Fraud schemes related to governmental entities, including municipalities, public schools, charter schools, educational service entities and government agencies, seem to be in the news regularly.  Based on our experience, the following are some examples of basic fraud schemes to be aware of at governmental entities, information on how or why these frauds occur and some controls that may help prevent them from happening.

Various types of credit card fraud can occur at governmental entities.  Although there are many variations on the schemes, these credit card frauds primarily consist of unauthorized or inappropriate usage of credit cards by staff members and government officials for personal items, or unauthorized payments made to credit card companies for an individual’s personal account.  Aside from an individual’s motivation and rationalization, credit card fraud occurs at governmental entities as a result of poor internal controls, including the ability to obtain a card, unnecessarily high credit limits available, physical access to the cards and/or card numbers, failure to monitor usage or submit supporting documentation and a lack of documentation review at appropriate levels of management prior to payments being processed.

One method to help improve internal controls related to credit cards is to use purchasing cards (“P-Cards”) instead of credit cards.  P-Cards can limit single transactions and daily and monthly spending to specific card holders and may only be used with particular vendors.  Additionally, P-Card usage may help simplify the timing, data entry and reconciliation issues at an organization.  However, it should be noted that the use of P-Cards does not completely eliminate the possibility of credit card fraud.

Payroll fraud may also be prevalent at governmental entities, particularly in larger organizations.  These fraud schemes could include false or “ghost” employees, who are paid by the organization but perform little or no actual work.  Payroll schemes can also involve falsified or overstated wages for actual employees.  Payroll fraud tends to occur where there is a lack of segregation of duties between payroll, timekeeping and human resource functions and a lack of oversight by the finance and human resource departments.  Particularly disconcerting is that payroll fraud in governmental entities can be initiated by senior officials who override established controls.   Methods to assist in controlling payroll fraud include appropriate segregation of duties, periodic matching of payroll to an approved employee list, confirmation that personnel files exist for each employee, confirmation that duplicate addresses do not exist in payroll and review of actual checks and endorsements to ensure there are not multiple paychecks to the same individual.

Because many governmental entities handle cash as a part of their operation, larceny of cash can also be prevalent.  The physical security of cash is fundamental to mitigate the risk of loss.  To avoid cash from being stolen, the individual tasks of cash receipts, cash counts, bank deposits and reconciliations should be segregated and regularly monitored and verified.  Also, mandatory job rotations and vacations should be enforced, and surprise cash counts should be regularly performed.

Many other examples of fraud at governmental entities include procurement fraud, including the administration of contracts, and performance schemes such as change order abuse and manipulation of figures to keep or receive funding from another government source.  To help prevent or deter fraud, messages of honesty, transparency and fiduciary responsibility should start from senior officials and executive management – referred to as the “Tone at the Top.”  Other high-level methods to prevent or deter fraud include a regular assessment of fraud risk areas, evaluation of internal controls and the implementation of specific fraud prevention programs.  For more information on fraud prevention, fraud risk assessments and specific internal control procedures for governmental entities, please contact Thomas Pratt or Brian Webster.

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This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter.

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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

© 2019 Schneider Downs. All rights-reserved. All content on this site is property of Schneider Downs unless otherwise noted and should not be used without written permission.