Fraud – Prevention, Policies and
Procedures
Roselli, Clark and
Associates
Certified Public Accountants
Introduction
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Presenters:
 Tony Roselli, CPA, Partner
 Chad Clark, CPA, Partner
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Cash handling
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Frequency of fraud
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Detection of occupational fraud
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Case studies
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Auditors’ responsibility to detect fraud
Introduction
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Typical deficiencies
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Implementation of procedures
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Obtaining a fraud policy template
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Conclusion
Cash Handling
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Cash handling = actual receipt of funds by a government
Takes on several forms: cash, currency, checks, credit
cards and on-line payments
Of these, cash is most susceptible to misappropriation
Treasurer maintains legal custodial responsibility
In most instances however, the Treasurer does not
handle the cash
Cash is typically handled at the department level by
clerks
Frequency of Fraud
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Inverse relationship between frequency of fraud and level
of economy
Vibrant economy = lower existence of fraud
Struggling economy = higher existence of fraud
Due to spousal layoffs, lack of pay raises, market
deterioration of portfolios and other financial related
situations
Fraud Triangle
Current fraud climate reaching historic levels due to
adverse conditions in the economy
Frequency of Fraud - continued
Level of Fraud
100%
75%
50%
25%
0%
Struggling economy
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Vibrant economy
Frequency of Fraud - continued
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Approximately 40% of our clients have been exposed to
some manner of fraud in the last 3 years
Mostly at the clerk level
Range from $2,000 to over $500,000
Lack of controls
Lack of policies
Lack of training
Easily preventable
Taxpayer is ultimately the victim
Frequency of Fraud - Fraud Triangle
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Frequency of Fraud - Types
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Building permits – 2 situations
Vending machine – 1 situation
Council on Aging – 2 situations
Transfer station – 2 situations
Recreation receipts – 1 situation
School lunch receipts – 1 situation
School lunch inventory – 1 situation
Petty cash reimbursements – 1 situation
Athletic receipts – 1 situation
Real estate tax refunds – 1 situation
Contract kickbacks – 1 situation
Detection of Occupational Fraud
Statistics per Journal of Accountancy – June 2010
IT Control
0.8%
Confession
1.0%
Notified by Police
1.8%
Surveillance
2.6%
External Audit
Document Exam
Account Reconciliation
By Accident
4.6%
5.2%
6.1%
8.3%
Internal Audit
13.9%
Management Review
15.4%
Tip - Whistleblower
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0.0%
40.2%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
Case Studies
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Building permits (both cases)
Cash collected was reduced and the reduced amount was
placed on Treasurer turnover report.
Amount reduced was misappropriated.
Treasurer and Accountant reconciled since they both agreed to
reduced amount.
No independent reconciliation was performed to the department
detail. This would have detected the theft.
Employee resigned in both situations, with no charges filed.
Case Studies - continued
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Real estate refunds case
Collector allowed unpaid real estate refunds to accumulate into
the millions of dollars
Collector Clerk created fictitious refund requests in the name of
acquaintances; in some instances, numerous times
The control in the system for refunds was bypassed and Clerk
was allowed to process requests manually
Collector did not reconcile with Accountant until year end
Over $500,000 was stolen over a 15 month period
Clerk is serving two years in jail and was ordered retribution
Case Studies - continued
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Recreation receipts case
Recreation Director created a separate bank account, with
Town’s name but without Treasurer approval
Cash received for activities was deposited partially to the
separate bank account and partially to the Town
Money was misappropriated from bank account
Over $100,000 was stolen
Director went to jail for one year with retribution
Off the books cash accounts are very common and should be
abolished
Case Studies - continued
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Petty cash reimbursements
Director for senior activities had created separate bank account
for seniors
Director incurred cost in administering the activity
Director reimbursed himself from separate bank account and
submitted reimbursement request to Town
In effect a double reimbursement
Was not discovered until Director was vacated and someone
else tried to reconcile separate account
About $80,000 was taken over a 10-year period
Case Studies - continued
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Vending machine
Same Director operated a soda machine
Town was unaware of the soda machine
Director kept funds and paid for supplies from cash receipts
Approximately $40,000 was taken over 10 years
Was not discovered until Director vacated position
Case Studies - continued
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School Lunch receipts
School lunch turnover manipulated prior to turnover to
Treasurer
No independent verification of turnover back to cashier register
performed, unknowing staff instructed to destroy records
Accountant and Treasurer reconcile since reduced amount is
reported amount
Deposits turned over infrequently thereby allowing manipulation
more easily
Director was relieved of their employment
Director was awarded unemployment benefits at hearing
Case Studies - continued
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School Lunch inventory
Cafeteria Director took turkeys to supplement catering business
Was caught through video surveillance
Claimed to be only be borrowing turkeys
Arbitrator sided with Director since there was no policy
prohibiting the unauthorized borrowing and assumed
subsequent payback of items
Director was awarded back pay for time since firing
School was required to give Director their job back
Case Studies - continued
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Transfer station
Patrons paid cash at gate to dump trash
Not all cash was recorded on turnovers to Treasurer
Scheme was discovered when Transfer Station Agent was
replaced and revenue spiked significantly
Difficult to prove if cash was in fact stolen so no charges were
filed
Auditor’s Responsibility To Detect
Fraud
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Statement on Auditing Standards (SAS) #99 – Consideration of
Fraud in a Financial Statement Audit
Issued in 2002 and effective 2003
This was a major change for audit firms
Due to fraud at World Com, Enron and other large SEC firms,
this SAS required auditors to focus on the risk that the financial
statements may be misstated due to fraud
However, the responsibility of preventing fraud was and
continues to be Management’s responsibility
Auditor’s Responsibility To Detect
Fraud – continued
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SAS 99 specifically states it’s Management’s responsibility to:
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Understand the risks of fraud
Set the proper philosophical tone
Create and maintain a culture of honesty and ethics
Develop and implement controls to prevent, deter and detect fraud
Develop procedures to monitor internal controls
Follow up with identified fraud risk areas communicated from your
auditors
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Auditor’s Responsibility To Detect
Fraud – continued
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Numerous audits typically result in findings
related to Management’s risk of preventing or
detecting fraud
These are communicated via a Management
Letter
It is Management’s responsibility to correct
these findings
Typical Deficiencies
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Inadequate departmental receipts policy
Lack of internal audits
Lack of segregation of duties
Receipt trends not monitored
No formally accepted fraud policy
No student activity policies
Lack of adequate training
Lack of background checks
Implementation of Procedures Departmental Receipts Policy
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Cash handlers are bonded
Use of pre-numbered receipt forms
Mandatory vacations for cash handlers
Reasonable turnover period, especially for
large amounts of cash
Secure, on-site storage between turnovers
Internal reconciliations of cash handler’s
documentation
Implementation of Procedures Internal Audits
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Internal audits by accounting or Treasury personnel
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Unannounced
Reconcile cash reported per turnover back to source document
such as number of permits issued
Cycle departments, so that all cash handling activities are
internally audited at least twice during the year
Add departmental reviews to annual audit process, such that
the independent auditor will audit 1 or 2 departments per year
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Implementation of Procedures Segregation of Duties
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Where practical, assure that cash handlers are independent of the
cash recording and cash reconciliation function
Always have reconciliations reviewed independently
Implementation of Procedures Monitor Receipt Trends
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Establish a spreadsheet that includes historical receipt
data (up to 5 years)
Determine revenue trends and create expectations based
on known facts
Investigate where revenue trends deviate from the
expectation
Expectations for Transfer Station could be comparing the
amount of trash produced from tipping fee invoices to
prior years and developing a revenue ratio
Implementation of Procedures Formal Fraud Policy
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Create a policy that communicates the City/Town
understanding of fraud to its employees
Designate a fraud officer
Emphasize the whistleblower statute within the policy
Review policy with Legal Counsel
Assure no contradiction with collective bargaining agreements
Formally accept policy through Selectmen or City/Town Council
Disseminate policy to all employees
Conduct training to assure understanding of policy
Implementation of Procedures Formal Fraud Policy
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Fraud policy template in a downloadable and
customizable form, available at:
www.roselliclark.com
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From home page, click on “Industries”
Then click on “Municipalities”
Go to bottom of page under caption “Key Note
Presentations”
Implementation of Procedures Student Activity Policies
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Develop policies to comply with MGL
Require reconciliations monthly
Train secretaries to assure proper cash
handling and cash disbursement procedures
Conduct independent audits every three
years
Implementation of Procedures Institute Formal Training
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Many times, departmental cash handlers are
not sophisticated bookkeepers
These cash handlers should undergo
adequate training procedures on a periodic
basis
This will help eliminate careless errors
Even we CPAs are required to take 80 hours
of training every two years
Implementation of Procedures –
Formal Background Checks
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Implement a policy of performing background
checks when hiring employees
Consider using CORI; which is required if
working with minors
Consider performing credit check as studies
show that there is a correlation between bad
credit and fraud
Conclusion
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The pressure and motivation to steal money is at
historic highs
City/Town officials need to understand this
Put policies in place to mitigate these risks
Once its happened its too late to say I should have
done something about it
End fraud and protect the taxpayer