Red Flags of Municipal Fraud: Preventing Employee Dishonesty

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On average, organizational loss from employee dishonesty is estimated to claim 6% of revenue. Most is never discovered and continues for years.

This webinar outlined fraud schemes common to municipalities as well as methods to prevent opportunities for theft. Best practices related to handling an incident, evidence gathering and security, proper reporting, whistleblower systems, and use of forensic professionals were discussed.

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Red Flags of Municipal Fraud: Preventing Employee Dishonesty

  1. 1. Oh No! Professional Handling of Fraud Incidents in Government Presented to the Illinois Municipal League by: Mary O’Connor, ASA, CFE Partner, Dispute Advisory Services
  2. 2. Agenda • Role of the external auditor in fraud investigation • Why are local governments vulnerable to employee dishonesty and other forms of fraud? • Conducting a fraud investigation • Fraud Incident Management Protocol • Special Focus: Public Relations
  3. 3. But My Auditor Gave a Clean Opinion • An unqualified audit opinion does NOT mean that there is no employee dishonesty or fraud occurring in the organization. • Employee dishonesty and other acts of fraud can be significant and the books can still balance; often exists even when bank accounts are reconciled. • SAS 99, professional skepticism and materiality
  4. 4. Why Are Governments Vulnerable? • Trust culture • No invoice/receivable cycle: revenue as a gift • Many part-time employees • Political implications • Budget constraints • Public nature; need for disclosure
  5. 5. Conducting the Investigation Goals in this process are to: • Follow-up on all credible tips and complaints • Follow-up on all management letter issues to fraud • Form a response team that preserves the secrecy of the situation • Avoid the “CSI” syndrome • Create a plan that allows the organization to work together in the future
  6. 6. Conducting the Investigation Goals (continued) • Preserve the evidence especially the computer record • Deal with the administrative leave and other employment issues • Deal with employee morale issues; manage emotions • Work for restitution, insurance claim preparation and possible criminal referral • Learn from mistakes of the past, and fix the problems • Communicate effectively to stakeholders
  7. 7. Reasons To Enlist A Forensics Team Know the endgame – it’s not only to prosecute! • Preserve the relationship of audit team and staff • Preserve management relationship with staff • The Police will not do this for the client • Tasks for the forensics team • Surveillance • Proof • Security of computer evidence • Interviewing • Insurance claim/restitution • Police/State’s Attorney support
  8. 8. Fraud Incident Management Protocol • Make sure that your organization has thought through this issue and developed a written plan to address suspicion or actual knowledge of fraud. • Establish a whistleblower system • Need for confidentiality • Need for public relations sense • Preservation of evidence • Legal handling of employment and criminal issues • Coordination with forensics team • Control of process • Members of the team
  9. 9. Contact Information Mary O’Connor, ASA, CFE Partner, Valuation and Dispute Advisory Services Sikich LLP T: 312.648.6652 F: 630.375.8831 M: 708.646.8737 Email: moconnor@sikich.com www.sikich.com Corporate Office 1415 W. Diehl Road, Suite 400 Naperville, IL 60563 Chicago Office 123 N. Wacker Dr., Ste 1500 Chicago, IL 60606
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