INTERNAL CONTROLS AND
FRAUD ISSUES IN LOCAL
GOVERNMENT
PRESENTED BY
PAUL E. GLICK
GLICK CONSULTING GROUP
EMAIL pglick@mindspring.com
A SURVEY OF FOLKS
REGARDING FRAUD

31% of All Americans are Dishonest

Another 40% are Situationally Honest (i.e., they will be
honest if it pays to be honest and dishonest if it pays to be
dishonest)

$200 Billion Employee Fraud Cost per Year Compared to
$11 Billion from Violent Crime

In Banks, 95% of Losses are from Employees and 5% are
Caused by Bank Robberies

In Retail, 70% of Losses are from Employees and 30% are
Caused by Shoplifters and Customers
Fraud and Abuse in The U.S.

U.S. Cost About $990 Billion A Year

Government And Public Administration Have A Median Loss
Of $93,000 Per Fraud Scheme

Average Organization Loses 7% Of Revenue

12% Of Cases In A Study Were Frauds That Occurred In
Government

Street Crime Only Costs The U.S. $4 Billion Annually
The Facts

Fraud Schemes Frequently Continue For Years Before They
Are Detected

The Typical Fraud In The Study Lasted 2 Years From The
Time It Began Until It Was Discovered

Frauds Are Much More Likely To Be Detected By A Tip Than
By Audits, Controls Or Any Other Means

Lack Of Adequate Internal Controls Was Most Commonly
Cited As The Factor That Allowed Fraud To Occur

Occupational Fraudsters Are Generally First-time Offenders
What Is Fraud?

It’s When Folks Are Ripping Off The
Government In Lots Of Different Ways

Fraud Is Like A Four Letter Word

Just Ignore It And It Will Go Away

It Will Never Happen To Us
Common Myths About Fraud

Most Folks Will Not Commit Fraud

Fraud Is Not Material

Most Fraud Goes Undetected

Fraud Is Well Concealed

Prosecuting Will Deter Others
Potential Cost Of Fraud

Loss In The Confidence In The
Government

Loss To The Reputation Of Innocent Third
Parties (i.e., The Remaining Staff)

Cost To The Perpetrator

The Public Loss
Potential Cost Of Fraud

Diversion Of Public Resources From Intended
Purpose

Loss Of Money, Assets And Time

Embarrassment, Guilt, Humiliation And Shame

Subsequent Management Decisions Are
Reviewed Under A Microscope

Any Investigation Turns The Government Or
Agency Inside Out
Personal Rip Offs For Glick

Send Banking Information
Bank of America
Wachovia Bank
TCF Bank
HSBC Bank
Catawba Valley Bank
Regions Bank
Bank of the West
Washington Mutual
Bank Financial
Huntington Bank
Smith Barney
Personal Rip Offs For Glick

Frank Senger - $20.5 Million

Chief Adeniran Aderogba - $10 Million

Dr Sikas Usman - 30% of $45.8 Million

Dr.Ahmed Kassim - $10.5 Million

Miss Caroline Williams – 30% Of $16.5 Million

Mr Jack Chow – No Amount

Jim Mcconville - $20 Million British Pounds
Personal Rip Offs For Glick

Richard H Mason – 10% On All Payments Made

Mr. Brendon Hopkins – 30% Of $26.5 Million British Pounds
(Twice)

Mr. Mark Johnson – Lottery - $2.5 Million British Pounds

Mr.Carlos Moreno – 50% Of $34.5 Million

Miss Joyce Awuse - $5.5 Million

Irs - $109.30

Dr Dansuki Dan - $25.5 Million
What Are Internal
Controls
What Are Internal Controls

A Plan Of Organization And All The
Methods And Measures Used By A
Government To Monitor Assets,
Prevent Fraud, Minimize Errors,
Verify The Correctness And Reliability
Of Accounting Data, Promote
Operational Efficiency, And Ensure
That Established Managerial Policies
Are Followed
What Are Internal Controls?

Said Simply “Techniques
Management Uses To Achieve Its
Objectives And To Meet Its
Responsibilities”
Internal Controls Are Actually:

A Coordinated Set Of Policies And
Procedures That Reflect A
Comprehensive Strategy For
Achieving Management’s Objectives
Why Are Internal Controls So
Important?

Because The Prevention Of Fraud Is
Critical And Costs Are High
Limitations On Internal Controls

Considerations Of Costs Will Prevent
Management From Ever Installing A
“Perfect System”

Controls Are Potentially Subject To
“Management Override”

Risk Of Collusion
A Basic Rule

More Is Not Necessarily Better

The Cost Of Excessive Or Redundant
Controls Could Exceed The Benefits

Employees May View Controls As
Unnecessary “Red Tape”
Session 5
The Internal Control
Environment
The Control Environment

Corporate Culture (Enron)

Does Management Believe That Internal
Controls Are Important To Achieving Its
Goals And Objectives?

Does Management View Internal Controls
As An Obstacle To Achieving Its Goals And
Objectives?
The Control Environment

The “Way We Do Things Around
Here”

Sets The Tone Of The Government,
Influencing The Control
Consciousness Of Its Staff
Management’s Attitude

A Person’s True Priorities Is One’s
Checkbook And Calendar

PG’s Checkbook - Horse Payments

PG’s Calendar - Work, Work, Work!
Management’s Attitude



What Is The Tone At The Top?
- Management
- Elected Officials

Will Management Allocate Resources To Internal
Controls?

Are There High Ethical And Professional
Standards?

Does Management Cut Corners?
Maintaining A Qualified Staff

Competent And Honest Staff

Up To Date Job Descriptions

Follow Appropriate Hiring Policies (E.G., Not Hiring A
Relative Or A Buddy)

Assign Authority And Responsibility

Ensure That Employees Are Trained

Review And Document Performance

Set Appropriate Performance Goals For Promotion
What Types of Public
Sector Fraud Exists
Profile of Fraud Perpetrator








Male Or Female (White Males Over 60?)
No Prior Criminal History (<8%)
Well Liked By Co-workers
Likes To Give Gifts/Compulsive Shopper
Gambling Problems Not Unusual
Long-term Employee
Rationalizes: Starts Small Or “Borrows”
Lifestyle Clues
General Observations Of A Fraudster









Male
Intelligent (Bored With The Job Routine)
Egotistical (Scornful Of Obvious Control Flaws)
Inquisitive (E.G., Tempted By The Discovery Of A
Computer Vulnerability)
A Risk Taker
A Rule Breaker
A Hard Worker
Under Stress
Disgruntled At Work
The Fraud Triangle
Perceived Opportunity
To Commit Fraud
Perceived Pressure
Facing Individual
Exacerbated
in Economic
Downturn
Person’s Rationalization
Or Integrity
Conditions Present When
Fraud Occurs

Incentive/Pressure

Opportunity

Attitude and Rationalization
Causes Of Fraud








Character And Personality
– Financial Stress
-- Addiction
-- Disaffection
-- Pathologies
Perceived Opportunity
- Permits Fraud
- Promotes Fraud
Who Commits Fraud?

Fraud Losses Caused By Managers And
Executives Were 16 Times Greater Than
Those Caused By Non-managerial
Employees.

Losses Caused By Men Were Four Times
More Those Caused By Women.

Those 60 And Older Were 28 Times Those
Caused By Perpetrators 25 Or Younger.
Generally, What is the Goal of A
Fraudster?

Cash, Cash, Cash
Types Of Public Sector Fraud

Receipts Fraud

Disbursements Fraud

Assets Fraud
Cash Schemes
Stealing Cash Funds Processed Or On
Hand
 Not Recording & Stealing The Cash
Receipts
 Under Ringing & Stealing The
Difference In Cash Receipts
 Altering Bank Deposits

Receipts Fraud

Lapping – Too Much Work!

Kiting – Bank Deposit Schemes

Granting Bogus Credit Memos

Forging Check Received
Receipts Fraud

Duplicate Payments

Charge Off Fraud – Bogus Write-offs

Disposal Fraud

Credit Card Manipulation
Disbursements Fraud

Personal Bills

Bid Rigging

False Claims (Fictitious Suppliers,
Kickbacks)

Conflict of Interest
Disbursements Fraud

Payroll Fraud (Ghost Employees,
Unclaimed Payroll Checks, Excess Payroll
Payments, Withholdings and W-2’s,
Vacation and Sick Time)

Travel Claim Fraud

Procurement and Credit Cards
Theft Of Assets Fraud

Petty Cash Fraud

Cash Register Theft

Consumable Inventory Theft

Capital Asset Theft

Using Assets For Personal Use
Red Flags

A Red Flag Is:



A Set Of Circumstances That Are Unusual In
Nature Or Vary From The Normal Activity.
A Signal That Something Is Out Of The
Ordinary And May Need To Be Investigated
Further.
Not About Guilt Or Innocence But Merely
Provides Possible Warning Signs Of Fraud.
Red Flags

Do Not Ignore A Red Flag–studies Of Fraud Cases
Consistently Show That Red Flags Were Present,
But Were Either Not Recognized Or Were
Recognized But Not Acted Upon By Anyone.

Sometimes An Error Is Just An Error–red Flags
Should Lead To Some Kind Of Appropriate Action,
I.E. An Investigation By A Measured &
Responsible Person, But Sometimes An Error Is
Just An Error And No Fraud Exists
Employee Red Flags

Employee Lifestyle Changes

High Employee Turnover

Significant Personal Debt And Credit Problems

Refusal To Take Vacation Or Sick Leave

Behavioral Changes

Lack Of Segregation Of Duties In A High-risk
(Vulnerable) Area
Employee Red Flags

Reluctance To Provide Information To Auditors

Photocopied Or Missing Documents

Weak Internal Control Environment

Unexpected Overdrafts Or Declines In Cash
Balances

Decisions Dominated By An Individual Or Small
Group
Employee Red Flags

Excessive Number Of Year-end Transactions

Management Displays Significant Disrespect For
Regulatory Bodies

Excessive Number Of Or Frequent Changes In
Checking Accounts

Accounting Personnel Are Lax Or Inexperienced
Employee Red Flags

High Employee Turnover Rate

Compensation Is Out Of Proportion

Decentralization Without Adequate Monitoring

Frequent Changes In External Auditors
Red Flags in Cash

Excessive Number Of Voids

Presence Of Personal Checks In Petty Cash

Unauthorized Bank Accounts

Excessive Or Unjustified Cash Transactions

Large Number Of Account Write-offs

Sudden Activity In A Dormant Account
Red Flags in Payroll

Inconsistent Overtime Hours For A Cost Center /
Department

Overtime Charged During A Slack Period

Overtime Charges For Employees Who Normally Would Not
Have Overtime Wages

Budget Variations For Payroll By Cost Center / Department

Employees With Duplicate Social Security Numbers, Names,
And Addresses

Employees With Few Or No Payroll Deductions
Red Flags in Procurement

Increasing Number Of Complaints About Services

Vendors Without Physical Address

Lack Of Physical Security Over Assets / Inventory

Payments To Vendors Not Included On An Approved Vendor
List

Vendor Address Matching Employee Address
Red Flags in Procurement

Purchases That Bypass Normal Procedures

Charges Without Shipping Documents

Vendor Payments Picked Up Rather Than Having It Mailed

High Volume Of Purchases From New Vendors
Profiles of an Government At Risk

Less Than 100 Employees.

Management Ignores Irregularities.

High Turnover With Low Morale.

Staff Lacks Training
Session 8
What Are Mitigating
Controls
Control Related Policies and
Procedures

Those Designed To Prevent The
Occurrence Of Errors And
Irregularities

Those Designed To Detect Errors And
Irregularities After They Have
Occurred
Or Top Ten Reasons
Frauds Beat Internal
Controls
And What Management Can Do About
It?
“Fighting the Last War”

Accountants Too Often Allow
Themselves To Focus Almost
Exclusively On Past Weaknesses
Rather Than On Current And Future
Exposures (Like Putting Up Traffic
Signals Only After An Accident
Occurs)
Establish A System Of Proactive Fraud
Policies – Don’t Wait For Something To Pop
Up!

Use Of The Analytical Review

Watch For Increasing Expenses,
Increasing Receivables/Decreasing Cash,
Increasing Revenue/Decreasing Cash

Use Fraud Assessment Questions With
Each Employee
Establish A System Of Proactive Fraud
Policies – Don’t Wait For Something To Pop
Up!

Enforce A Mandatory Vacation Policy With
A Senior Person Filling The Position For
Several Days

Enforce A Mandatory Job Rotation Policy

Periodically, Stage A Surprise Audit Of
Each Position
Detection of Fraud Schemes
Tip (46.2%)
 By Accident (20%)
 Internal Audit (19.4%)
 Internal Controls (23.3%)
 External Audit (9.1%)
 Notified by Police (3.2%)

Control Related Policies
 Authorization




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Properly Designed Records
Security Of Assets And Records
Segregation Of Duties
Periodic Reconciliations
Periodic Verifications
Analytical Review
1. Goin’ Through the Motions



Process Mentality
Just Doing The Steps In The Process
Not Thinking About What One Is Doing

Example: Two Signatures Required On Checks.
Both Check Signers Fail To Notice The Check Has
No Payee And Still Sign The Check

Remedy: Reinforce The Need To Pay Attention
And The Consequences For Failure
2. See No Evil, Hear No Evil


Blind Trust
Failure To Acknowledge Warning Signals

Example: Failure To Follow Up On A Customer
Complaint Of An Incorrect Bill For Service And
Relying On The Experienced And Valued Billing
Clerk’s Response That It Was Just An Error.

Remedy: Realize That Anyone Can Commit Fraud.
Assume Discrepancies Are Fraud And Prove To
Yourself It Is Only An Error.
3. It’s Good to be The King



Positional Immunity
Rationalizing That Controls Don’t Apply To Me
Because I Am In Upper Management.
Often Referred To As Management Override.

Example: Executive Director Doesn’t Report Leave
Used, But Still Gets Paid For Unused Leave
Annually.

Remedy: Identify Someone Within Or Outside The
Entity That You Can Report These Circumstances
To And Not Jeopardize Your Job.
4. New Kid on the Block


Situational Incompetence
New Employee Not In A Position To Question Why

Example: New Accounts Payable Clerk Questions
Why Purchases From A Certain Vendor Do Not
Require Bids, And Is Told That Such Purchases
Are Exempt.

Remedy: If You Are The Supervisor, Don’t Assume
New Employee Just Doesn’t Understand. Take
Their Questions Seriously And Ask Your Self Why.
If You Are The Employee, Ask More Than One
Person.
5. Where’s All the Time Gone?


Workload Overload
Not Enough Time To Perform Control Procedures

Example: Knowing That The Supervisor Is Too
Busy To Reconcile Accounts Receivable, A Billing
Clerk Steals Cash And Posts Unauthorized
Adjustments.

Remedy: Reevaluate Assignment Of Duties, And
When Needed, Demand More Resources By
Focusing On The Consequences Of Fraud.
6. Can’t We All Be Happy?


Conflict Avoidance
Responsible Employees Not Comfortable In
Confronting Other Employees

Example: A Supervisor Recognizes That The Cash
Drawer Is Always Short At The End Of The Day,
But Is Uncomfortable In Confronting The
Employee.

Remedy: Reinforce Supervisory Responsibilities.
Provide Employee Management Training. Don’t
Tolerate Poor Performance.
7. Where’s the Beef?


Informational Restraint
Responsible Employees Lack The Information
They Need To Identify An Improper Transaction

Example: An Accounts Payable Clerk Is Not
Provided A Contract That Includes A Not-toexceed Price Limit And Vendor Takes Advantage
By Over-billing.

Remedy: Reinforce With Employees The Openness
And Availability Of Records And Information.
8. It’s None of My Business


Behavioral Ignorance
Responsible Employees Ignore Behavioral Signs
Or Indicators Of Possible Fraud

Example: Management And Other Employees Fail
To Investigate Or Question An Employee That Is
Living Well Above Their Means Or Salary Level.

Remedy: Create An Environment Within The
Government That Fosters Ethical And Responsible
Behavior. Create An Anonymous hotline
9. It’s Over My Head


Informational Ignorance
Officials Ignore Fraud Warning Signs In Reports
Because They Don’t Understand The Reports

Example: Highway Patrol Fine Revenue Was
Embezzled And Monthly Budget Report Shows A
Potential Problem, But The Report Is Too
Complicated For Management And Governing
Board To Understand.

Remedy: When It Comes To Reports, Use The Kiss
Principle And Train The Users.
10. A Bad Apple in the Bunch


Ethically Challenged
Employees Responsible For Controls Are Just Not
Ethical And Morally Responsible Individuals

Example: Purchasing Supervisor Is Dishonest And
Convinces An Accounts Payable Employee To
Process Fake Invoices For Payment And Split The
Money Between Them.

Remedy: Don’t Hire Crooks.
To Summarize Internal Controls:





Provide A Favorable Control Environment
Provide For The Continuing Assessment Of Risk
Provide For The Design, Implementation And
Maintenance Of Effective Control Related Policies
And Procedures
Provide For The Effective Communication Of
Information (We Kind Of Skipped This Topic)
Provide For The Ongoing Monitoring Of The
Effectiveness Of Control Related Policies And
Procedures
We Are Finished

That Guy Can Talk, Can’t He?

Contact Paul @
pglick@mindspring.com