Fraud and Prevention in Local Governments
What Can I Do?
By Jamie Rivette, CPA, Principal, Yeo & Yeo CPAs & Business Consultants
The term “fraud” is used and heard often these days. As a government employee, it is important to know the definition of
fraud and the best way to prevent it from happening in your organization.
Fraud is defined as: A false representation of a matter of fact—whether by words or by conduct, by false or misleading
allegations, or by concealment of what should have been disclosed—that deceives and is intended to deceive another so
that the individual will act upon it to his or her legal injury.
There are three main categories of fraud: financial statement fraud, corruption, and asset misappropriation. The most
common type of fraud in a government entity is asset misappropriation. Asset misappropriation occurs when a third party
or employee abuses his or her position to steal from an organization.
The following are five forms of asset misappropriation commonly found in governments:
1. Stealing or misusing non-cash assets – using a government vehicle for personal use, stealing government owned
equipment
2. Billing – submitting invoices for fictitious goods, services, or purchases
3. Skimming – stealing cash before it is recorded/deposited
4. Payroll – padding hours or creating fictitious employees
5. Bribery – receiving something of value to influence a decision
This leads to the question, what can I do to prevent fraud from happening at my municipality?
The following are five tools for fraud prevention:
1. Establish strong internal controls. The most important step after identifying fraud risks is to establish procedures
to mitigate these risks. This is achieved through internal controls. Management is responsible for establishing and
maintaining a system of internal controls over accounting procedures as well as all assets belonging to the
governmental unit. Internal controls are policies and procedures designed to provide reasonable assurance that
assets are safeguarded against unauthorized use and disposition.
2. Implement hotlines (telephone, email, website, etc.) to receive tips from internal/external sources that can be
pursued immediately.
3. Perform surprise audits (unplanned audits of petty cash, inventory, etc.)
4. Data analysis to analyze trends and help identify fluctuations in operations.
5. Train employees to recognize common signs of fraud (incentive or pressure; opportunity; and rationalization).
Common signs include:
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An employee’s lifestyle appears inconsistent with their income level
An employee is overly nervous about audits
An employee who handles cash or signs checks does not take allowed vacations
Duplicate or out-of-sequence check numbers appear on the bank statement
Payments are made to unusual vendors or for unusual amounts
Instances of fraud are most likely to be detected by tips. It is not sufficient to use internal controls as the sole tool for fraud
prevention. It is important to have a solid code of conduct or ethics policy that is followed by governance. It is also
essential to lead by example, set a strong tone at the top, communicate zero tolerance for fraud, enforce the code of
conduct policy and behave ethically.
Jamie L. Rivette, CPA
Jamie L. Rivette, CPA is a Principal and serves in the audit department of the Saginaw office of Yeo & Yeo. She is a member of the firm’s Audit
Team and co-leader of the Government Services team. She serves on the Michigan Government Finance Officers Association Standards Committee
and is a reviewer for the Government Finance Officers Association Certificate of Achievement for Excellence in Financial Reporting program.
Contact Jamie via e-mail at jamriv@yeoandyeo.com or call 989.793.9830.