How a Tax Commissioner Walks Away with $800,000

Day 29 of 30 Days of Fraud

The Theft

Some twenty years ago, I was working on an audit of a county tax commissioner’s office. We were noticing differences in the receipts and the cash collections.

Theft of cash

Picture is courtesy of AdobeStock.com

So one day I walk into the Tax Commissioner’s office. As I step in, I see several thousand dollars of cash laying on her desk. So, I remarked to her, “Haven’t made a deposit lately?” She laughed and said, “No, I’ve been too busy lately.”

I thought to myself, “Strange. She knows we’re here for the annual audit, and she has all this undeposited cash in open view. It’s as though she has no fear.”

The next day a gentleman comes into the room where we (the auditors) were working and whispers to me, “The Commissioner has a cocaine habit.” I did not know the fellow, so I wondered if the assertion had any merit. Regardless, this was shaping up to be an interesting audit.

Our audit disclosed unaccounted-for funds of over $300,000 in the year one. Year two, the differences continued and exceeded $500,000. After three years, the unaccounted-for amount was in the $800,000 range.

Why was she not removed? Tax Commissioners are elected in Georgia, so the only person that could remove her was the governor. The local county commissioners could not dismiss her.

Finally, the FBI was brought in. But even they could not prove who was stealing the money. Why? The tax office had two cash drawers and eight clerks. All eight worked out of both drawers. So when cash went missing, you could not pin the differences on any one person.

In addition, the books were a disaster, postings were willy-nilly. There was no rhyme or reason–what I call “designed smoke.”

The tax commissioner eventually went to prison for tax evasion. She made the mistake of depositing some of the stolen cash into her personal bank account, and the Feds were able to prove she had not reported the income.

The Weakness

The primary weakness was the lack of design in the collection process. Two or more people should never work from one cash drawer. Deposits were not timely made (and in many cases, not made at all). And then the books (mainly the tax digest) was not appropriately posted as collections were received.

The Fix

The primary fix was to remove the tax commissioner.

Next, each cash drawer should be assigned to only one person at a time.

Cash receipts should be written and the tax digest should be posted as tax payments are received.

Finally, deposits should be made daily.

Bribery – Can You Stop It?

Here are methods to lessen the threat of bribes being paid to your people

A bribe is seen as a charm by the one who gives it; they think success will come at every turn. Proverbs 17:8

The FBI performed a sting operation involving two mid-Georgia city council members. The Bureau’s court complaint alleges that two city council members contacted a city vendor requesting a bribe. The vendor, according to the complaint, had previously provided services to the city, but when the contract came up for renewal, the city officials sought monetary encouragement (also known as cash) to continue the arrangement.

Picture is courtesy of DollarPhotoClub.com

Picture is courtesy of DollarPhotoClub.com

The vendor’s president, once aware of the proposed bribe, contacted the FBI, which in turn conducted the sting. On the arranged date, the company CFO  delivered $20,000 in cash to the city council members (the conversation was recorded by Bureau agents); after that, arrests were made.

Detecting Bribes

This case reminds me of how difficult it is to detect bribes, and that there are usually two factors in identifying and prosecuting corruption:

* A tip (usually from someone within the organization) and
* Assistance from law enforcement

Corruption is predominantly discovered by tips or by accident though we will examine a couple of audit techniques below. The Association of Certified Examiner’s (ACFE) biennial fraud surveys reflect that over 60% of corruption-related frauds are unearthed by tips or by accident.

How common is corruption?

Very.

The ACFE’s 2012 Report to the Nation disclosed corruption was the root of 35% of all government fraud, and the percentages are much higher in other industries such as oil and gas, mining, real estate, and utilities.

How are organizations harmed?

Bribes harm organizations indirectly.

Vendors usually don’t absorb the cost of the bribe; they pass the expense along to the organization in the form of increased invoice billings, or the vendor will, in some cases, provide substandard products or services. Either way, the organization loses, and the villain walks away with cash or a free vacation or a free car or … well, you get the picture.

Auditor Techniques

One audit procedure that can be performed is to compare vendor costs over a period of time. I suggest the tests be performed and advertised (let everyone know) so that those tempted will think twice – the potential of detection is a strong deterrent.

How?

  1. Obtain the check register for multiple periods (e.g., three years)
  2. Sort the payments by vendor name, aggregate the total paid by vendor and period
  3. Compare the annual vendor totals (e.g., annual vendor totals for each of the three years)
  4. Investigate significant differences

Inflated invoices are a smoking gun. For unexplained increases, determine who approved the invoices.

Also, inquire within departments about faulty or substandard products received (another smoking gun); then, if significant, see who approved the related purchases – especially if the faulty product is repeatedly received.

Mitigating Corruption

To mitigate corruption, implement these controls (there are others, but here are a few suggestions):

  • Require sealed bids that are opened in the presence of multiple people 
  • Implement a whistleblower program (include vendors)
  • Require announced periodic vendor audits
  • Implement a conflict of interest policy
  • Implement a bribery prevention policy (include gifts)
  • For significant construction contracts, monitor all phases of the project, including solicitation of bids, awarding of the bid, development of the contract, on-site construction, and related billing, and contract change orders (don’t trust the builder to do this for you).

Your Thoughts

What corruption prevention strategies does your organization use?

Finding Free Summaries of GASB Statements

Do you ever need a summary of a GASB statement? Maybe you don’t have time to read the whole pronouncement and you need a quick overview. The Governmental Accounting Standards Board provides a summary of each GASB statement on their website. Below I show you an example search for a summary of GASB 68. Start at their website: www.gasb.org

How to Lessen Segregation of Duties Problems in Two Easy Steps

Fraud prevention in two easy steps

Darkness is the environment of wrongdoing.

Why?

No one will see us–or so we think.

As you’ve seen many times, fraud occurs in darkness.

Segregation of duties

Picture courtesy of DollarPhoto.com

In J.R.R. Tolkien’s Hobbit stories, Sméagol, a young man murders another to possess a golden ring, beautiful in appearance but destructive in nature. The possession of the ring and Sméagol’s hiding of self and his precious (the ring) transforms him into a hideous creature–Gollum. I know of no better or graphic portrayal of how that which is alluring in the beginning, is destructive in the end.

Fraud opportunities have those same properties: they are alluring and harmful. And, yes, darkness is the environment of theft. What’s the solution? Transparency. It protects businesses, governments, and nonprofits. And while we desire open and understandable processes, often businesses have just a few employees that operate the accounting system. And many times they alone understand how it works.

It is desirable to divide accounting duties among various employees, so no one person controls the entire process. This division of responsibility creates transparency since multiple eyes see the accounting processes–but this is not always possible.

Lacking Segregation of Duties

Many small organizations lack appropriate segregation of duties and believe that solutions do not exist or that fixing the problem is too costly. But is this true? Can we create greater transparency and safety with simple procedures and without significant cost?

Yes.

Below I propose two processes to reduce fraud:

  1. Bank account transparency and
  2. Surprise audits.

1. Bank Account Transparency

Here’s a simple and economical control: Provide all bank statements to someone other than the bookkeeper. Allow this second person to receive the bank statements before the bookkeeper. While no silver bullet, it has power.

Persons who might receive the bank statements first (before the bookkeeper) include the following:

  • A nonprofit board member
  • The mayor of a small city
  • The owner of a small business
  • The library director
  • A church leader

What is the receiver of the bank statements to do? Merely open the bank statements and review the contents for appropriateness (mainly cleared checks).

In many small entities, accounting processes are a mystery to board members or owners since only one person (the bookkeeper) understands the disbursement process, the recording of journal entries, billing and collections, and payroll.

One set of eyes on an accounting process is not a good thing. So how can we shine the light?

Fraud Prevention

Picture courtesy of DollarPhoto.com

Second Person Sees the Bank Statements

Allow a second person to see the bank statements.

Fraud decreases when the bookkeeper knows someone is watching. Suppose the bookkeeper desires to write a check to himself but realizes that a board member will see the cleared check. Is this a deterrent? You bet.

Don’t want to send the bank statements to a second person? Request that the bank provide read-only online access to the second person, and let the bookkeeper know that the other person will review bank activity.

Even the appearance of transparency creates (some) safety.

Suppose the second person reviewer opens the bank statements (before providing them to the bookkeeper) and does nothing else. The perception of reviews enhances safety. I am not recommending that you don’t perform the review, but if the bookkeeper even thinks someone is watching, fraud will lessen.

2. Surprise Audits

Another way to create small-entity transparency is to perform surprise audits. These reviews are not opinion audits (such as those issued by CPAs) but involve random inspections of various areas such as viewing all checks clearing the May bank statement. Such a review can be contracted out to a CPA or performed by someone other than the bookkeeper–such as a board member.

Segregation of Duties

Picture courtesy of DollarPhoto.com

Adopt a written policy stating that the surprise inspections will occur once or twice a year.

The policy could be as simple as the following:

Twice a year a board member (or designee other than the bookkeeper) will inspect the accounting system and related documents. The scope and details of the inspection will be at the judgment of the board member (or designee). An inspection report will be provided to the board.

Why word the policy this way? You want to make the system general enough that the bookkeeper has no idea what will be inspected but distinct enough that an actual review occurs with regularity (thus the need to specify the minimum number of times the review will be performed).

Sample Inspection Ideas

Here are some sample inspection ideas:

  • Inspect all cleared checks that clear a particular month for appropriate payees and signatures and endorsements
  • Agree all receipts to the deposit slip for three different time periods
  • Review all journal entries made in a two week period and request an explanation for each
  • Review two bank reconciliations for appropriateness
  • Review one monthly budget to actual report (to see that the report was appropriately created)
  • Request a report of all new vendors added in the last six months and review for appropriateness

The reviewer may not perform all of the procedures and can perform just one. What is done is not as important as the fact that something is done. In other words, the primary purpose of the surprise audit is to make the bookkeeper think twice about whether he or she can steal and not be caught.

Again multiple people seeing the accounting processes reduces the threat of fraud.

Shine the Light

The beauty of these two procedures (bank account transparency and surprise audits) is they are straightforward and cheap to implement but nevertheless powerful. So shine the light.

What other procedures do you recommend for small entities?

For more information about preventing fraud, check out my book: The Little Book of Local Government Fraud Prevention.