How does an organization protect itself from wasteful, abusive, or fraudulent financial and operational practices? Local governments are especially susceptible to these types of practices. Unfortunately, many smaller local governments have no plan in place to protect themselves from either waste, abuse or fraud. The average dollar loss for fraud of a local government is $92K. This statistic was taken from the ACFE 2018 Report to the Nations. It is extremely important for local governments to be proactive in fighting against waste, abuse, and fraud. We hope this article will provide you with ideas to combat wrong behavioral practices and protect public funds. Before we dive right into tips on detecting and preventing wrong unethical behavior, let’s define waste, abuse, and fraud.
Waste and abuse are similar as they involve actions that are inconsistent with sound fiscal, business, or accepted behavioral practices. Fraud is considered an illegal practice and the perpetrator intended to perform the fraudulent activity. For example, entertainment and travel expenses are prone to abuse and waste. If there is no legitimate business reason for the travel or entertainment, chances are the local government has succumbed to wasteful or abusive spending. Furthermore, an example of fraudulent activity would be stealing cash from a customer payment and the customer’s balance still shows as ‘owed’ in the accounting software. Chances are the bookkeeper (perpetrator) will eventually ‘write-off’ the balance and the local government would never realize the funds were stolen. As you can see the second example, the perpetrator intended to steal the cash as opposed to the first example wasted government funds. Now that we have a basic understanding of waste, abuse, and fraud, let’s review three powerful tactics to protect yourself.
THE GREEN BOOK STANDARDS FOR INTERNAL CONTROL IN THE FEDERAL GOVERNMENTS
Leading by example is crucial to fighting against any type of inappropriate behavior. If those charged with governance or upper management do not show integrity and ethical values, chances are any new policies or procedures will “fall on deaf ears” as the saying goes.
This concept is part of the GREEN BOOK’s internal control principles. The tone at the top can be a driver or a barrier to protecting the local government from waste, abuse, or fraud. Management with oversight of those charged with governance will establish policies and procedures, communicate and educate the rest of the staff of the organization. What should Management communicate? Good question! A good internal control system is vital to the well being of the organization.
At a high level, there are five internal control components and 17 principles. These components include control environment, risk assessment, and control activities, information and communication, and monitoring. The tone at the top would be placed with the control environment. This component needs to communicate the organization is committed to integrity and ethical values, ensure those charged with governance exercise their authority responsibility, establish structures, reporting lines, authorities, and responsibilities, educate its workforce, and hold the staff accountable. Risk assessment is to identify and analyze risks (fraud, waste, abuse), identify those risks that could significantly affect these internal controls, and provide appropriate objectives. The control activities speak to the business operations and the risk these activities are vulnerable to waste abuse and fraud. Information and communication speak to how the organization will inform and communicate to staff, external vendors, etc. Monitoring speaks to how the organization will ensure these internal controls are working as intended. An exhaustive read on this subject can be found by clicking on this URL. Monitoring these internal controls periodically is a safety mechanism for you to ensure the local government’s internal controls are working as intended and assists in improving these controls.
TIP #1: SPENDING POLICY
A non-tolerant spending policy sends a strong message to the rest of the organization that personal purchases and overspending won’t be allowed. Staff and management are less prone to abuse or waste if the policy reprimands for breaking the policy. A policy does not work if there is no follow through. The organization needs to be prepared to follow through with the reprimands placed in the policy. Depending on the situation the organization would at minimum ‘write the personnel up’ or at the other extreme terminate the personnel. Educate your personnel of the seriousness of this policy and its consequences if the policy is not adhered to. The mere fact of a policy where the staff understands the consequences of the matter will prevent wrong behavior. Of course there are limitations to this tip and this leads us to tip #2.
TIP#2: DATA ANALYSIS
In almost every organization, there will be personnel who seek to personally benefit at the expense of the employer. The government is no exception. One way to protect yourself is using technology as a tool to detect waste or abuse. Data analysis software has made it feasible to analyze entire populations of mass amounts of transactions and associated data to identify indicators of waste and abuse.
First, data analytics flag any signs of abuse or waste. This need not mean waste or abuse is present, but it does warrant further investigation. Second, data analytics can be used to analyze if purchases are aligned with a personnel’s job duties and flag those purchases which are not. Third, utilizing software saves the team (likely finance) time since the software is flagging the transactions. The saved time can be spent on other value-added duties. Data analytics is important but it does have its limitations. At times, collusion and other measures are not detected by data analytics. For this reason, we will explain tip #3.
TIP#3: WHISTELBLOWER PROGRAM
Policies and data analytics do a good job in detecting and preventing waste, abuse, or fraud but they have their limitations. Often, government employees who are committed to following the rules and these employees become aware of a situation that just doesn’t seem right or strange. Perhaps, they see wasteful or abusive behavior otherwise undetectable due to collusion or other measures. While policies and data analytics won’t necessarily pick these behaviors, a whistleblower may. A whistleblower may not even be part of the organization. S/he may be a citizen, vendor, or customer.
One aspect of the whistleblower program is the whistleblower’s identity isn’t needed. S/he can call/email and communicate the situation and the organization doesn’t need to know her/his name, phone number, address, etc. While some individuals are comfortable with their identity being known when s/he blows the whistle but others do not. This is, essentially, why its imperative that all government organization have an avenue to allow individuals with helpful information to come forward without intimidation or fear.
According to the ACFE 2018 Report to the Nations, the whistleblower program was the best tactic to detect fraud. 40% of the cases where fraud was detected came from a tip. A whistleblower program is an avenue where the ‘tipster’ or whistleblower can leave comments to help the organization stop unethical behavior. The second most useful tactic ‘Internal Audit’ detected 15% of fraud cases. As you can see the whistleblower program not only is the best but beat the second best tactic by 25%! It can be argued this the most important and best way to detect fraud, waste, and abuse.
Make sure the whistleblower program includes those outside the organization. According to the ACFE 2018 Report to the Nations, 32% of the tips that led to fraud detection came from people outside the organization and 14% came from an anonymous source. These stats behoove any organization to allow outsiders to communicate any wrong behavior.
FINAL THOUGHTS
Local governments are just as susceptible to waste, abuse, or fraud as any other organization. It is crucial for each and every government to protect themselves as they are stewards of public funds and owe the public the security and assurance that public funds are used wisely and responsibly. Always remember the tone at the top. Lead by example first. Second, create policies and procedures. Third, communicate and educate the importance of integrity and ethical behavior.
If you would like to speak with me, I am available. Please email me at david@dfarnsworthcpa.com or call me at (408) 780-2236. Have a great day!
David Farnsworth, CPA
P.S. We are on a mission to help local governments with fraud prevention and governmental finance. We exist to help eliminate abuse, wasteful spending and fraud. Our goal is to help you run a transparent financially responsible District or Agency. When you’re ready, here are a few ways we can help right away:
- Sign-up to our monthly newsletter here. We cover topics ranging from fraud prevention, financial reporting, government budgeting, etc.
- Take our fraud risk assessment (link to assessment here) We’ll give you specific recommendations on how to improve your situation right away.
- Receive our free fraud prevention package (click this link to schedule a meeting)
- Jump on a video conference call to get specific fraud prevention recommendations (click this link to schedule a meeting).
- Request a proposal to perform the financial audit. request for proposal.