Is your organization actively preventing fraud through strong policies and internal controls? As a local government, are you positioned to detect fraud? Is your Management and/or Council/Board ready to address fraud when it happens?

These are important questions managers and governing body members should be asking themselves given that more and more cases of fraud at governments are being reported in the news. The Association of Certified Fraud Examiners (ACFE) stated in their “2018 Global Study on Occupational Fraud and Abuse (Report)” that 85% of fraud perpetrators have never been punished or terminated from prior employment. Also, 24% of perpetrators were employed for over 10 years.

Also, according to ACFE’s latest report:

●2,690 cases of fraud were reported globally in the previous year.
●Fraud took place in 125 countries and 23 industry categories (including local governments).
●The median duration of a fraud scheme was 16 months.
●Asset misappropriation schemes are most the most common and least costly – $114,000 median loss.
●Financial statement and fraud schemes are the least common and most costly – making up 10% of fraud cases.
●Internal control weaknesses were responsible for nearly half of frauds.

Does your organization have appropriate safe-guards in place in order to detect and prevent fraud? First, it’s important to understand the differences between ‘fraud’ and ‘error’. Fraud refers to an intentional act by one or more individuals among management, those charged with governance, employees, or third parties, involving the use of deception to obtain an unjust or illegal advantage. Error refers to unintentional misstatements of amounts or disclosures in financial statements.

Fraud is on the increase due to a number of factors. Though the economy on the whole is doing very well, individuals working at government agencies still must contend with their own personal financial situations. These situations can include personal debt, the fear of being laid off, increased prices or financial obligations, etc. There are also internal organization pressures including the effects of layoffs or staffing reductions which can create a weakened internal control system. This weakened system promotes an opportunity for fraudulent activity.

What are some basic guidelines to follow to prevent fraud?

First, you need to eliminate the opportunity to commit fraud. Assuming your CFO, accounting personnel, and individuals with fiscal responsibilities are ‘trustworthy and good people’ is not an effective system of internal control.

Do you have real and substantive internal controls at your organization? Do you have segregation of duties?

Segregation of duties can be difficult at a local government due to limited staffing capacity. Board members can be utilized as additional resources to support segregation of duties. What is most critical for your organization? It is key that whoever manages accounting should not be writing and signing checks or collecting revenue and making deposits.

How Do You Detect Fraud?

One way to detect fraud is a timely detailed reconciliation of the bank accounts by someone independent of fiduciary activities. Fraud can be as simple where the perpetrator just writes themselves a check or wires money to their personal bank account. Another method to help detect fraud is to have a strong written fraud policy. Everyone should be responsible for protecting the organization, and you should have a written policy that makes it is a requirement to report “suspected fraud” and who to report the issue to. According to the ACFE report, 40% of occupational fraud is initially detected by a tip, while external audits detect 4%.

Okay, say the worst case scenario has happened and fraud has already happened at your organization. You should have a policy up front of how you will deal with fraud. There are difficult decisions to be made and you don’t want to make them based on emotions of the moment. Will you prosecute? Will you terminate the employee with cause? These are difficult questions, but it’s better to have a fraud policy in place before the incident takes place so you have a clear course of action to follow.

A final word. Fraud does happen, even at local governments. Prioritize your plan to address this issue today.