At the Risk Management Services Annual Meeting in November, Vic Hartman, an expert on fraud and corruption investigations, discussed how to create a more fraud-resistant organization. Hartman is a former FBI agent and currently works as a certified public accountant and attorney.
Occurrences of fraud require three conditions: opportunity, pressure and rationalization. The top three classes of fraud are financial statement fraud, asset misappropriation and corruption. The latter two are more common in local government.
The most common type of asset misappropriation fraud is purchasing card or credit card abuse. This could take the form of an employee who uses a city-issued card for unapproved purchases, after which the supervisor fails to review the purchases. Solutions for detecting asset misappropriation include establishing review policies, using continuous monitoring and auditing, and in cases where fraud has occurred, prosecuting the employee.
Corruption is a major priority of the FBI, and corruption is harder to detect because the money involved cannot be followed or audited. There is no paper trail in corruption cases because of a lack of investigation and controls. Corruption can involve bribes, kickbacks and undisclosed conflicts of interest. When investigating fraud, investigators will examine the code of conduct, code of ethics, civil fraud and criminal fraud. Corruption can be prevented by adopting policies and procedures, such as conflict of interest forms. Senior officials should follow the policies and procedures and discuss them with staff. Staff should also have a method for reporting fraud. Municipal leaders should periodically review conflict of interest and financial disclosure forms and action should be taken if needed.
Hartman discussed several cases of individuals who committed fraud and were prosecuted. These individuals were accepting bribes, kickbacks and stealing from municipalities.
Municipalities, whether large or small, can implement these internal controls to help prevent fraud:
- Have an independent person review bank and credit card statements.
- Implement mandatory vacations. Fraudulent activities can be detected during an employee’s time away.
- Rotate responsibilities of employees.
- Have two signatures required on checks.
- Institute a policy for staff accepting free lunch from individuals. There should be zero tolerance for violations among employees with certain positions, such as procurement officials.
- Recognize the at-risk officials: elected officials, subject matter experts and procurement officials.
While creating a fraud-resistant organization is a proactive approach to preventing employee theft, embezzlement and other dishonest acts will still occur at times. When a crime does occur, the SC Municipal Insurance and Risk Financing Fund offers coverage to municipalities to help indemnify them for their losses. Public official bonds are available for employees or public officials who have regular access to cash and financial instruments. The insurance protection exists to cover employee dishonesty and theft, and it is economical and easy to purchase.
A public officials bond is protection against a specific employee-related crime. In order to cover financial losses stemming from business-related crime, SCMIRF offers crime coverage to its members. The coverage covers public employee dishonesty, forgery or alteration, theft, disappearance and destruction inside and outside the premises and computer fraud. The coverage limits range from $200,000 to $500,000 per occurrence. The SCMIRF coverage contract should be reviewed for specific exclusions and conditions.
For more information on public official bonds and crime coverage, contact Robert Collins, underwriting manager at 803.933.1279 or rcollins@masc.sc.