Three Moves to Combat Fraud in Local Government

Across the nation, there’s a lot of talk about fraud and embezzlement in all types of industries, local governments included.

Quarter Horses and Multi-Million Dollar Embezzlement

The topic is so popular that a 2017 documentary titled ‘All the Queen’s Horses’ tells the story of what’s thought to be the biggest municipal fraud case in our country’s history.  Dixon, Illinois’ appointed controller and treasurer embezzled $53.7 million from the city over a twenty-two-year period. Yes, that’s $53,700,000 – with that many zeroes – stolen from a city with a population of around 15,000.  The former employee used the money to fund her nationally-known quarter horse breeding business.

Though I’m not a movie critic, I highly recommend you watch the documentary.  For our purpose here, though, I want to point out that municipalities are not immune to the fraud and embezzlement conversation.

Looking Ahead

During a recent presentation at the Kansas County Treasurers Association, our team led a discussion about fraud, internal controls, and more.  My inner auditor loves digging into these types of situations!  Many things went wrong in Dixon, Illinois.  However, the good news is that there are proactive measures you can put in place to set your municipality up for continued success.  Below are some items to consider.

  1. When is the last time internal controls were reviewed?  Internal controls are a coordinated set of policies and procedures that reflects a comprehensive strategy for achieving management objectives.  We have a lot of conversations with clients about this topic.  Ultimately, we provide a response similar to this: management (including the governing body) is responsible for making sure the right controls are in place and that they are performing as intended.
    • Is the same person taking payment (receipting in the cash), counting cash at the end of the day, creating the bank deposit, and taking the deposit to the bank?  Many public offices struggle to divide up the work because they don’t have large teams.  But there are still methods to work through this challenge with an eye toward strengthening internal controls.
  1. Do you have a fraud reporting hotline?  Fraud reporting hotlines are often inexpensive and can provide great value for a small cost.  According to the Association of Certified Fraud Examiners’ Report to the Nations, 2018 Global Study on Occupational Fraud & Abuse, tips are by far the most common initial fraud detection method.  Furthermore, 54% of tips come from employees, 17% of tips are anonymous, and 15% of tips come from customers.
  1. What is the message from management?  Cities, counties, townships, and other local governmental entities have management structures similar to other businesses and organizations. Setting the tone at the top is crucial in combatting potential fraud and embezzlement.  Many municipalities have a ‘code of conduct’ that encompasses its position on business ethics, what is considered fraudulent activity, and states the consequences for breaking the policy.  Do you have a code of conduct?  Do all of the employees know what it is?  

Though there’s a lot of conversation about fraud and embezzlement, there’s good news.  Your municipality doesn’t have to be the next hit documentary.  With the right tools and procedures, you can set your local governmental entity up for continued success in serving your community for years to come.  Stay tuned for more tips and tricks!