The Little Book of Local Government Fraud Prevention

Whether your government is small or large, this book provides guidance in reducing theft

Do you desire to fight fraud in governments? Or maybe you are just curious about how fraudsters get away with their wily schemes. See my book The Little Book of Local Government Fraud Prevention. You can purchase it on Amazon as a paperback. Also, the ebook is available as a Kindle download.

Local Government Fraud Prevention

Fraud occurs in local governments in a multitude of ways, yet many cities, counties, school systems, authorities, and other public entities are ill-prepared to prevent or detect its occurrence. Why is this so? Some governments place too much reliance on annual audits as a cure-all, but clean audit opinions don’t mean that fraud is not occurring. And some governments fail to understand how vulnerable they are–until it’s too late.

Why is local government fraud so common? Many small governments don’t have a sufficient number of employees to segregate accounting duties. It is also these smaller governments that place too much trust in their accounting personnel. This combination of a lack of segregation of duties and too much trust in key employees often leads to significant losses from theft.

The Little Book of Local Government Fraud Prevention provides several real-life stories of fraud. The stories will inform you about how local government employees steal. Then I provide you with prevention techniques to assist you in mitigating fraud risks. In one story, for example, the book shows how a single municipal employee stole over $53 million dollars, all from a city of just 16,000 citizens.

If you audit governments, you will find this book helpful in pinpointing common areas where governmental fraud occurs. The book also includes fraud audit checklists and fraud detection procedures. Whether you are an internal or external auditor, you will find fresh ideas for prevention and detection.

The Little Book of Local Government Fraud Prevention will assist you if you are a:

1. Local government accounting employee
2. Local government elected official
3. Local government auditor
4. Local government attorney
5. Certified Public Accountant
6. Certified Fraud Examiner

Even if you don’t work with governments, you’ll find this book useful. I provide fraud prevention steps for transaction cycles such as billing and collections, payables and expenses, payroll, and capital assets.

Together we can bring down the risk of fraud and corruption in our local governments. Come join the team. We’ll all be better for it.

If you don’t desire to spend money on the book, here’s a free list of controls.

2017 OMB Compliance Supplement Issued on August 17, 2017

The Office of Management and Budget issued the 2017 Compliance Supplement today (August 17, 2017). You can see it here.

The 2017 Compliance Supplement applies to audits of fiscal years beginning after June 30, 2016.

2017 Compliance Supplement

Thefts of Cash From Local Governments are Common

Local governments are perfect environments for thefts of cash

Thefts of cash from local governments are common, are they not? 

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

Johnson County’s longtime court clerk admitted today to stealing $120,000 of court funds from 2015 through 2016. Becky Cook, 62, faces up to 10 years in federal prison after pleading guilty to federal tax evasion and theft.

Thefts of Cash from Local Governments

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

Thefts of Cash from Local Governments

1. Decentralized Collection Points

First, consider that 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 thefts of cash are 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. 

A more centralized receipting system reduces the possibility of theft, but many governments may not be able to centralize the receipting function. Why? Here are three reasons:

  1. 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.
  2. Customer convenience (e.g., recreation centers and senior citizen centers) may drive the receipting location decision.
  3. Other locations, such as landfills, are purposely placed on the outer boundary of the government’s geographic area.

What’s the result? Widely differing receipting systems. Since these numerous receipting locations have varying controls, the risk of theft is higher. 

2. Lack of Accounting Controls

Second, consider that many governments lack sufficient accounting controls for cash.

It’s more likely cash will be stolen if cash collections are not receipted. 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. Doing so 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 also handle cash collections.
  9. Don’t allow the person billing customers to handle cash collections.

If segregation of duties is not possible (such as 7., 8. and 9. above), consider having a second person review the activity (either an employee of the government or maybe an outside consultant).

Final Thoughts About Fraud Prevention for Cash

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

Finally, make sure your government has sufficient fidelity bonding. If all else fails, you can recover your losses through insurance.

For more fraud prevention guidance, check out my book on Amazon; click the book below.

Also, here’s a post concerning how to audit cash.

Have you ever desired to become a fraud prevention champion? In this half-day course, we will peer into real-life governmental fraud cases and see how they occurred. You will leave the class with practical fraud prevention steps for any national, state or local government. The course location is the Capital Hilton Hotel in Washington DC.

Date:August 9, 2017
Time:8:00-11:35 a.m.
Event:Charles Hall Speaking at AICPA Governmental Accounting and Auditing Update Conference
Topic:How to Become a Super Fraud-Prevention Champion
Sponsor: AICPA
Public:Public
Registration:Click here to register.

Omission of MD&A from Governmental Financial Statements

Governments can exclude the MD&A from their financial statements

According to AU-C 730, the auditor’s report on the financial statements should include an other-matter paragraph that refers to the required supplementary information (RSI). In governmental financial statements, the management, discussion, and analysis (MD&A) is considered RSI. Though the MD&A is “required” supplementary information, governments can–strangely enough–exclude it from the financial statements.

omission of management, discussion and analysis

Picture from AdobeStock.com

Omitting the MD&A – Effect on an Audit Opinion

If the required supplementary information is omitted, the auditor should include an other-matter paragraph in the opinion such as the following:

Management has omitted the management, discussion, and analysis that accounting principles generally accepted in the United States of America require to be presented to supplement the basic financial statements. Such missing information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. Our opinion on the basic financial statements is not affected by this missing information.

Notice the omission of the MD&A does not affect the opinion rendered (in other words, it does not result in a modified report).

RSI Audit Standard

AU-C 730 is the audit standard for required supplementary information. Click here for an overview of the supplementary information audit standards. The former supplementary information standards were SASs 118, 119 and 120; those standards are now–under the Clarity Standards–AU-C sections 720, 725, and 730.

Omitting the MD&A – Effect on a Compilation Report

In compilation reports, the language is as follows:

Management has omitted the management, discussion and analysis that accounting principles generally accepted in the United States of America require to be presented to supplement the basic financial statements. Such missing information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board which considers it to be an essential part of financial reporting and for placing the basic financial statements in an appropriate operational, economic, or historical context. 

How to Make Your Business More Profitable by Funding Depreciation

Money in the bank for capital purchases

From time to time, I have clients ask me “What is funding depreciation?” And more importantly, they ask, “How can this technique make my organization more profitable and less stressful?”

Here’s a simple explanation.

Funded depreciation is the setting aside of cash in amounts equal to an organization’s annual depreciation. The purpose: to fund future purchases of capital assets with cash.

Funding Depreciation

Picture Courtesy of Canva

Funding Depreciation

Suppose you buy a $10,000 whiz-bang gizmo – a piece of equipment – that you expect to use for ten years, and at the end of the ten years you expect it to have no value. Your annual depreciation is $1,000.

In this example, a $1,000 depreciation expense is recognized annually on your income statement (depreciation decreases net income) even though no cash outlay occurs. The balance sheet includes the cost of the whiz-bang gizmo, but at the end of ten years, the equipment has a $0 book value, being fully depreciated.

The smart manager will annually set aside $1,000 in a safe investment – such as a certificate of deposit or money market account – for the future replacement of the whiz-bang gizmo.

If the company does not annually invest the $1,000, it has a few options at the end of the ten-year period:

  • Borrow the full amount for the replacement cost
  • Seek outside funding (e.g., grants)
  • Use other funds from within the organization
  • Ask U2 to do a special benefits concert – just kidding

Obviously, if you borrow money to replace the equipment, you will have to pay interest – another cash outlay. Suppose the rate is 10%. Now the organization must pay out $1,100 each year. If the organization funds the depreciation (invests $1,000 annually), it earns interest. If the entity chooses not to fund depreciation, it will pay interest.

Businesses that fund depreciation are always making money from interest (granted not much these days) rather than paying for it.

Another advantage to funding depreciation: you know you will have the money to purchase the capital asset. You’re not concerned with whether a creditor will lend you the money for the acquisition. You’re financially stronger.

Why Doesn’t Every Entity Fund Depreciation?

So why doesn’t everyone fund depreciation?

  • Some don’t understand the concept
  • Some had rather spend the cash flows for the ten years (e.g., owners taking too much in distributions)
  • Some need the money just to run the organization
  • In governments, elected officials desire to keep tax rates low while they are in office
  • In growing businesses, the owners may need the money to fund the growth of the company
  • Most importantly, it may require two cash payments (more in a moment)

Concerning the last point, if the business had to borrow money to purchase the initial capital asset, then it must make the debt service payments (cash outlay 1). If the company also funds depreciation for that same asset (making investments equal to the annual depreciation), another cash flow occurs (cash outlay 2).

If the business can ever get into a position where it pays cash for new equipment, it will be better off. Then only one cash outlay (investment funding) occurs, and the company is making–not paying–interest.

What if the organization cannot–due to cash flow constraints–fund depreciation for all new equipment purchases? Consider doing so for just one or two pieces of equipment–over time, the entity may be able to move into a fully funded position.

Who Should Fund Depreciation?

So, who should fund depreciation?

Organizations with sufficient cash flow and discipline. It’s the smart thing to do.

Imagine a world with no debt, a world where you don’t have to wonder how you will pay for equipment. Dreaming? Maybe, but funded depreciation is worth your consideration.

I am looking forward to speaking the the Georgia Association of School Business Officials in Augusta, Georgia on November 8th. We’ll review a few school fraud cases and then look at how to prevent thefts in local school systems.

Date:November 8, 2016
Time:9:00 a.m. - 4:00 p.m.
Event:Charles Hall providing fraud prevention class at the Georgia Association of School Business Officials Conference
Topic:Prevention of Fraud in Local Schools
Public:Private

25 Products I Use as an Accountant

Accounting Office

Picture from AdobeStock.com

Here’s a list of accounting products that I use as an accountant and auditor:

  1. Governmental Accounting, Auditing, and Financial Reporting GFOA Blue Book
  2. Evernote (as my digital cloud library)
  3. Sharefile (as my secure means to transfer information)
  4. Caseware (electronic trial balance and working papers)
  5. Excel
  6. Word
  7. Adobe Acrobat Pro DC (PDF maker)
  8. Apple iPhone
  9. Apple iPad
  10. Dell laptop
  11. Three extra monitors
  12. Standup desk
  13. Zoom (conferencing software)
  14. Checkpoint (Thomson Reuter’s electronic guides)
  15. CheckpointLearning (Thomson Reuter’s online CPE)
  16. WordPress (blogging software)
  17. LinkedIn (to participate in accounting groups)
  18. Fujitsu i500 scanner
  19. Keynote (an alternative to PowerPoint)
  20. Outlook (for email)
  21. Fantastical (iPad calendar app)
  22. Basecamp (cloud project management software)
  23. Livescribe 3 Smartpen
  24. 1Password (to store and retrieve passwords)
  25. Amazon Tap (for music)

I use all of the above products with the exception of the stand-up desk. The desk I use is from Levenger; it appears they’ve discontinued that model.

What products do you recommend for accountants?

Note: I do receive affiliate commissions on Amazon products.

City Manager Pockets Cash from the Sale of Excess Property

Day 30 of 30 Days of Fraud

The Theft

Is it possible to convert large pieces of excess property to cash–all without anyone knowing? Apparently yes.

Two men, Alfred Ketzler (the city manager) and Alfred Fabian, were found guilty of wire fraud and theft from the city of Tanana, Alaska.

Illegal sales of government property

Picture is courtesy of AdobeStock.com

Department of Justice Indictment Press Release

So what happened?

First, the Department of Justice stated “Ketzler would acquire surplus federal property that was stored at several different locations without notifying the mayor of Tanana or the city council for the city of Tanana of the federal excess and surplus property obtained on behalf of the city of Tanana.”

The Department of Justice went on to say “that Fabian, for his part, would transport federal excess and surplus property obtained on behalf of the city of Tanana to storage locations in and around Fairbanks, Alaska, including his own residence.”

Finally, the indictment stated that once the excess property was received, Ketzler would sell the equipment to individuals and businesses, telling them the property belonged to the City of Tanana. He asked that the checks be made out to him personally. The indictment continued by saying Ketzler would deposit the checks in his personal account and make payments to Fabian.

The indictment stated that the men received approximately $122,000 in illegal funds.

The property sold included:

  • Trucks
  • Fork Lifts
  • Bulldozers
  • Other industrial equipment

Department of Justice Sentencing Press Release

A June 2014 Department of Justice press release stated:

Anchorage, Alaska – U.S. Attorney Karen L. Loeffler announced today that two Fairbanks men were sentenced on Friday, June 6, 2014, in federal court in Fairbanks after being found guilty of wire fraud and theft from a local government receiving federal funds.

Alfred Richard Ketzler, Jr., also known as “Bear” Ketzler, 57, of Fairbanks, Alaska, was sentenced to 16 months in prison to be followed by two years of supervised release by Chief U.S. District Court Judge Ralph R. Beistline. Ketzler pled guilty in March 2014. Ketzler has already paid restitution to the City of Tanana in the amount of $116,500.

Alfred McQuestion Fabian, 62, of Fairbanks, Alaska, was sentenced to six months in prison to be followed by two years of supervised release by Chief U.S. District Court Judge Ralph R. Beistline. Fabian pled guilty in March 2014.

The Weakness

The city may have had appropriate inventory controls (the DOJ press releases did not say). Most noteworthy, this case appears to reflect a circumvention of controls. The city manager had the power and ability to consummate transactions that were (apparently) not recorded on the city’s records. The indictment states that Ketzler did not provide the city with appropriate notice of the receipt and sale of the excess property. Also the payments received were not recorded on the city’s books.

The Fix

Organizations should do all they can in the hiring process to bring people in that are honest. How? Background checks and the calling of references are critical.

It is imperative that all property be included in inventory—as soon as title transfers to the city. And, obviously, all payments should be made to the city (in this case) and not to individuals. A receipt should be issued to the payor that details the reason for the payment, the amount, and who made it.