All of these headlines have something important in common:
- Former … Mayor Pleads Guilty, Gets Probation
- Embezzler Given Home Detention
- City officials in Court Soon
- 3 Ex- … Officials in jail; Town in ‘a Mess’
In each of these news stories, the public officials or employees were involved in crime or dishonesty. Employees who have the motive and opportunity to do so will sometimes steal from their employers, and cities and towns are not immune from fraudulent activities. Local governments can always suffer from theft from an outside source, but fraudulent activity often occurs from within, orchestrated by a previously trusted — and often times previously respected — employee or elected official.
Sources of fraud
The American Institute of Certified Public Accountants defines fraud as “an intentional act that results in a material misstatement in financial statements,” and employees and officials may have many reasons to engage in it. The AICPA and other organizations have used the “fraud triangle,” first developed by Dr. Steve Albrecht, who works in the fields of human resources and security for governments, schools and private industry.
The triangle identifies three critical things that come together to convince someone to take part in theft.
Internal controls
To protect a city or town against acts of dishonesty, it is important to have good internal controls in place. Here are common examples of internal controls:
- Segregation of duties – This ensures that no one person has the responsibility for transactions from beginning to end.
- Separation of functions – This divides transaction processing or functions so that different units or functional areas of the organization are involved in each. For example, an administrative assistant opens the mail and logs cash receipts before turning them over to the finance department.
- Physical asset control – Any movement of assets requires documents to authorize their movement, and may include physical restraints such as padlocks, fences and locked file cabinets.
- Signatures and countersignatures – Signatures provide evidence that the documents have been authorized and approved. Documents should not be valid until signed. Countersignatures demonstrate that two or more designated individuals have concurred on the approval of the document.
- Passwords and personal identification numbers – Use passwords and PINs for computer and mobile devices.
- Review processes and procedures – These steps increase the opportunity for discovering any fraud that has taken place.
- Focused audits – Internal audits with a very narrow focus can be done by internal management. This puts staff on notice that sensitive areas are being surveyed, which can deter fraudulent activity.
- Rotation of key personnel – This involves periodic rotation of personnel with other employees taking over the duties of an employee, preferably without advanced notice.
In addition to good internal controls, municipalities should also obtain crime insurance coverage, including employee dishonesty. If required by city ordinance, it should also purchase public official bonds. A public official’s bond guarantees the honest performance of a public official’s duties in accordance with the law or regulations, and includes the honest accounting of all funds entrusted to the official.
Crime coverage takes many forms, including employee dishonesty, employee theft, forgery/alteration and computer fraud. Blanket coverage is typically written on all employees instead of individual employees, unless certain employees are excluded.
The Municipal Association of SC-sponsored property and liability insurance pool, the SC Municipal Insurance and Risk Financing Fund, provides blanket crime and employee dishonesty coverage and staff can also assist with public officials’ bonds. For more information, contact Heather Ricard at hricard@masc.sc or 803.933.1258 or Robert Collins at rcollins@masc.sc or 803.933.1279.