The core of any organization’s fraud prevention program is strong internal controls. Yet too many governments either fail to develop controls that address common risks or, if they establish controls, neglect to enforce them. Your government must do both if it wants to help prevent occupational theft and fraud perpetrated by outsiders.
Governments at risk
According to the Association of Certified Fraud Examiners (ACFE), corruption, billing fraud and payroll fraud are three of the most frequent types of fraud schemes within government administration. However, proper segregation of duties — for example, assigning account reconciliation and fund depositing to two different staff members — is a relatively easy and effective method of preventing such fraud.
For all government entities of any size, such controls as strong management oversight, regular audits and confidential fraud hotlines are associated with decreases in financial losses. The ACFE has found that proactive data monitoring and analysis is the most effective means of limiting the duration and cost of fraud schemes — 50% shorter and 60% smaller than organizations that do not monitor data.
Getting priorities straight
Most governments have at least a fundamental set of controls, but employees bent on fraud can usually find gaps in the fence. Government entities handle large amounts of money and are involved in a significant number of transactions, which make them a prime target for fraud. This can be especially problematic when the “tone at the top” is lax and management or board members indicate that preventing fraud is low on their priority list. Most governments do not have funds budgeted to combat fraud.
Government boards may also inadvertently enable fraud when they place too much trust in the manager and fail to challenge that person’s financial representations. Unlike for-profit companies, government boards may lack members with financial oversight experience, which means they may fail to notice important warning signs that something is amiss.
Send the right message
How municipalities deal with perpetrators can also increase their fraud risk. A reputation for honesty and fiscal responsibility is any government entity’s bedrock. So it is not surprising that many organizations choose to quietly fire fraud perpetrators and sweep such incidents under the rug.
Unfortunately, such actions encourage fraud by telling potential thieves that the consequences of getting caught are relatively minor. Even if an incident is hushed up, it could fuel insidious rumors that do more reputational damage than publicly addressing the issue head-on would. It is better, therefore, to file a police report, consult an attorney and inform major stakeholders about the incident and what you are doing to prevent it from happening again.
Cover all bases
Internal control policies should address both common fraud risks and those specific to your organization and constituents. Is your government entity exposed to fraud? Answer the questions on Yeo & Yeo’s Internal Control Checklist to find out.