Finding and Preventing Fraud In Local Governments

A PRESENTATION BY M C NAIR, M C LEMORE, MIDDLEBROOKS & CO., LLC

Fraud in the News

2

Fulton County
City of Broxton Dawson County
McIntosh County
Wilkinson County

Fraud in the News

3

City of McIntyre Clayton County

City of Grovetown

City of Conyers
Gwinnett County

Who?
4

County Commissioner Mayor

City Clerk
Clerk of Superior Court Housing Authority Director

Who?
5

Sheriffs Office Police Office

Tax Commissioner Payroll Clerk

EMS Director

Funds Used For:

6

Car Loan Payments Mortgage Payments Vacation Expenses Clothing Waterslide

Funds Used For:

7

Barn

Christmas Decorations Christmas Gifts Parties

Personal Business

How Was Money Stolen?

8

Extra Payroll Checks Skimming Fines Skimming Utility Fees

Skimming Passport Fees

Drug-Buy Money Taken

How Was Money Stolen?

9

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)

Georgia Governments
DESIGN OF LOCAL GOVERNMENTS MAY INCREASE FRAUD RISK

Local Government Accounting

11

Decentralized Accounting Processes

Numerous Tax

points of collection:

office Utility office Sheriffs department Clerk of Superior Court Magistrate Court Probate Court Clerks office EMS Code enforcement

Local Government Accounting

12

Decentralized Accounting Processes

Numerous Clerks Constitutional

people sign checks including:

Members

Commissioners/Mayors/Council

Officers Development Authority Director Airport Board Member Law Library Member Recreation Director

Local Government Accounting

13

Decentralized Accounting Processes

Numerous
Utility

accounting systems:

Billing and Collections Constitutional Officers accounting systems County or City accounting system County Development Authority Downtown Development Authority Airport Recreation Department Etc.

Local Government Accounting

14

Lack of Uniformity = Greater Risk

Local Government Accounting

15

Cities and counties have multiple leaders Constitutional officers are single decision makers

Local Government Accounting

16

Local Government Accounting

17

Does one person control?

Local Government Accounting

18

Single Person Control = Greater Risk

Fraudster Profile
19

What does a fraudster look like?

Fraudster Profile
20

50%
with organization for more than 5 years

85%
with no criminal record

Georgia Governments
DESIGN OF EXTERNAL AUDITS MAY INCREASE RISK OF UNDETECTED FRAUD

External Auditors Responsibility

22

Numbers are materially correct

External Auditors Responsibility

23

Looking for material fraud

Certified Fraud Examiner Survey

24

Median loss for governments

$100,000

Problem
25

Many frauds not material

Frauds Detected by External Audits

26

4.6%

Average Duration of Frauds Before Detection

27

18 Months

Georgia Governments
FRAUD DETECTION APPROACH

Focus
29

High dollar exposure Higher probability of occurrence

Dollar Exposure
30

Expense Reimbursement

Small dollar exposure High dollar exposure

Corruption

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

Probability of Occurrence
32

Does the government have limited

personnel? Are accounting duties segregated?

Probability of Occurrence
33

Are there independent checks on

transactions? Surprise audits Review by an elected official Are appropriate records maintained?

Probability of Occurrence (ACFE Survey)

34

Scheme Corruption Billing Expense Reimbursements Non-Cash Larceny Check Tampering

Percent of Cases 32.4% 24.4% 18.2% 17.0% 14.2% 13.6%

Skimming
Cash on Hand Payroll Financial Statement Fraud Register Disbursements

13.1%
11.9% 11.4% 2.8% 2.8%

County Fraud Risk Assessment Example

35

Area Payroll

Potential Dollar Impact High

Fraud Risk Assessment High

Why? Checks are signed with electronic signature; clerk runs payroll and reconciles bank statement Three employees work from one cash drawer Payments not always supported by receipts

Tax Commissioners Office Expense Reimbursement

High

Moderate

Low

High

County Fraud Risk Assessment Example

36

Area Utilities Office

Potential Dollar Impact High

Fraud Risk Assessment Moderate

Why? Daily detail of receipts not always equal to deposit per bank Significant construction contract approved with no bid process 30% decrease in landfill fee income

County Commissioners

High

High

Landfill Fees

Moderate

High

Georgia Governments
CASH FRAUD

Finding Cash Fraud

38

Risk

Procedure

Theft of Cash Theft of Cash

Theft of Cash

Perform analytical analysis of revenues (comparing year to year) Perform surprise cash drawer counts Review composition (cash, checks) of deposit slip and compare to receipts written or keyed

Finding Cash Fraud

39

Risk Theft of Landfill Cash

Theft of Police Overnight Cash Receipts

Procedure Reconcile daily on-site receipts with amounts provided to clerks office Reconcile nightly police receipts with amounts provided to clerks office

Finding Cash Fraud

40

Risk Theft of Utility Cash

Theft of Utility Cash

Procedure Examine write offs or reductions of receivable accounts Reconcile collections per utilities receipts report with deposit slip

Preventing Cash Fraud

41

Segregate the following:

Role Opening mail Billing

Keying in receipts

Role Billing (e.g., utilities) Creating or making deposit Writing off or writing down individual accounts (e.g., utility bill or EMS bill)

Preventing Cash Fraud

42

Segregate the following:

Role Keying in receipts Making deposit

Collection

Writing of police tickets

Role Preparing deposit slip Reconciling bank statement Reconciling bank statement Collection of fines

Preventing Cash Fraud

43

Issue receipts to payor Restrictively endorse checks Reconcile money received daily to

receipt register Reconcile receipts to deposit slip

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)

Preventing Cash Fraud

45

Reconcile bank statements; account

for all outstanding items Require documentation for druginformation and drug-buy money; review by senior law enforcement officer

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

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

Preventing Cash Fraud

48

Use lockbox service

Review accounts receivable aging

Georgia Governments
PAYROLL FRAUD

Finding Payroll Fraud

50

Risk

Procedure

Extra payroll checks issued Inflated payroll checks

Inflated payroll checks

Sort pay register by employee and count number of checks issued Sort pay register by employee and scan for significant variations Download master pay rates per computer and compare to personnel files

Finding Payroll Fraud

51

Risk

Procedure

Inflated overtime pay

Ghost employee

Compare budget/actual per trial balance; compare approved overtime to keyed time in payroll report Sort payroll employee names by department; inquire of department head and finance director

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

Preventing Payroll Fraud

53

Segregate the following:

Role Check processing Check processing Check processing Pay rate authorization

Role Check signing Check distribution Bank reconciliation Entering pay rate in computer Approval of hours worked Entering hours worked in computer

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

Preventing Payroll Fraud

55

Restrict master pay rate access

(with strong password) Use separate payroll bank account Periodically perform surprise audit of one departments payroll

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

Georgia Governments
DISBURSEMENT FRAUD

Finding Disbursement Fraud

58

Risk

Procedure

Duplicate payment with theft of second check

False vendor payment to employee

Download check register; perform same (invoice #), same (amount), different (vendor #) test Download vendor file and payroll file; match addresses

Finding Disbursement Fraud

59

Risk

Procedure

Intentional duplicate Download check register; payment to vendor; theft query file for duplicate of refund check amounts and vendor number Forgery Look at all checks (returned with bank statement) for a month or two, examining payees and signatures

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

Preventing Disbursement Fraud

61

Segregate the following:

Role Check processing Check processing Check processing

Role Check signing Mailing of checks Bank reconciliation

Preventing Disbursement Fraud

62

Segregate the following:

Role Check processing Adding new vendors

Role Issuance of purchase orders Check signing

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)

Preventing Disbursement Fraud

64

Review vendor list for vendors with

similar names addresses

ABC
ABC

but

different

Company

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

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)

Preventing Disbursement Fraud

67

Mark invoices PAID upon

payment Dont pay from copies of invoices

Preventing Disbursement Fraud

68

Limit the number of check signers Dont sign blank checks Secure unused check stock

Preventing Credit Card Fraud

69

Limit the number of credit cards Require documentation for all

charges Timely reconcile credit card statements

Preventing Credit Card Fraud

70

Establish appropriate credit limits Consider the use of purchase cards

Preventing Electronic Transaction Fraud

71

Establish a fixed list of transfer to

account numbers with the governments bank

Preventing Electronic Transaction Fraud

72

Restrict access to electronic funds

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

Preventing Electronic Transaction Fraud

73

Require confirmation from the

bank for each electronic funds transfer; send to:

Person

creating the transfer Second person (reviewer)

Georgia Governments
CORRUPTION

Finding Corruption
75

Risk

Procedure

Kickbacks to person authorizing a purchase or contract Kickbacks to person authorizing a purchase

Examine all significant construction bid processes Download check register, sort by vendor, scan for reasonableness

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

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

Preventing Corruption
78

Transparency is Healthy

Preventing Corruption
79

Require sealed bids that are opened

in a public meeting Change order approval by governing body Restrict sole-source contracts

Georgia Governments
GENERAL FRAUD PREVENTION

General Fraud Prevention

81

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.

General Fraud Prevention

82

Require uninterrupted vacation for

key accounting personnel Perform background checks for accounting personnel

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

If All Else Fails

84

Make sure government has

appropriate fidelity bond

Concluding Remarks
85

Governments:
Consider

fraud prevention now.

Auditors:
Protect

yourselves and your clients; report control deficiencies.

McNair, McLemore, Middlebrooks & Co., LLC

Contact Charles Hall 478-330-5248 chall@mmmcpa.com Linkedin.com/in/charlesbhall