Fraud in the Government Realm. Introduction. What is Fraud? My career began with a local government fraud in 1993

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1 Fraud in the Government Realm Introduction My career began with a local government fraud in What is Fraud? 3 1

2 Two Types of Fraud 4 Fraud Do not be think it is not happening 5 Your employees? 6 2

3 ACFE 2014 Report To The Nations On Occupational Fraud and Abuse 7 How Occupational Fraud is Committed Breakdown of All Occupational Fraud Schemes % of Cases & Median Loss Scheme % of Cases Median Loss 22.3% $100,000 Billing Non-Cash Misappropriations 21.0% 95,000 Expense Reimbursements 13.8% 30,000 Misappropriation of Cash on Hand 11.9% 18,000 Skimming 11.8% 40,000 Check Tampering 10.9% 120,000 Payroll 10.2% 50,000 Cash Larceny 8.9% 50,000 Cash Register Disbursements 2.8% 20,000 8 Victim Organizations Organization Type of Victim Median Loss 9 3

4 Schemes Scheme Type by Size of Victim Organization 10 Perpetrators Men vs. Women: 67% of frauds committed by men 33% of frauds committed by women $185,000 median loss from fraud committed by men $83,000 median loss from fraud committed by women Level of employment: 42% - fraud committed by employees 36% - fraud committed by managers 19% - fraud committed by owner/executive Source: 2014 ACFE Report to the Nations on Occupational Fraud and Abuse 11 Perpetrators Age of Perpetrator - Frequency 12 4

5 Perpetrators Age of Perpetrator Median Loss 13 Perpetrators Education of Perpetrator Median Loss 14 Other Statistics Average scheme lasted 18 months Typical perpetrator is first-time offender with clean employment histories Most exposed by tips Median loss caused by occupational fraud cases was $145,000 Organizations with some form of fraud hotline saw a 50% likelihood that a fraud would be detected by a tip 15 5

6 A Few Considerations Behavioral Red Flags of Perpetrators 16 Fraud Myths Here are some common myths about fraud: We don t have to worry about fraud because we have an audit? - As reported by the ACFE report only 3% of frauds are discovered by external auditors. External auditors are focused on material fraud and not looking at every transaction. People only steal cash and we don t touch cash so we don t have to worry? - The most common fraud schemes I have seen don t involve the theft of cash. Forgery, check tampering, credit card abuse and other types of disbursement frauds are much more common. 17 Fraud Myths (continued) We have two signatures required on checks so we don t worry about disbursements? - Financial institutions do not review checks for authorized signors. Checks can be easily forged or manipulated after they are signed by authorized signatures. We only have limited staff so there is nothing we can do? - Staff size limitations can promote an environment where fraud could occur. However, there are many practical steps an entity can take to mitigate a segregation of duties. An independent person receiving and reviewing an unopened bank statement (or reviewing online banking) is one of the best. Detailed review of financial statements and budget to actual reports. I am always happy to talk about fraud. 18 6

7 Fraud Myths (continued) It will not happen to us! - Frauds are common in all types and sizes of organizations. Most of the frauds I have been involved with have been committed by very nice people. We would miss the money because our budget it tight! - Biggest municipal fraud in U.S. History occurred in Dixon, Illinois. The embezzler took $53.7 million over 20 years. The annual budget is approximately $8.0 million a year. 19 Local Government Fraud Fringe Areas don t just focus on your system - Swimming Pools - Scrap metal - Fuel pumps - Fire Department s you are funding - Library s you are funding

8 Government Court System Bookkeeper (receipt fraud) - Judicial office of County government (annual receipts approximately $50,000) - Collected restitution and remitted money to the victims - Originally went in and made several recommendations They had a computer system that made no sense (bookkeeper said it was all the systems fault) Did not make timely deposits, no oversight by director, no training of staff, no one else in the office touched books - 6 months later we were asked to go back - They began making timely deposits by taking money to the County Treasurer's office - System seemed to be in better order but bookkeeper still went on with story after story

9 25 Contact Information Timothy J. Morgus, CPA, CGFM Partner Phone: Began public accounting career in Serves as Partner on audit engagements with counties, municipalities, local authorities, and various governmental agencies. Member of the Association of Certified Fraud Examiners GFOA for Pennsylvania Western Region State Board Treasurer GFOA Special Review Committee for Comprehensive Annual Financial Reports Technical Reviewer Federal Bureau of Investigation Pittsburgh Division 2015-XVI Citizens Academy Class Graduate Trustee of Butler Health Systems, Audit Committee Chairman Butler Hospital Foundation, Chairman of the Board 26 9