STOP THIEF! Ernie Cooper, CPA/CFF, CFE, Former FBI Agent
Fraud continues to be a prevalent
issue for cities, counties, and special districts across the nation. This “fraud cost” can amount to thousands of dollars and in some cases disrupt operations, impact going concern, and significantly damage the municipality’s reputation among the community. And don’t think it just happens to Enron-type organizations—it can happen to any organization or municipality. In my thirty-plus years of dealing with the fraud world, not only as a forensic accountant but also as an FBI Special Agent for over twenty years, I have seen first-hand many sad cases, where just an ounce of fraud prevention could have minimized and in some cases prevented these losses from ever occurring.
Often organizations have the mentality that their auditor will catch any fraud occurring within their organization. “Auditors are responsible for planning and performing an audit to obtain reasonable assurance about whether an organization’s financial statements are free of material
Be Aware of the Prevalence of Fraud
According to the Association of Certified Fraud Examiners’ 2016 “Report to the Nations on Occupational Fraud and Abuse,” government organizations had a median loss to fraud of $100,000. Of governmental fraud cases, local governments were victims of 32.3% of the cases and state/ provincial governments were victims of 31.3% of the cases. When ranking the percentage of cases by industry, government and public administration fraud cases came in second, only after fraud cases in the banking and financial services sector. CSMFO MAGAZINE MAY 2016
Be Aware of Fraud’s Breeding Grounds Fraud breeds where there is a breakdown of internal controls. A recent scandal in the City of Placentia, which made headlines just this April, exemplifies this type of fraud scheme and how it can take place within a municipality. According to The Orange County Register, a Placentia finance official has been charged with embezzling $4.3 million from the city. The official transferred money to personal accounts, bypassing four accounting safeguards in the process. He also manipulated computer software to modify bank ledgers, which prevented city officials and auditors from noticing the true destination of the wired funds.
While there is always the risk of being subject to fraud, there are some basic, key steps you can take to prevent and detect fraud at your municipality.
One of the best ways you can help protect your municipality is to first of all understand that fraud can happen and may even be happening at your municipality.
regarding fraud occurring within your municipality with your auditor so they can help you build your defense against it.” Don’t bury your head in the sand. It is real and it is happening in today’s environment.
misstatement, which could be caused by error or fraud. As such, auditors don’t always catch fraud,” explained VLS Partner Renée Graves, CPA, CGFM, who specializes in audits of governmental entities. In fact, according to the Association of Certified Fraud Examiners, only 3.8% of fraud cases were initially detected by an external audit. “Auditors can, however, help identify weakness in internal control systems and conduct forensic audits to support organizations in preventing and detecting fraud,” Renée said. “Be sure to discuss any concerns you have
“This is a prime example of a municipality not consistently assessing risk and revising internal controls to protect itself against the risk,” said Renée. “It is the municipality’s responsibility to do this, but often they wait for their auditor to come in, gain an understanding of their systems, and then tell them where their systems are weak. By the time the auditor has done this, it’s too late. Municipalities need to be doing it on a pro-active and ongoing basis—keeping up with technology and electronic processing and the schemes that are out there creating risk.” Another case that made headlines involved a former Southern California city employee being arrested in
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