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Internal Controls for Governmental Entities Michigan Association of Municipal Clerks June 25, 2015 Sarah L. Jennings, CPA, CFE Principal Maner Costerisan
Internal Controls for Governmental Entities
Michigan Association of Municipal Clerks June 25, 2015
Sarah L. Jennings, CPA, CFE
Principal Maner Costerisan
What we will cover…
Trends of fraud schemes Common types of fraud What we can do Other Considerations Case Studies
2014 Report to the Nations on Occupational Fraud and Abuse
Typical organization loses an estimated 5% of annual revenues to occupational fraud
Organizations with < 100 employees had the highest frequency of fraud at 30.8%with a median loss of almost $154,000
2014 Report to the Nations on Occupational Fraud and Abuse
Billing schemes were cited as the most common scheme small organizations, in over 40% of cases Most common detection method in small organizations was tip (over 40%)
Victim Organizations – by Type
Victim Organizations – by Size
Victim Organizations – Scheme Type
Duration of Fraud by Scheme
Victim Organizations – Industry
Frequency of Scheme – Industry
2014 Report to the Nations on Occupational Fraud and Abuse
Most perpetrators (82% of cases) were NEVER charged or convicted
Hind site is 20/20 – there were red flags in over 92% of the cases
Living beyond their means Unusually close relationships with vendors Excessive control issues Financial difficulties
Red Flags
What is going on out there???
Pressure/Need Rationalization
Opportunity
Common Types of Fraud Asset Misappropriation Corruption
Conflicts of Interest Bribery Illegal Gratuities Economic Extortion
Fraudulent Financial Reporting Financial Non-Financial
Common Types of Fraud – Asset Misappropriation
Cash Fraudulent Disbursements
Expense reimbursement and credit cards Purchasing and billing Check tampering Payroll
Larceny Skimming
Non-Cash Misuse Larceny
Corruption
• The wrongful use of influence to procure a benefit for the actor or another person, contrary to the duty or rights of others – Conflicts of interest – Bribery – Kickbacks – Illegal gratuities – Economic extortion
Corruption – conflict of interest
• Investment ownership in a supplier or competitor • Purchasing of goods or services through a broker
or middleman that the purchaser controls • Acceptance of inappropriate gifts • Involvement of other business ventures with
contractors • Purchaser enters into unapproved employment
negotiations with a contractor/supplier
Corruption – bribery
• Inappropriate or excessive gifts • “Loans” (whether repaid or not) or guarantees
of loans • Inappropriate or excessive favors • Personal discounts on items or services • Cash payments
Corruption – kickbacks
• Type of bribery • Personal kickbacks for directing excess
business to vendor • Vendor returning part of purchase price to
influence future purchases
Corruption – illegal gratuities
• Similar to bribery • Difference only in proof that gratuity was
given to influence an official act
Corruption – economic extortion
• The flipside of bribery • Government employee or official demands a
bribe or kickback for payment or contract
Red Flags of Corruption
• Internal • External • Analytical
Purchasing and Billing PROBLEM
False vendors Actual vendor, false charges Mailing address changes Personal purchases
Purchasing and Billing SOLUTION
• Thorough vendor approval process • Review for duplicate vendors • Compare vendor addresses to employee
addresses • Review reports for amounts under specified
threshold • Review year-to-date vendor payment totals
Non Cash Problem
• Theft or misuse of inventory, supplies or property of the Township
Non Cash Solution
• Periodic property verifications (fixed assets) • Supplies restriction and analysis • Periodic machine hour review
Payroll PROBLEM
Ghost employees Unauthorized hours Unauthorized rates
Payroll SOLUTION
• Review payroll register – specifically looking at year to date totals
• Hour approval at the appropriate level • Appropriate authorization and access levels
Expense Reimbursement and Credit/Purchase Card
PROBLEM • Educational books • http://www.salesreceiptstore.com/ • http://www.smileygenerator.us/fake_receipt/
Expense Reimbursement and Credit/Purchase Card
SOLUTION • Require detail receipts for all purchases • Require approval at a reporting level above
the employee • Periodic review of “black hole” accounts • Compare calendar to mileage/conference
Skimming PROBLEM
Theft before the revenue was recorded Fees collected and not received or recorded by the organization Cash collected for sales but the sale not recorded
Skimming SOLUTION
• Budget - have an expectation of revenue • Compare historical results for different time
periods (more than 1 event or period) • Reconcile cash timely • Require multiple individuals to count cash • Count down drawers daily, or at each shift
change if possible • Utilize a numerical sequence of receipts • Require sign off on all receipts
Larceny PROBLEM
Theft after the revenue was recorded Refunds entered Credits to receivables
Larceny SOLUTION
• Budget - have an expectation of revenue • Review refunds and credits issued monthly
(potentially more frequently to begin the process)
• Count down drawers daily, or at each shift change if possible in order to maintain accountability
Check Tampering PROBLEM
Forged authorized signature Altered payee Altered amount
Check Tampering SOLUTION
• Review cancelled checks periodically • Review for unusual check runs or manual
checks
What we can do
Education and communication Internal Fraud Risk Assessment Documented Policies and Considerations
Education
Definitions Tone at the Top Report abuse
Perpetrator to authorities Scheme to colleagues
Repeat annually or with any turnover
Internal Fraud Risk Assessment
Employee Assessment Physical Controls Knowledge and Assessment of the Schemes Vulnerability Assessment
Receipts Disbursements Payroll
Questions to Ask Yourself Receipts
How would you know if something didn’t get there that should have?
Disbursements Who approves? Who signs? Who reviews what cleared the bank?
Reconciliation/Closing Who gets the statements or has access to online activity? Who compares the financial institution statements to the internal reports? Who sees cancelled check images?
Internal Controls - Receipts
Register sales reconciled at each shift change to drawer cash, at minimum on a daily basis Initial cash listing maintained for all cash and checks and reconciled to bank deposits Remote capture deposit utilized Receipts issued in sequential order Reconciliation of receivable aging monthly Accounts receivable clerk - restricted access to create new customer accounts
Internal Controls - Disbursements Established and documented procedures for new vendors
Accounts payable clerk – restricted access to create new vendors
Positive pay solutions with your financial institution Monthly review of vendor totals Dual signature requirements Review of vendor account details and transactions
Disbursements - Concluded After signature, checks not returned to the preparer Cancelled check images returned from the bank or available for review Payments made to employees reviewed for appropriate authorizations, by approved individual Supporting documentation required for all expense reimbursements and Township credit card charges
Internal Controls - Payroll
Payroll clerk - restricted access to HR module Cannot input new employees Cannot input rate changes
All time sheets approved at a level above the employee Review direct deposit listing – including account number
Payroll - Concluded
Review of payroll register Checks distributed by someone other than the payroll clerk Detail review of deductions report Detailed review of payments made on behalf of employees for retirement options
Internal Controls - Reconciliation/Closing
Journal entry control and review Who does them and what can they adjust?
Reconciliations reviewed and approved at an appropriate level and on a timely basis Documentation of all reviews Management should receive financial statements (activity as well as statement of position) monthly
Reconciliation/Closing - Concluded
Bank statements received by and reviewed at an appropriate level monthly (this can be accomplished via online accessibility) Cancelled checks compared to approved check registers Reconciliation of numerical check sequence
Internal Controls - Other
Review exception reports periodically Segregate duties when possible Designate a “watch-dog” over all significant procedures Consider read/view only access to financial information (on-line banking) as well as general ledger detail for management Approve electronic transfers at the appropriate level
Quick Controls that should be in Place
Management review of original financial institution statements; this can be accomplished with online accessibility; cancelled checks should be available Management review of receivable write offs or returns Management review of vendor totals Management review of payroll registers, W-2’s and 1099’s issued
Other Considerations
Check with your financial institution on what fraud prevention services they offer – many products were mentioned in the controls we have covered
Insurance Make sure it is adequate Read the fine print
Hotline Cost benefit analysis Consider access to internal and external stakeholders
Documented Policies • Financial policies and procedures
– Purchasing – Month end close
• Conflicts of interest • Document retention • Fraud prevention • Checklists documenting key controls and
approval
Case Studies
To Wrap it Up
• Educate!
• Segregate!
• Recuperate!
