Finding and Preventing Fraud in Local Governments

A PRESENTATION BY MCNAIR, MCLEMORE,

MIDDLEBROOKS & CO., LLC

Finding and Preventing Fraud In Local Governments

Fraud in the News

Fulton County

City of Broxton

Dawson County

McIntosh County

Wilkinson County

Fraud in the News

City of McIntyre

Clayton County

City of Grovetown

City of Conyers

Gwinnett County

County Commissioner

City Clerk

Clerk of Superior Court

Housing Authority Director

Sheriff’s Office

Police Office

Tax Commissioner

Payroll Clerk

EMS Director

Funds Used For:

Car Loan PaymentsMortgage PaymentsVacation Expenses

Clothing

Waterslide

Funds Used For:

Christmas DecorationsChristmas

Parties

Personal Business

How Was Money Stolen?

Extra Payroll Checks

Skimming Fines

Skimming Utility Fees

Skimming Passport Fees

Drug-Buy Money Taken

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

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

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

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.

Lack of Uniformity = Greater Risk

Cities and counties have multiple leaders

Constitutional officers are single decision

makers

Does one person control?

Single Person Control =

Greater Risk

Fraudster Profile

What does a fraudster look

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

External Auditors’ Responsibility

Numbers are materially

correct

External Auditors’ Responsibility

Looking for material fraud

Certified Fraud Examiner Survey

Median loss for

governments

$100,000

Problem

Many frauds not material

Frauds Detected by External Audits

Average Duration of Frauds Before Detection

18 Months

FRAUD DETECTION APPROACH

Georgia Governments

High dollar exposure

Higher probability of occurrence

Dollar Exposure

Expense

Reimbursement

•Small dollar exposure

Corruption

•High dollar exposure

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

Does the government have limited personnel?

Are accounting duties segregated?

Are there independent checks on transactions?Surprise auditsReview by an elected official

Are appropriate records maintained?

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%

County Fraud Risk Assessment Example

Area Potential Dollar Impact

Fraud Risk Assessment

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

County Fraud Risk Assessment Example

Area Potential Dollar Impact

Fraud Risk Assessment

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

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

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

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

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)

Role RoleKeying in receipts Preparing deposit slip Making deposit Reconciling bank

statementCollection Reconciling bank

statementWriting of police tickets

Collection of fines

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

Reconcile receipts to deposit slip

Make daily depositsAssign cash drawer to one person

No cashing of personal checksMail bank statements to person outside of accounting (e.g. Mayor)

Reconcile bank statements; account for all outstanding items

Require documentation for drug-information and drug-buy money; review by senior law enforcement officer

Require counting of confiscated funds with two persons present and document amount of funds confiscated

Limit the number of cash receipt locations

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

Use lockbox serviceReview accounts receivable aging

PAYROLL FRAUD

Georgia Governments

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

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

Risk Procedure

Ghost employee Sort payroll employee names and direct deposit bank account numbers looking for duplicate bank account numbers in same payroll batch

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

Use biometric payroll time machines

Secure unused payroll check stock

Review year-end W-2sMaintain documentation of approved pay rate in personnel files

Restrict master pay rate access (with strong password)

Use separate payroll bank account

Periodically perform surprise audit of one department’s payroll

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

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

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

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

Preventing Disbursement Fraud

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

Role RoleCheck processing Issuance of purchase

ordersAdding new vendors Check signing

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)

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

Restrict access to accounts payable module (with strong password)

Before payment, match:(1) purchase order, (2) receiving document and (3) invoice

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)

Mark invoices “PAID” upon payment

Don’t pay from copies of invoices

Limit the number of check signers

Don’t sign blank checksSecure unused check stock

Preventing Credit Card Fraud

Limit the number of credit cards

Require documentation for all charges

Timely reconcile credit card statements

Preventing Credit Card Fraud

Establish appropriate credit limits

Consider the use of purchase cards

Preventing Electronic Transaction Fraud

Establish a fixed list of “transfer to” account numbers with the government’s bank

Restrict access to electronic funds software

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

Require confirmation from the bank for each electronic funds transfer; send to:Person creating the transferSecond person (reviewer)

CORRUPTION

Georgia Governments

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

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

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

Transparency is Healthy

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

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.

Require uninterrupted vacation for key accounting personnel

Perform background checks for accounting personnel

Prosecute fraudsters: Send a message

Perform surprise auditsTell employees that this will happen every year

Then perform the tests annually

If All Else Fails

Make sure government has appropriate fidelity bond

Concluding Remarks

Governments: Consider fraud prevention now.

Auditors: Protect yourselves and your clients; report control deficiencies.

McNair, McLemore, Middlebrooks & Co., LLC

ContactCharles Hall

478-330-5248chall@mmmcpa.com

Linkedin.com/in/charlesbhall

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