Here's a look at how to prevent local government fraud. The slide deck covers typical transaction cycle weaknesses and how to mitigate risk in each.

1. A PRESENTATION BY
MCNAIR, MCLEMORE,
MIDDLEBROOKS & CO., LLC
Finding and Preventing Fraud
In Local Governments

2. Fraud in the News
Fulton County
City of Broxton
Dawson County
McIntosh County
Wilkinson County
2

3. Fraud in the News
City of McIntyre
Clayton County
City of Grovetown
City of Conyers
Gwinnett County
3

4. Who?
County Commissioner
Mayor
City Clerk
Clerk of Superior Court
Housing Authority Director
4

5. Who?
Sheriff’s Office
Police Office
Tax
Commissioner
Payroll Clerk
EMS Director
5

6. Funds Used For:
Car Loan
Payments
Mortgage
Payments
Vacation
Expenses
Clothing
Waterslide
6

7. Funds Used For:
Barn
Christmas
Decorations
Christmas Gifts
Parties
Personal
Business
7

8. How Was Money Stolen?
Extra Payroll Checks
Skimming Fines
Skimming
Utility Fees
Skimming
Passport Fees
Drug-Buy Money
Taken
8

9. How Was Money Stolen?
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)
9

10. DESIGN OF
LOCAL GOVERNMENTS
MAY INCREASE
FRAUD RISK
Georgia Governments

11. Local Government Accounting
 Decentralized Accounting Processes
 Numerous points of collection:
Tax office
Utility office
Sheriff’s department
Clerk of Superior Court
Magistrate Court
Probate Court
Clerk’s office
EMS
Code enforcement
11

12. Local Government Accounting
 Decentralized Accounting Processes
 Numerous people sign checks including:
Commissioners/Mayors/Council Members
Clerks
Constitutional Officers
Development Authority Director
Airport Board Member
Law Library Member
Recreation Director
12

13. Local Government Accounting
13
 Decentralized Accounting Processes
 Numerous 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.

14. Local Government Accounting
14
Lack of
Uniformity =
Greater Risk

15. Local Government Accounting
15
Cities and counties have
multiple leaders
Constitutional officers are
single decision makers

16. Local Government Accounting
16

17. Local Government Accounting
Does one person
control?
17

18. Local Government Accounting
18
Single Person
Control =
Greater Risk

19. Fraudster Profile
What does a
fraudster look
like?
19

20. Fraudster Profile
50%
with organization
for more than 5 years
85%
with no criminal record
20

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

22. External Auditors’ Responsibility
Numbers are
materially
correct
22

23. External Auditors’ Responsibility
Looking for
material fraud
23

24. Certified Fraud Examiner Survey
Median loss for
governments
$100,000
24

25. Problem
Many frauds
not material
25

26. Frauds Detected by External Audits
26
4.6%

27. Average Duration of Frauds Before Detection
27
18 Months

28. FRAUD DETECTION
APPROACH
Georgia Governments

29. Focus
High dollar exposure
Higher probability of
occurrence
29

30. Dollar Exposure
Expense
Reimbursement
•Small dollar
exposure
Corruption
•High dollar
exposure
30

31. 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

32. Probability of Occurrence
32
Does the government have limited
personnel?
Are accounting duties segregated?

33. Probability of Occurrence
33
Are there independent checks on
transactions?
Surprise audits
Review by an elected official
Are appropriate records
maintained?

34. 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%
34

35. County Fraud Risk Assessment Example
35
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

36. County Fraud Risk Assessment Example
36
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

37. CASH FRAUD
Georgia Governments

38. Finding Cash Fraud
38
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

39. Finding Cash Fraud
39
Risk Procedure
Theft 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

40. Finding Cash Fraud
40
Risk Procedure
Theft of Utility Cash Examine write offs or
reductions of receivable
accounts
Theft of Utility Cash Reconcile collections per
utilities receipts report
with deposit slip

41. Preventing Cash Fraud
41
Segregate the following:
Role Role
Opening mail Billing (e.g., utilities)
Billing Creating or making
deposit
Keying in receipts Writing off or writing
down individual accounts
(e.g., utility bill or EMS
bill)

42. Preventing Cash Fraud
42
Role Role
Keying in receipts Preparing deposit slip
Making deposit Reconciling bank
statement
Collection Reconciling bank
statement
Writing of police tickets Collection of fines
Segregate the following:

43. Preventing Cash Fraud
43
Issue receipts to payor
Restrictively endorse checks
Reconcile money received daily to
receipt register
Reconcile receipts to deposit slip

44. 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)

45. Preventing Cash Fraud
45
Reconcile bank statements; account
for all outstanding items
Require documentation for drug-
information and drug-buy money;
review by senior law enforcement
officer

46. 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

47. 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

48. Preventing Cash Fraud
48
 Use lockbox service
 Review accounts receivable aging

49. PAYROLL FRAUD
Georgia Governments

50. Finding Payroll Fraud
50
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

51. Finding Payroll Fraud
51
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

52. 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

53. Preventing Payroll Fraud
53
Segregate the following:
Role Role
Check processing Check signing
Check processing Check distribution
Check processing Bank reconciliation
Pay rate authorization Entering pay rate in
computer
Approval of hours worked Entering hours worked in
computer

54. 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

55. Preventing Payroll Fraud
55
Restrict master pay rate access
(with strong password)
Use separate payroll bank account
Periodically perform surprise audit
of one department’s payroll

56. 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

57. DISBURSEMENT
FRAUD
Georgia Governments

58. Finding Disbursement Fraud
58
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

59. Finding Disbursement Fraud
59
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

60. 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

61. Preventing Disbursement Fraud
61
Segregate the following:
Role Role
Check processing Check signing
Check processing Mailing of checks
Check processing Bank reconciliation

62. Preventing Disbursement Fraud
62
Segregate the following:
Role Role
Check processing Issuance of purchase
orders
Adding new vendors Check signing

63. 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)

64. Preventing Disbursement Fraud
64
Review vendor list for vendors with
similar names but different
addresses
ABC
ABC Company

65. 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

66. 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)

67. Preventing Disbursement Fraud
67
Mark invoices “PAID” upon
payment
Don’t pay from copies of invoices

68. Preventing Disbursement Fraud
68
Limit the number of check signers
Don’t sign blank checks
Secure unused check stock

69. Preventing Credit Card Fraud
69
Limit the number of credit cards
Require documentation for all
charges
Timely reconcile credit card
statements

70. Preventing Credit Card Fraud
70
Establish appropriate credit limits
Consider the use of purchase cards

71. Preventing Electronic Transaction Fraud
71
Establish a fixed list of “transfer to”
account numbers with the
government’s bank

72. Preventing Electronic Transaction Fraud
72
Restrict access to electronic funds
software
Establish dollar limits (per person,
per day) with bank

73. Preventing Electronic Transaction Fraud
73
Require confirmation from the
bank for each electronic funds
transfer; send to:
Person creating the transfer
Second person (reviewer)

74. CORRUPTION
Georgia Governments

75. Finding Corruption
75
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

76. 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

77. 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

78. Preventing Corruption
Transparency
is Healthy
78

79. Preventing Corruption
79
Require sealed bids that are opened
in a public meeting
Change order approval by
governing body
Restrict sole-source contracts

80. GENERAL FRAUD
PREVENTION
Georgia Governments

81. 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.
81

82. General Fraud Prevention
82
Require uninterrupted vacation for
key accounting personnel
Perform background checks for
accounting personnel

83. 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

84. If All Else Fails
84
Make sure government has
appropriate fidelity bond

85. Concluding Remarks
85
Governments:
Consider fraud prevention now.
Auditors:
Protect yourselves and your clients;
report control deficiencies.

86. McNair, McLemore, Middlebrooks & Co., LLC
Contact
Charles Hall
478-330-5248
chall@mmmcpa.com
Linkedin.com/in/charlesbhall