Theft of Cash From Local Governments (Cities and Counties)

How many times have you seen a local newspaper article with news like the following?

Johnson County’s longtime court clerk admitted today to stealing $120,000 of court funds from 2006 through 2009. Becky Cook, 62, faces up to 10 years in federal prison after pleading guilty to federal tax evasion and bankruptcy fraud.

Usually the causes of such cash thefts are (1) decentralized collection points and (2) a lack of accounting controls.

cash

Decentralized Collection Points

Governments commonly have several collection points. Examples include:

  • Recreation department
  • Police department
  • Development authority
  • Water and sewer department
  • Airport authority
  • Landfill
  • Building and code enforcement
  • Courts

Many governments  have over a dozen receipting locations. With cash flowing in so many places, it’s no wonder that cash theft is common. Each cash receipt area may have different accounting procedures – some with physical receipt books, some with computerized receipting, and some with no receipting system at all. Often these decentralized cash collections points (e.g., landfill) funnel into a central location (e.g., county administrative office).

A more centralized receipting system reduces the possibility of theft, but many governments may not be able to centralize the receipting function.

Why?

  • Elected officials, such as tax commissioners, often determine how monies are collected without input from the final receiving government (e.g., county commissioners or school). Consequently each elected official may decide to use a different receipting system.
  • Customer convenience (e.g., recreation centers and senior citizen centers) may also drive the location decision.
  • Other locations, such as landfills, are purposely placed on the outer boundary of the government’s geographic area.

    Result: Widely differing receipting systems. Numerous receipting locations with varying controls leads to a higher risk of theft.

    Accounting Controls (for Cash)

    If cash collections are not receipted, it’s more likely cash will be stolen. If the transaction is recorded, then the receipt record must be altered, destroyed or hidden to cover up the theft. That’s why it’s critical to capture the transaction as early as possible: it makes theft more difficult.

    Additional steps that will enhance your cash controls include the following:

    1. If possible, provide the government’s administrative office (e.g., county commissioners’ finance department) with electronic viewing rights for the decentralized receipting locations (e.g., landfill).
    2. Require the transfer of money on a daily basis; the government’s administrative office (e.g., county commissioners’ finance department) should provide a receipt to each transferring location (e.g., landfill).
    3. Limit the number of bank accounts.
    4. Deposit funds daily.
    5. Periodically perform surprise audits of outlying receipting areas.
    6. Use a centralized receipting location (and eliminate the decentralized cash collection points).
    7. Persons creating deposit slips and handling cash should not key those receipts into the accounting system.
    8. The person reconciling the bank statements should not be involved in cash collections.

    If segregation of duties is not possible (such as 7. and 8. above), consider having a second person review the activity (either an employee of the government or maybe an outside consultant).

    When possible, use an experienced fraud prevention specialist to review your cash collection procedures. Can’t afford to? You can’t afford not to. The average incidence of governmental fraud results in a loss of approximately $100,000.

    Finally make sure your government has sufficient fidelity bonding. 

    How about you? Has your government or a government you provide services to suffered a theft of cash?

     

    Evernote – Five Steps to Simultaneous Search

    You can search the Internet and Your Evernote at the same time

    After you have built your personal library in Evernote, you can then do what my daughter calls a way cool thing: you can search Chrome, Bing, or Yahoo – and your Evernote account – at the same time. Yeah, I would call that a way cool thing (or as we used to say in the 70s, far out)

    Here’s how. (This discussion assumes you already have an Evernote account.)

    1. Install your web clipper extension.

    Evernote provides web clippers for browsers including Safari, Explorer, Google Chrome, and Firefox. If you click this link: web clipper, Evernote will automatically recognize your browser; then click the “Get Web Clipper” link to download. Once you are done, you will see the elephant icon (like the one below) – usually to the right of your URL.  (You will not see the elephant icon in Explorer; see my prior post.)

    Clippers

    2. Enable the simultaneous search feature in your browser.

    In Google Chrome, go to Settings, then Extensions. Now click the Options link.

    Then check the Related Results option (the last item in the list below).

    Screen Shot 2013 01 19 at 4 16 57 PM

     

     

     

     

     

     

     

     

     

     

    To enable simultaneous search in Firefox, click Tools, Add-ons, Add-ons-Extensions, Evernote Web Clipper, Options, check Use Simultaneous Search (the last option in the list), then Save.

    3. Open your search engine (e.g., Google).

    4. Sign into your account from the web clipper.

    Click the elephant icon, login, check Show Related Results when you search the web (after password below) and click Sign In. (If you don’t see the Show Related Results option when you click the elephant icon, log out of the clipper and then log back in; when you log back in, you should see the option.)

    Screen Shot 2013 01 19 at 3 30 21 PM

    5. Perform your search.

    Now you can search the Internet and your Evernote account.

    Try It, You’ll Like It

    The above may seem like too much trouble, but once you download the clipper and establish your settings, it’s quite simple. Click the elephant icon, key in your username and password, check Show Related Results, click Sign In, and start searching. I think you too will find it a way cool thing.

    Are there other features in Evernote that you like?

    To Consolidate or Not To Consolidate

    Shakespeare wrote:

    To be, or not to be, that is the question:
    Whether ’tis Nobler in the mind to suffer
    The Slings and Arrows of outrageous Fortune,
    Or to take Arms against a Sea of troubles,
    And by opposing end them.

    I write:

    To consolidate or not to consolidate, that is the question. (Sorry, I’m not Shakespeare.)

    Believe me, this question, once encountered, can feel like you are taking Arms against a Sea of troubles.

    When the Financial Accounting Standards Board (FASB) casts the Slings and Arrows of variable interest entities, equity method accounting, combinations, consolidations, I don’t feel like Hamlet, but Dorothy (in the Wizard of Oz) – Lions and tigers and bears, oh, my.

    And if FASB is not daunting enough, we turn to run, and their stands the Governmental Accounting Standards Board (GASB) with statements 14, 39, and now, 61, The Financial Reporting Entity: Omnibus an amendment of GASB Statements No. 14 and No. 34 – all dealing with whether to include other entities in a government’s financial statements.

    Courtesy-of-iStockiStock_000018901527Small.jpg So what’s a boy or girl to do?

    Here’s an overview of how for-profits, nonprofits, and governments make the consolidation or inclusion decision.

    FASB Consolidations and Combinations

    First, let’s examine the issue when a for-profit company has financial ownership of another entity.

    When assessing potential for-profit consolidations: consider this continuum:

    (1) less than 20% ownership – cost method,

    (2) 20% to 50% ownership – equity method, and

    (3) more than 50% ownership – consolidation.

    The FASB Codification states that a company with 20% ownership is presumed to have the ability to exercise significant influence over the operating and financial policies of the investee; if the company cannot significantly influence the investee, then the cost method should be used. Additionally, the Codification states that a company owns a controlling financial interest if its ownership stake exceeds 50%

    So how are these three methods reflected in the financial statements?

    1. Cost method: simply book the purchase of an investment

    2. Equity method: record the purchase of the investment; thereafter, increase or decrease the investment account for your proportionate share of earnings or losses of the investee

    3. Consolidation: bring together each of the line items of the respective companies and eliminate transactions between the consolidated entities

    Second, for-profit consolidations may also occur, even when there is no ownership of a related entity, if the related entity is a variable interest entity (VIE). For VIEs, consider:

    1. The power to direct the activities of the other entity,

    2. An obligation to absorb the losses of the other entity, and

    3. A right to receive benefits of the other entity.

    (There are other VIE factors, but I’m trying to keep this simple.)

    If a for-profit company has no ownership interest in a related entity, the companies may still be combined if there is common ownership (e.g., one company makes bread and another related company distributes the bread – both are owned by the same individual).

    Thirdly, if one nonprofit controls another nonprofit entity and it has an economic interest, then they will be combined. Also in some cases, you may combine sister nonprofits, even if one non-profit doesn’t control the other – if they are governed by the same board members. Nonprofits may also have a controlling financial interest in a for-profit, and if they do, the nonprofit will consolidate the for-profit entity.

    GASB Inclusions

    Governmental statements, based on fund accounting, present multiple columns for the entities included; in contrast, FASB uses one column for the consolidated whole. Governments don’t consolidate; they include.

    Since governments usually don’t buy an interest in other entities (for purposes of control), you should focus on non-ownership issues (e.g., who appoints the voting majority?) to determine whether an entity should be included. See the Appendix C flowchart of GASB Statement No. 61 to aid you in making this determination.

    Got It?

    As you can tell, the decision to consolidate or not to consolidate can be quite a challenge, but hopefully this overview will aid you in your future determinations. I invite you to post your own thoughts and ideas.

    OCBOA Governmental Financial Statements

    The AICPA recently provided a webcast titled: The New AICPA OCBOA Publications: What They Are and How They Apply to Governments and Not-for-Profits Using Cash, Modified Cash, and Regulatory Frameworks.

    I was surprised to see the number of governments that present financial statements in accordance with an other comprehensive basis of accounting (OCBOA). The webcast did not provide an exact percentage of governments using OCBOA, but it looks like you can easily conclude that over 33% of governments use OCBOA. 

    Why Issue OCBOA Financial Statements?

    As I said in my prior OCBOA post, the short answer is: Cost. If you’ve created GAAP basis governmental financial statements, you know how complicated these statements are. OCBOA statements – whether cash basis, modified cash basis or tax basis – are simpler to create. 

    Many governments require GAAP basis statements so make sure, before making any changes, that OCBOA statements are permissible in your locale.

    Modified Cash Basis of Accounting

    The modified cash basis is the pure cash basis with modifications having substantial support. (A pure cash basis of accounting would reflect only cash inflows and outflows with beginning and ending cash.)

    A common modification to the cash basis is the capitalization of assets purchased and recognition of depreciation over estimated useful lives. Though using the modified cash basis, impaired capital assets may also be written down. In addition, the related long-term debt would normally also be recorded. 

    Another common modification is the deferral of revenue recognition for governments receiving cash that will be used in future periods; the deferral would be shown as a liability.

    OCBOA Presentation Issues

    GAAP basis governmental financial statements reflect government-wide and fund-level presentations. OCBOA statements will normally include the same type of presentation – government-wide and fund-level statements – though you are using different recognition criteria. A general rule for OCBOA statements is: follow GAAP guidelines where you can; this includes disclosures (though the notes are amended in accordance with the framework used).

    While not required for OCBOA statements, you may include supplementary information.

    Required supplementary information (RSI) is not required under the modified cash basis, but can be provided; if provided, the information is not considered RSI but supplementary information or additional information. RSI can only be “required” by GAAP.

    While certain disclosures are not required in OCBOA statements (e.g., fair value of investments or the funded status of a defined benefit plan), such information can be provided in the notes. 

    Use of the AICPA Financial Reporting Framework for Small- and Medium-Sized Entities 

    Governments should not use the AICPA small- and medium-sized entity framework.

    Updated AICPA Guidance

    If you are issuing governmental OCBOA statements, I strongly recommend that you purchase the AICPA’s updated book: Applying OCBOA in State and Local Governmental Financial Statements. Mike Crawford and Mike Glynn have done a fine job in preparing this publication.

    Unlimited FDIC Coverage Ceases

    The unlimited FDIC coverage for noninterest-bearing accounts has expired. (Since the FDIC still has the following notice on its website after December 31, 2012, I am assuming there were no last minute changes to the Transaction Account Guarantee expiration date.)

    The following comes from an FDIC FAQ (as of January 2, 2013):

    Frequently Asked Questions Regarding Notice of Expiration: Temporary Unlimited Coverage for Noninterest-Bearing Transaction Accounts

    Section 343 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) provides temporary unlimited deposit insurance coverage for noninterest-bearing transaction accounts (NIBTAs) at all FDIC-insured depository institutions (IDIs) from December 31, 2010 through December 31, 2012 (the Dodd-Frank Deposit Insurance Provision). In anticipation of the expiration of the Dodd-Frank Deposit Insurance Provision, the FDIC issued Financial Institution Letter FIL-45-2012 to provide related direction and guidance to IDIs.

    Below are frequently asked questions and answers concerning the expiration of the Dodd-Frank Deposit Insurance Provision.

    1. When the Dodd-Frank Deposit Insurance Provision expires, how will noninterest-bearing transaction accounts be insured by the FDIC? What will be the impact on deposit insurance coverage on other types of accounts?

    Beginning January 1, 2013, noninterest-bearing transaction accounts will no longer be insured separately from depositors’ other accounts at the same IDI. Instead, noninterest-bearing transaction accounts will be added to any of a depositor’s other accounts in the applicable ownership category, and the aggregate balance insured up to at least the Standard Maximum Deposit Insurance Amount (SMDIA) of $250,000, per depositor, at each separately chartered IDI.

    For example, if after the expiration of the Dodd-Frank Deposit Insurance Provision a depositor under the single ownership category has $500,000 deposited in a noninterest-bearing transaction account and $250,000 deposited in a certificate of deposit, or total deposits of $750,000, the depositor would be insured for up to $250,000 and uninsured for the remaining balance of $500,000.

    Depositors should be made aware that Section 335 of the Dodd-Frank Act permanently increases the SMDIA to $250,000.

    To see the remainder of the FDIC FAQ, click here.

    Extension of Unlimited Coverage Defeated

    The CFO Journal reported on December 13, 2012 that the Senate blocked a vote to extend the unlimited FDIC coverage for noninterest-bearing accounts.

    Effects on Financial Statement Disclosures and Management Letters

    Consider how this change will affect your December 31, 2012 year-end financial statement disclosures. You may also want to consider management letter comments to address the decreased FDIC coverage.

    Some governments had moved substantial funds into noninterest-bearing accounts (given the low interest rate returns) in order to receive the unlimited FDIC coverage. These governmental entities need to consider whether they need to seek safety by means of other types of investments such as treasuries. In addition, depositors who had relied on the U.S. government’s sovereign credit risk will now need to consider the bank’s credit risk.