Finding and Preventing Fraud in Local Governments
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Transcript of Finding and Preventing Fraud in Local Governments
A PRESENTATION BY MCNAIR, MCLEMORE,
MIDDLEBROOKS & CO., LLC
Finding and Preventing Fraud In Local Governments
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Fraud in the News
Fulton County
City of Broxton
Dawson County
McIntosh County
Wilkinson County
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Fraud in the News
City of McIntyre
Clayton County
City of Grovetown
City of Conyers
Gwinnett County
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Who?
County Commissioner
Mayor
City Clerk
Clerk of Superior Court
Housing Authority Director
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Who?
Sheriff’s Office
Police Office
Tax Commissioner
Payroll Clerk
EMS Director
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Funds Used For:
Car Loan PaymentsMortgage PaymentsVacation Expenses
Clothing
Waterslide
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Funds Used For:
Barn
Christmas DecorationsChristmas
Gifts
Parties
Personal Business
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How Was Money Stolen?
Extra Payroll Checks
Skimming Fines
Skimming Utility Fees
Skimming Passport Fees
Drug-Buy Money Taken
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How Was Money Stolen?
Theft of Confiscated Property (from Property
Room)Forgery on Check
DisbursementsUsing Authorized
Signature to Write Checks to Self
Theft of Property Tax Monies
Kickback (Inflating Cost of Property Purchased)
DESIGN OF LOCAL GOVERNMENTS
MAY INCREASE FRAUD RISK
Georgia Governments
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Local Government Accounting
Decentralized Accounting ProcessesNumerous points of collection:
Tax office Utility office Sheriff’s department Clerk of Superior Court Magistrate Court Probate Court Clerk’s office EMS Code enforcement
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Local Government Accounting
Decentralized Accounting ProcessesNumerous people sign checks
including: Commissioners/Mayors/Council Members Clerks Constitutional Officers Development Authority Director Airport Board Member Law Library Member Recreation Director
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Local Government Accounting
Decentralized Accounting ProcessesNumerous 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.
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Local Government Accounting
Lack of Uniformity = Greater Risk
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Local Government Accounting
Cities and counties have multiple leaders
Constitutional officers are single decision
makers
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Local Government Accounting
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Local Government Accounting
Does one person control?
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Local Government Accounting
Single Person Control =
Greater Risk
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Fraudster Profile
What does a fraudster look
like?
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Fraudster Profile
50% with organization
for more than 5 years
85% with no criminal record
DESIGN OF EXTERNAL AUDITS
MAY INCREASE RISK OF UNDETECTED FRAUD
Georgia Governments
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External Auditors’ Responsibility
Numbers are materially
correct
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External Auditors’ Responsibility
Looking for material fraud
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Certified Fraud Examiner Survey
Median loss for
governments
$100,000
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Problem
Many frauds not material
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Frauds Detected by External Audits
4.6%
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Average Duration of Frauds Before Detection
18 Months
FRAUD DETECTION APPROACH
Georgia Governments
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Focus
High dollar exposure
Higher probability of occurrence
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Dollar Exposure
Expense
Reimbursement
•Small dollar exposure
Corruption
•High dollar exposure
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Probability of Occurrence
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
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Probability of Occurrence
Does the government have limited personnel?
Are accounting duties segregated?
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Probability of Occurrence
Are there independent checks on transactions?Surprise auditsReview by an elected official
Are appropriate records maintained?
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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%
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County Fraud Risk Assessment Example
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
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County Fraud Risk Assessment Example
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
CASH FRAUD
Georgia Governments
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Finding Cash Fraud
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
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Finding Cash Fraud
Risk ProcedureTheft 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
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Finding Cash Fraud
Risk ProcedureTheft of Utility Cash Examine write offs or
reductions of receivable accounts
Theft of Utility Cash Reconcile collections per utilities receipts report with deposit slip
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Preventing Cash Fraud
Segregate the following:
Role RoleOpening mail Billing (e.g., utilities)Billing Creating or making
depositKeying in receipts Writing off or writing
down individual accounts (e.g., utility bill or EMS bill)
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Preventing Cash Fraud
Role RoleKeying in receipts Preparing deposit slip Making deposit Reconciling bank
statementCollection Reconciling bank
statementWriting of police tickets
Collection of fines
Segregate the following:
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Preventing Cash Fraud
Issue receipts to payorRestrictively endorse checksReconcile money received daily to receipt register
Reconcile receipts to deposit slip
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Preventing Cash Fraud
Make daily depositsAssign cash drawer to one person
No cashing of personal checksMail bank statements to person outside of accounting (e.g. Mayor)
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Preventing Cash Fraud
Reconcile bank statements; account for all outstanding items
Require documentation for drug-information and drug-buy money; review by senior law enforcement officer
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Preventing Cash Fraud
Require counting of confiscated funds with two persons present and document amount of funds confiscated
Limit the number of cash receipt locations
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Preventing Cash Fraud
Control issuance of receipt books; account for receipt numbers
Provide governing body and finance director with periodic revenue reportsPrint month-t0-date report compared with prior year and/or budget
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Preventing Cash Fraud
Use lockbox serviceReview accounts receivable aging
PAYROLL FRAUD
Georgia Governments
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Finding Payroll Fraud
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
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Finding Payroll Fraud
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
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Finding Payroll Fraud
Risk Procedure
Ghost employee Sort payroll employee names and direct deposit bank account numbers looking for duplicate bank account numbers in same payroll batch
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Preventing Payroll Fraud
Segregate the following:
Role RoleCheck processing Check signingCheck processing Check distributionCheck processing Bank reconciliationPay rate authorization Entering pay rate in
computerApproval of hours worked
Entering hours worked in computer
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Preventing Payroll Fraud
Use biometric payroll time machines
Secure unused payroll check stock
Review year-end W-2sMaintain documentation of approved pay rate in personnel files
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Preventing Payroll Fraud
Restrict master pay rate access (with strong password)
Use separate payroll bank account
Periodically perform surprise audit of one department’s payroll
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Preventing Payroll Fraud
Mail unopened bank statement to person not involved in payroll processing (or provide electronic access)
Use direct depositProvide departmental payroll summary to department head for review
DISBURSEMENT FRAUD
Georgia Governments
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Finding Disbursement Fraud
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
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Finding Disbursement Fraud
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
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Finding Disbursement Fraud
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
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Preventing Disbursement Fraud
Segregate the following:
Role RoleCheck processing Check signingCheck processing Mailing of checksCheck processing Bank reconciliation
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Preventing Disbursement Fraud
Segregate the following:
Role RoleCheck processing Issuance of purchase
ordersAdding new vendors Check signing
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Preventing Disbursement Fraud
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)
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Preventing Disbursement Fraud
Review vendor list for vendors with similar names but different addressesABC ABC Company
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Preventing Disbursement Fraud
Restrict access to accounts payable module (with strong password)
Before payment, match:(1) purchase order, (2) receiving document and (3) invoice
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Preventing Disbursement Fraud
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)
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Preventing Disbursement Fraud
Mark invoices “PAID” upon payment
Don’t pay from copies of invoices
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Preventing Disbursement Fraud
Limit the number of check signers
Don’t sign blank checksSecure unused check stock
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Preventing Credit Card Fraud
Limit the number of credit cards
Require documentation for all charges
Timely reconcile credit card statements
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Preventing Credit Card Fraud
Establish appropriate credit limits
Consider the use of purchase cards
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Preventing Electronic Transaction Fraud
Establish a fixed list of “transfer to” account numbers with the government’s bank
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Preventing Electronic Transaction Fraud
Restrict access to electronic funds software
Establish dollar limits (per person, per day) with bank
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Preventing Electronic Transaction Fraud
Require confirmation from the bank for each electronic funds transfer; send to:Person creating the transferSecond person (reviewer)
CORRUPTION
Georgia Governments
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Finding Corruption
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
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Finding Corruption
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
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Preventing Corruption
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
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Preventing Corruption
Transparency is Healthy
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Preventing Corruption
Require sealed bids that are opened in a public meeting
Change order approval by governing body
Restrict sole-source contracts
GENERAL FRAUD PREVENTION
Georgia Governments
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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.
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General Fraud Prevention
Require uninterrupted vacation for key accounting personnel
Perform background checks for accounting personnel
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General Fraud Prevention
Prosecute fraudsters: Send a message
Perform surprise auditsTell employees that this will happen every year
Then perform the tests annually
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If All Else Fails
Make sure government has appropriate fidelity bond
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Concluding Remarks
Governments: Consider fraud prevention now.
Auditors: Protect yourselves and your clients; report control deficiencies.
McNair, McLemore, Middlebrooks & Co., LLC
ContactCharles Hall
Linkedin.com/in/charlesbhall