCLEMORE, MIDDLEBROOKS & CO., LLC Finding and Preventing Fraud In Local Governments
- 2. Fraud in the News Fulton County City of Broxton Dawson County McIntosh County Wilkinson County 2
- 3. Fraud in the News City of McIntyre Clayton County City of Grovetown City of Conyers Gwinnett County 3
- 4. Who? County Commissioner Mayor City Clerk Clerk of Superior Court Housing Authority Director 4
- 5. Who? Sheriff’s Office Police Office Tax Commissioner Payroll Clerk EMS Director 5
- 6. Funds Used For: Car Loan Payments Mortgage Payments Vacation Expenses Clothing Waterslide 6
- 7. Funds Used For: Barn Christmas Decorations Christmas Gifts Parties Personal Business 7
- 8. How Was Money Stolen? Extra Payroll Checks Skimming Fines Skimming Utility Fees Skimming Passport Fees Drug-Buy Money Taken 8
- 9. How Was Money Stolen? Theft of Confiscated Property (from Property Room) Forgery on Check Disbursements Using Authorized Signature to Write Checks to Self Theft of Property Tax Monies Kickback (Inflating Cost of Property Purchased) 9
- 10. DESIGN OF LOCAL GOVERNMENTS MAY INCREASE FRAUD RISK Georgia Governments
- 11. Local Government Accounting Decentralized Accounting Processes Numerous points of collection: Tax office Utility office Sheriff’s department Clerk of Superior Court Magistrate Court Probate Court Clerk’s office EMS Code enforcement 11
- 12. Local Government Accounting Decentralized Accounting Processes Numerous people sign checks including: Commissioners/Mayors/Council Members Clerks Constitutional Officers Development Authority Director Airport Board Member Law Library Member Recreation Director 12
- 13. Local Government Accounting 13 Decentralized Accounting Processes Numerous accounting systems: Utility Billing and Collections Constitutional Officers’ accounting systems County or City accounting system County Development Authority Downtown Development Authority Airport Recreation Department Etc.
- 14. Local Government Accounting 14 Lack of Uniformity = Greater Risk
- 15. Local Government Accounting 15 Cities and counties have multiple leaders Constitutional officers are single decision makers
- 17. Local Government Accounting Does one person control? 17
- 18. Local Government Accounting 18 Single Person Control = Greater Risk
- 19. Fraudster Profile What does a fraudster look like? 19
- 20. Fraudster Profile 50% with organization for more than 5 years 85% with no criminal record 20
- 21. DESIGN OF EXTERNAL AUDITS MAY INCREASE RISK OF UNDETECTED FRAUD Georgia Governments
- 22. External Auditors’ Responsibility Numbers are materially correct 22
- 23. External Auditors’ Responsibility Looking for material fraud 23
- 24. Certified Fraud Examiner Survey Median loss for governments $100,000 24
- 26. Frauds Detected by External Audits 26 4.6%
- 27. Average Duration of Frauds Before Detection 27 18 Months
- 29. Focus High dollar exposure Higher probability of occurrence 29
- 30. Dollar Exposure Expense Reimbursement •Small dollar exposure Corruption •High dollar exposure 30
- 31. Probability of Occurrence 31 Nature of the transaction (Inherent Risk) e.g. Cash is inherently risky Understand the transaction cycle (Control Risk) Understanding will shed light on the probability of fraud
- 32. Probability of Occurrence 32 Does the government have limited personnel? Are accounting duties segregated?
- 33. Probability of Occurrence 33 Are there independent checks on transactions? Surprise audits Review by an elected official Are appropriate records maintained?
- 34. Probability of Occurrence (ACFE Survey) Scheme Percent of Cases Corruption 32.4% Billing 24.4% Expense Reimbursements 18.2% Non-Cash 17.0% Larceny 14.2% Check Tampering 13.6% Skimming 13.1% Cash on Hand 11.9% Payroll 11.4% Financial Statement Fraud 2.8% Register Disbursements 2.8% 34
- 35. County Fraud Risk Assessment Example 35 Area Potential Dollar Impact Fraud Risk Assessment Why? Payroll High High Checks are signed with electronic signature; clerk runs payroll and reconciles bank statement Tax Commissioner’s Office High Moderate Three employees work from one cash drawer Expense Reimbursement Low High Payments not always supported by receipts
- 36. County Fraud Risk Assessment Example 36 Area Potential Dollar Impact Fraud Risk Assessment Why? Utilities Office High Moderate Daily detail of receipts not always equal to deposit per bank County Commissioners High High Significant construction contract approved with no bid process Landfill Fees Moderate High 30% decrease in landfill fee income
- 38. Finding Cash Fraud 38 Risk Procedure Theft of Cash Perform analytical analysis of revenues (comparing year to year) Theft of Cash Perform surprise cash drawer counts Theft of Cash Review composition (cash, checks) of deposit slip and compare to receipts written or keyed
- 39. Finding Cash Fraud 39 Risk Procedure Theft of Landfill Cash Reconcile daily on-site receipts with amounts provided to clerk’s office Theft of Police Overnight Cash Receipts Reconcile nightly police receipts with amounts provided to clerk’s office
- 40. Finding Cash Fraud 40 Risk Procedure Theft of Utility Cash Examine write offs or reductions of receivable accounts Theft of Utility Cash Reconcile collections per utilities receipts report with deposit slip
- 41. Preventing Cash Fraud 41 Segregate the following: Role Role Opening mail Billing (e.g., utilities) Billing Creating or making deposit Keying in receipts Writing off or writing down individual accounts (e.g., utility bill or EMS bill)
- 42. Preventing Cash Fraud 42 Role Role Keying in receipts Preparing deposit slip Making deposit Reconciling bank statement Collection Reconciling bank statement Writing of police tickets Collection of fines Segregate the following:
- 43. Preventing Cash Fraud 43 Issue receipts to payor Restrictively endorse checks Reconcile money received daily to receipt register Reconcile receipts to deposit slip
- 44. Preventing Cash Fraud 44 Make daily deposits Assign cash drawer to one person No cashing of personal checks Mail bank statements to person outside of accounting (e.g. Mayor)
- 45. Preventing Cash Fraud 45 Reconcile bank statements; account for all outstanding items Require documentation for drug- information and drug-buy money; review by senior law enforcement officer
- 46. Preventing Cash Fraud 46 Require counting of confiscated funds with two persons present and document amount of funds confiscated Limit the number of cash receipt locations
- 47. Preventing Cash Fraud 47 Control issuance of receipt books; account for receipt numbers Provide governing body and finance director with periodic revenue reports Print month-t0-date report compared with prior year and/or budget
- 48. Preventing Cash Fraud 48 Use lockbox service Review accounts receivable aging
- 50. Finding Payroll Fraud 50 Risk Procedure Extra payroll checks issued Sort pay register by employee and count number of checks issued Inflated payroll checks Sort pay register by employee and scan for significant variations Inflated payroll checks Download master pay rates per computer and compare to personnel files
- 51. Finding Payroll Fraud 51 Risk Procedure Inflated overtime pay Compare budget/actual per trial balance; compare approved overtime to keyed time in payroll report Ghost employee Sort payroll employee names by department; inquire of department head and finance director
- 52. Finding Payroll Fraud 52 Risk Procedure Ghost employee Sort payroll employee names and direct deposit bank account numbers looking for duplicate bank account numbers in same payroll batch
- 53. Preventing Payroll Fraud 53 Segregate the following: Role Role Check processing Check signing Check processing Check distribution Check processing Bank reconciliation Pay rate authorization Entering pay rate in computer Approval of hours worked Entering hours worked in computer
- 54. Preventing Payroll Fraud 54 Use biometric payroll time machines Secure unused payroll check stock Review year-end W-2s Maintain documentation of approved pay rate in personnel files
- 55. Preventing Payroll Fraud 55 Restrict master pay rate access (with strong password) Use separate payroll bank account Periodically perform surprise audit of one department’s payroll
- 56. Preventing Payroll Fraud 56 Mail unopened bank statement to person not involved in payroll processing (or provide electronic access) Use direct deposit Provide departmental payroll summary to department head for review
- 58. Finding Disbursement Fraud 58 Risk Procedure Duplicate payment with theft of second check Download check register; perform same (invoice #), same (amount), different (vendor #) test False vendor payment to employee Download vendor file and payroll file; match addresses
- 59. Finding Disbursement Fraud 59 Risk Procedure Intentional duplicate payment to vendor; theft of refund check Download check register; query file for duplicate amounts and vendor number Forgery Look at all checks (returned with bank statement) for a month or two, examining payees and signatures
- 60. Finding Disbursement Fraud 60 Risk Procedure Altered payee on checks Look at all checks (returned with bank statement) for a period of time, examining payees and endorsements; compare to check register
- 61. Preventing Disbursement Fraud 61 Segregate the following: Role Role Check processing Check signing Check processing Mailing of checks Check processing Bank reconciliation
- 62. Preventing Disbursement Fraud 62 Segregate the following: Role Role Check processing Issuance of purchase orders Adding new vendors Check signing
- 63. Preventing Disbursement Fraud 63 Run monthly report of new vendors; have person outside of accounts payable review the report for propriety Check public records for validity of new vendors (require street address even if P.O. Box will be used for payment)
- 64. Preventing Disbursement Fraud 64 Review vendor list for vendors with similar names but different addresses ABC ABC Company
- 65. Preventing Disbursement Fraud 65 Restrict access to accounts payable module (with strong password) Before payment, match: (1) purchase order, (2) receiving document and (3) invoice
- 66. Preventing Disbursement Fraud 66 Provide budget/actual reports to finance director and governing body Be aware that department heads may budget for fraud (i.e., increase budget request for fraudulent payments)
- 67. Preventing Disbursement Fraud 67 Mark invoices “PAID” upon payment Don’t pay from copies of invoices
- 68. Preventing Disbursement Fraud 68 Limit the number of check signers Don’t sign blank checks Secure unused check stock
- 69. Preventing Credit Card Fraud 69 Limit the number of credit cards Require documentation for all charges Timely reconcile credit card statements
- 70. Preventing Credit Card Fraud 70 Establish appropriate credit limits Consider the use of purchase cards
- 71. Preventing Electronic Transaction Fraud 71 Establish a fixed list of “transfer to” account numbers with the government’s bank
- 72. Preventing Electronic Transaction Fraud 72 Restrict access to electronic funds software Establish dollar limits (per person, per day) with bank
- 73. Preventing Electronic Transaction Fraud 73 Require confirmation from the bank for each electronic funds transfer; send to: Person creating the transfer Second person (reviewer)
- 75. Finding Corruption 75 Risk Procedure Kickbacks to person authorizing a purchase or contract Examine all significant construction bid processes Kickbacks to person authorizing a purchase Download check register, sort by vendor, scan for reasonableness
- 76. Finding Corruption 76 Risk Procedure Violations of purchasing policy by splitting check payments Download check register, sort by vendor, scan for transactions just below dollar threshold with same payment date
- 77. Preventing Corruption 77 Ask key governing body members and local government management to sign an annual conflict of interest statement Adopt a policy that restricts gratuities to a certain dollar amount Require disclosure of conflicts to the governing body
- 79. Preventing Corruption 79 Require sealed bids that are opened in a public meeting Change order approval by governing body Restrict sole-source contracts
- 81. General Fraud Prevention The ability to report fraud anonymously is key. Employees often fear making a report due to the threat of retaliation from superiors or negative reactions from their peers. 81
- 82. General Fraud Prevention 82 Require uninterrupted vacation for key accounting personnel Perform background checks for accounting personnel
- 83. General Fraud Prevention 83 Prosecute fraudsters: Send a message Perform surprise audits Tell employees that this will happen every year Then perform the tests annually
- 84. If All Else Fails 84 Make sure government has appropriate fidelity bond
- 85. Concluding Remarks 85 Governments: Consider fraud prevention now. Auditors: Protect yourselves and your clients; report control deficiencies.
- 86. McNair, McLemore, Middlebrooks & Co., LLC Contact Charles Hall 478-330-5248 chall@mmmcpa.com Linkedin.com/in/charlesbhall