Red Flags of Governmental Fraud

Fraudsters unwittingly send signals--Do you know them?

Fraud is detected by tips more than any other way–over 40% in the most recent Association of Certified Fraud Examiners’ survey. And many of those tips came from employees who knew the signs of fraud.

How can governments make employees aware of fraud signals? Education.

Picture is courtesy of DollarPhotoClub.com

Picture is courtesy of DollarPhotoClub.com

Would your employees recognize fraud if it were occurring? Some red flags are obvious. Others are not. Here are some sample governmental fraud red flags:

External Red Flags

  • Unexplained increases in the wealth of an accounting employee or elected official
  • Employee personal problems such as a divorce, substance abuse, financial difficulties, legal problems
  • Employee living beyond his or her means
  • Unusually close employee association with a vendor

Cash Receipts and Billing Red Flags

  • Taxpayer complaints concerning nonpayment notices (even though payment has been made)
  • A pattern of customer complaints in the utility billing and collection process
  • Substantial write-offs of receivables without support
  • Unexplained decreases in revenues
  • A pattern of missing receipt forms

Disbursements and Purchasing Red Flags

  • Altered or incomplete supporting documentation for disbursements
  • Purchasing party (e.g., department head) picking up processed vendor checks rather than accounts payable personnel mailing them
  • Unexplained increases in expenses
  • Excessive expenses when compared to the budget
  • Vendors without physical addresses

Payroll Red Flags

  • Employees with no or little payroll deductions
  • Excessive overtime expenses
  • Excessive payroll expenses when compared to the budget

Capital Assets Red Flags

  • Winning bid appears too high; all contractors submit consistently high bids
  • Qualified construction contractors not submitting bids
  • Reports of missing capital assets
  • A lack of accountability for capital assets

General Red Flags

  • A refusal by accounting personnel to take vacations
  • Unwillingness to share accounting duties
  • Employee irritability or defensiveness
  • Complaints about inadequate employee pay
  • A lack of transparency in accounting
  • Rumors of unethical conduct
  • A history of corruption in the government
  • Financial decisions made by one person with little or no accountability
  • Undocumented journal entries
  • Untimely bank reconciliations
  • Inexperienced or lax accounting personnel
  • Missing accounting records

Just because a red flag exists does not mean that fraud has occurred, but it’s still important to know the signs. Often where there’s smoke, there’s fire. Teaching employees the signals of fraud can save your government a great deal of money.

To learn more about fraud prevention for governments, check out my book on Amazon.

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