How to Prevent Fraud in Your Government

March 1, 2020 | Article

Fraud can impact any type of organization and cause severe damage. Governments in particular are prime targets for fraud. Knowing what to look for and ways to prevent fraud before it happens are essential to the well-being of any governmental agency, regardless of size.

Why are governments so vulnerable to fraud?
Governments can be highly susceptible to fraud for many reasons:

  • Segregating duties with smaller governments is difficult (if not impossible). There might not be enough people cross-trained to fill in and cover positions in addition to completing regular review procedures.
  • There can be a lot of cash—physical cash—coming through the door. Physical cash can be hard to secure, even with strong internal controls.
  • Governmental organizations often have long-term employees, many of whom are working in high-ranking positions. The highest dollar losses related to fraud can be traced to long-term, trusted employees. An incident in Dixon, Ill. involving a long-term employee embezzling government funds cost the city $53 million.
  • There are often different divisions and several moving parts within governments. Anytime you have lots of moving parts, you have opportunities for problems to occur.

These types of situations allow fraud to occur within governments. This fraud can come in the form of unauthorized payroll payments or expense payments, shortage of cash, false vendors, ghost employees, kickbacks, bid rigging, bribery and extortion, to name a few common schemes. With the longevity of employees, these schemes can take years before they are discovered.

Did you know?
The average fraud scheme lasts 16 months.

The Role of the Council, Audit Committee and Board
If you find yourself on a council, audit committee or government board, it’s important to understand your roles and responsibilities. These positions typically include a duty of care regarding oversight for the government’s operations as well as an understanding of fraud risk and the task of establishing committees for managing fraud risk.

These duties become even more all-encompassing if you find yourself on the audit committee. Responsibilities can include such roles as overseeing audit functions, monitoring internal controls, code of conduct compliance, investigating/initiating the investigation of allegations of fraud and monitoring adequacy of insurance protection.

Sharing your time and talents isn’t all recognition and roses. There’s also a level of personal liability. Ignorance to fraud risks without action can include removal from the position and damage to a reputation. In some circumstances, there may be civil damages for negligence.

Fraud Prevention Tips for Your Government
While you can’t eliminate fraud in your government entity entirely, there are steps you can take to prevent it before it starts or at least catch it early on.

  1. Tone at the top.
    If the top of the organization, including its board or governing body, isn’t committed, there is no way to prevent or eliminate fraud issues. Create an environment and culture emphasizing ethical behavior. The governing body is the check and balance of management. Having a questioning, skeptical view is essential.

  2. Internal controls and review procedures.
    Ensure internal controls and processes are in place to mitigate fraud risk. Internal control weaknesses are responsible for nearly half of fraud incidents. Consider using data analytics and information to scour your departments for unusual trends and patterns on an ongoing basis.

  3. Policies and procedures.
    Implement well-documented, effective accounting processes and procedures, as well as a fraud policy. Create a fraud prevention program and have a fraud policy in place. This should begin with the hiring process by establishing pre-employment background checks. It should also continue into employment by updating policies and job duty descriptions on a regular basis.

  4. Segregation of duties.
    Ensure segregation of duties is established, effective and reviewed on a regular basis. Cross-train employees for job duty rotations. Do not allow an individual to maintain or reconcile all financial records.

  5. Employee dishonesty coverage.
    Review insurance policies for employee dishonesty coverage and consider the cost benefit of increased premiums for protection if something were to happen.

  6. Anonymous third-party reporting systems.
    Forty percent of frauds are uncovered by anonymous tips, showing the importance of having an avenue for employees to report concerns without fear of retribution. This should include a whistleblower policy and hotline and routine fraud risk assessments.

The Importance of Understanding Fraud’s Impact
Government organizations have several factors, which make them more highly susceptible to fraud. By understanding major risk areas and developing preventative policies and procedures early on, you can work to reduce the fraud risk to your organization.

The key way to prevent fraud from occurring is to begin with the right tone at the top, followed by prevention mechanisms that allow for segregation of duties, regular review of processes and swift, documented action if misconduct occurs.

What do you do if fraud does occur?

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