“No one is immune from the temptations of stealing.”

Part 1 of a Series

Newspapers report that governments and organizations small and large are at considerable risk to white collar crimes.  How can government executives, elected officials, and citizens in small and large public agencies help stop this dishonesty? 

Technology? Technology can thwart embzzlement, but it can also be the tool of modern embezzlers. Audits? Small public agencies could find detailed audits cost-prohibitive. Large accounting firms cannot audit every transaction in every department of large a government agency. In large agencies, audits are the results of limited sampling of accounting data, and the accounting audit sometimes does not often involve a careful and deliberate audit and analysis of process and cash controls of all of the many accounts processed throughout an organization.  Surprisingly often found are what is commonly called, “cigar box” financial systems, wherein, there are no records, but just a box where money is deposited and withdrawn.  One municipal water and village administration had literally a cigar-box and a yellow pad to record all transactions.  All cash inputs went into the box, and all disbursements were paid out from the box.  When asked how they reconciled the box, it was revealed that for 190 years there has always been money in the box, therefore, the books must be balanced. [Shockingly, this was actually discovered in a large village in New York State].

While many municipalities profess to follow GFOA, GAAP and GASB standards, too many of them have loose controls that make them subject to embezzlement and fraud.  Of course, in each of these cases, deliberate accounting principles need to be applied.  But the clever embezzler will require vigilance through more indirect methods of discovery.  In what follows, we provide a list of several conditions that should raise warning flags, and several procedures that will discourage even the most vicious and persistent embezzler:

1. Never let anyone in the organization NOT take vacations.  It is common to see key financial processing people who are overworked and always having to postpone their vacations. For the health and happiness of the employee as well as the health and happiness of the organization, no one should become so indispensable to preclude them from taking vacations. Be sure the person who takes the required vacations does NOT tell everyone to leave his or her work undone until he or she returns.  [This is a giant red flag that not only this person is the one person able to do the task at hand, but that there could be more to their control than just doing tasks].

This is a clear opportunity to let the fox have the keys to the chicken coop without establishing checks and balances. No one in an organization should be indispensable, especially the person with 25 years of experience.  It is the obligation of management to ensure that no one person is the only person controlling money or posting of transactions.  For example, it is ridiculous to allow the building permit staff to both issue building permits and then collect the money.  Similarly, a single person in Parks and Recreation staff should not be permitted to both register people for classes and to collect the money.

2. Whoever authorizes disbursement cannot reconcile. Whoever authorizes disbursement of any checking account, savings account, money market, or investment accounts cannot have the ability to reconcile their corresponding statements.

• writing checks, authorizing electronic transfers, transferring money, etc.

In one case, a clerk was writing checks in varying amounts of about $2,000 each month to herself every month for hundreds of months [approximately, $2,000 per month for 240 months, equals $480,000 over 20 years]. When time came for her to reconcile the checkbooks, she would shred her canceled checks and show the books to be balanced.  The culprits can be fiscal officers down to the lowest paid clerks — no one is immune from the temptations of stealing.

3. Always have a universal double entry accounting of all moneys collected.  In one case there was a clerk in the water department who collected money from contractors who would dutifully mark the giant paper ledger indicating that the contractor had paid his tap fees or other fees.  Unfortunately, no one ever reconciled the ledger with the money in the bank.  This resulted in a one million dollar embezzlement over ten years.

 4. Look for revenue patterns. Someone should be checking for consistent and inconsistent patterns. For example, if on the average, parking tickets yield normally $30,000 in the month of April and the average revenue during one April were half that amount, then someone should be aware to ask why the revenues are so low. There may be logical reasons such as heavy snow fall or extensive street repairs, etc.

 5. Nothing is too small to overlook. Governments are usually large revenue driven operations. What if an accountant were to tell the City Manager that the books were balanced to within 99.5% accuracy? One could think that may be good.  But, if the accountant were auditing a $150 million dollar budget, then a .005% margin of error would yield a $75,000 opportunity for embezzlement for one year and $750,000 over ten years, and $1.5 million over twenty years.  One and a half million dollar retirement fund is not bad for a twenty year employee who may believe that she/he has been underpaid and overworked for twenty years. [It is shocking to learn that many of these scoundrels are so arrogant that they take their millions and put them in auditable checking accounts, savings accounts and stocks.]  I know of one city wherein the CPA from the accounting firm believed that .005% was not “materially significant” when dealing with a $150 million dollar budget.

6. MAKE A MODEL PUBLIC DENOUNCEMENT OF EVERY INFRACTION.   A fiscal officer of a medium sized city was also the data processing manager, the purchasing and accounts payable guru, the payroll and the auditing manager.  It was not surprising that this person was buying “X” million dollars a year in computers, but only had on hand, about 1/2 “X”.   When the disclosures were made to the Mayor and City Council chairperson, they responded that they would change this person’s titles and make sure this possible embezzlement ceased.  Since they did not prosecute the individual, they had immediately sent the grapevine message that they would condone irregular behavior.  There must be a clear-cut SEPARATION OF DUTIES.
 

7. DON’T LET ANYONE BE THE ONLY PERSON TO KNOW SOMETHING.  Sometimes there is only one person who knows how to do something.  Look out for an employee or manager who insists that their duties or functions cannot be performed by or shared with others; hence, when they are out, or not present, their functions stop and resume only when they return. Look out when only one person knows how to prepare financial reports.  Look out for long tenured employees who are overly protective or secretive of their work [i.e., with such statements as “this is my area, and you cannot be here”, “these reports are too complex for you to understand”, etc.]

Look out for a person who frequently assumes financial duties in areas outside of their own work. No public entrusted entity should make themselves so vulnerable to let only one person be the only person who knows something.   Unfortunately, in organizations [public or private or small or large] there are too many lazy people.  I had worked in an organization where there were dozens of small tasks which required deliberate attention to detail.  Since I was responsible for the final reporting of the information, for the sake of expedience, I slowly asked people if they would let me do their job. Over time I did the majority of all of the fiduciary and statistical tasks related to the management of a $100 million dollar operation. Fortunately, I had no larcenous tendencies, but, now as a consultant and working on the other side of the process, I realize that my innocent taking over of other people’s work made me into a prime candidate to do mischief.

8. ASSUME ANYONE IS OPEN TO DISHONESTY.  With the every increasing pressures and stress at the workplace and at home, it is no surprise that some of the most outstanding people can be tempted and go astray.  It may be that a twenty-five year employee who was the most honest and diligent employee for twenty years.  However, the last five years could have been a short period in their life where stress forced them to be a wee-bit dishonest.

9. UNUSUAL AND EXPENSIVE PURCHASES. One example of this problem would be the $30,000 a year clerk who drives a Corvette and has a million dollar home.  Some people believe that it is not the business of the employer to know how a person pays for expensive new toys.  However, as a public servant, conspicuous purchases should raise the concern of any responsible official.

10. HOLD MANAGEMENT RESPONSIBLE.  If a fiscal officer delegates tasks to a lower level employee, he/she should be equally held responsible for illegal acts perpetrated by the lower level employee. Delegation of tasks should not imply or result in delegation of all responsibility and accountability.

PART 2 of the SERIES (conditions 11- 25) coming soon