How to Prevent and Detect Fraud: Implementing Internal Controls

Transcription

1 How to Prevent and Detect Fraud: Implementing Internal Controls League of Minnesota Cities 2018 Clerks Orientation Conference June 21, 2018 St. Cloud, Minnesota Mark F. Kerr, JD, CFE Special Investigations Director Office of the State This outline is an educational resource. This outline is not legal advice and should not be relied upon in lieu of legal advice. The contents of this outline may be changed at any time.

2 Office of the State Role and Responsibility Constitutional Office Financial oversight includes: Counties Cities School Districts Towns Police and Fire Relief Pension Funds Soil and Water Conservation Districts Port Authorities TIF Districts As well as approximately 150 other special districts

3 Office of the State Divisions Audit Practice Pension Tax Increment Financing Government Information Legal/Special Investigations

4 Legal/Special Investigations Division The Legal/Special Investigations Division investigates allegations of theft or misuse of public funds. It also provides legal compliance information and training to local government officials.

5 Types of Fraud Theft Minn. Stat Includes temporary taking Even small amount of public funds is a felony Embezzlement Minn. Stat and Refuse or omit to turn over public funds Felonies

6 Types of Fraud (continued) False Claims Presenting (Minn. Stat ) Allowing or paying (Minn. Stat ) Felonies Forgery Check forgery (Minn. Stat ) Altering a public record with intent to defraud (Minn. Stat or ) Felonies Misuse of Public Funds/Assets

7 Suspect Fraud? Reporting Requirement Minn. Stat City employee/officer who discovers evidence of theft, embezzlement, unlawful use or misuse of public funds or property Must promptly report to state auditor (in writing) and to law enforcement Identity of reporter is private data (Minn. Stat , subd. 2) Reporting form is on OSA website

8 The Fraud Triangle Motive/Incentive (Financial Pressure) Rationalization Opportunity

9 Key: Reduce Opportunity: Tools of Protection (Internal Controls): Segregation of Duties Other Internal Control Procedures Strong Control Environment

10 Segregation of Duties One person should not control an entire transaction or process (separate authorization, recording & custody) No employee should be in a position to commit fraud and then conceal it Build double-checks into process Cross-training (assignment/job rotation) Trust but verify

11 Problem: Employee Writes Self Unauthorized Check May involve: Check written to employee Recorded in records as void or as written to a vendor Amount changed from that approved Phantom vendor/employee

12 Solution: Check Writing Procedures Do not pre-sign checks or deposit slips Obtain all required signatures on checks (> 1) (e.g., Minn. Stat ) Be careful as to who has or controls signature stamps

13 Solution: Someone Else Reviews Bank Statements Review bank statement and canceled checks (optical images) by someone not involved with check writing. Amount altered? Void check cashed? Unauthorized checks written? Checks out of sequence? Checks without required signatures? Compare with claims approved In small cities, involve mayor or city council members Your review must be prompt. Minn. Stat (When the bank sends a statement, the burden shifts to the customer to promptly notify the bank of unauthorized payments.)

14 Solution: Involve The Bank No cash withdrawals. No cashing of checks written to city. No account transfers without written authorization. Up-to-date authorized signatures.

15 Solution: Involve The Bank (cont d) No accounts should be created without council resolution. Periodically obtain from bank a list of all city accounts including any account using city s tax I.D. number. Consider moving to Positive Pay system.

16 Issue: Phantom Employees or Vendors Solution: Prevent phantom employees & vendors Separate incompatible duties: Authorize vendor to be established Authorize payments to vendor Enter payments into accounting system

17 Problem: Special Risk of Cash Receipts Permits Fees Fines Solid waste/recycling centers Park & recreation Licenses Copies of records Risk increases in small cities/departments Skimming Lapping

18 Problem: Receipts Not Deposited Skimming Cash removed prior to receipt (unreceipted cash) Lapping Receipted cash replaced with unreceipted checks

19 Solution: Build in Double Checks Someone other than person collecting money compares items sold to money collected (movie theatre example) Person collecting money is not person preparing deposit Person collecting money receives periodic report of deposits Second person OKs all voids/refunds Small cities or departments: involve elected officials or other employees

20 Solution: Further Internal Controls for Receipts Daily deposits Reconcile receipts with deposits daily Do not leave receipts unattended Know the amount in any change fund (starting balance) Consolidate cash collection points Periodic report of deposits to department collecting payments

21 Solution: Further Internal Controls for Receipts (cont d) Pre-numbered receipts for all payments/sales Note if payment is by cash or check (& check number) & compare to deposit Deposits made intact Beware of voids & refunds No cashing of personal checks out of undeposited receipts No borrowing from public funds (no IOUs or markers )

22 Problem: Unauthorized Personal Payments City funds used for personal purchases Credit card Petty cash Expense reimbursements Electronic fund transfers

23 Solution: Internal Controls for Personal Payments Require original invoices & original itemized receipts ( slice & dice ) Reference claims approved (with amounts) in minutes Specific vendors, not just credit card company, on claims list approved by city council

24 Solution: Internal Controls for Fuel Purchases Maintain fuel purchase log for city vehicles Who is making purchase Type & amount of fuel purchased Vehicle being fueled & odometer reading Date, time & location of purchase Require original, detailed receipts Monthly review Calculate fuel consumption Unleaded fuel for diesel vehicle?

25 Problem: Misuse of City Property/Time Timesheet fraud Personal use of city vehicles/ equipment

26 Solution: Written Policies on Internal Controls Use of city property Check handling, cash collections & EFT procedures Employee and travel expenses OSA Statements of Position: Credit cards Petty cash (Imprest Cash Fund Timesheets Why? Avoid problems Allow discipline where appropriate Consistency for all employees Sets environment

27 Problem: Weak Control Environment Disengaged or otherwise engaged city council Employees reluctant to voice concerns No action taken when noncompliance with internal controls, late deposits or reports City council and management fail to set the tone at the top

28 Solution: Control Environment The same rules apply to all Don t belittle internal control procedures Don t allow management to override procedures Avoid conflicts of interest (Minn. Stat ) Appropriate discipline for violations Be alert to employee s outside interests It s the public s money

29 Misconceptions The accountants/auditors are responsible for internal controls It can t happen here Only big entities (with big budgets) can have internal controls

30 Misconceptions (continued) We have an accounting policy & procedure manual, so we re all set We copied the neighboring city s manual, so we re all set

31 Suspect Fraud? Other Considerations Criminal? Disciplinary action? Insurance coverage? Get advice

32 Website: Statements of Position Investigative Reports Internal Control Letters E-Updates (Avoiding Pitfalls) Reporting Forms And More...

33 Thank you! Office of the State 525 Park Street, Suite 500 St. Paul, Minnesota, David Kenney (651) Mark F. Kerr (651) This outline is an educational resource. This outline is not legal advice and should not be relied upon in lieu of legal advice. The contents of this outline may be changed at any time.