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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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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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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Lack of Uniformity = Greater Risk

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Cities and counties have multiple leaders

Constitutional officers are single decision

makers

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Does one person control?

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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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Does the government have limited personnel?

Are accounting duties segregated?

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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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Role RoleKeying in receipts Preparing deposit slip Making deposit Reconciling bank

statementCollection Reconciling bank

statementWriting of police tickets

Collection of fines


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Issue receipts to payorRestrictively endorse checksReconcile money received daily to receipt register

Reconcile receipts to deposit slip

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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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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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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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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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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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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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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


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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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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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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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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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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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


Role RoleCheck processing Check signingCheck processing Mailing of checksCheck processing Bank reconciliation

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Role RoleCheck processing Issuance of purchase

ordersAdding new vendors Check signing

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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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Review vendor list for vendors with similar names but different addressesABC ABC Company

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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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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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Mark invoices “PAID” upon payment

Don’t pay from copies of invoices

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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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Restrict access to electronic funds software

Establish dollar limits (per person, per day) with bank

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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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Transparency is Healthy

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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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Require uninterrupted vacation for key accounting personnel

Perform background checks for accounting personnel

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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

[email protected]

Linkedin.com/in/charlesbhall

mailto:[email protected]

