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In Case You Hadn’t Heard…Fraud, Fraud, Everywhere a Fraud?

March 28th, 2014 by Keith Hock

A few months ago, I wrote about Rita Crundwell, embezzler of approximately $54 million from the Illinois town where she worked (Ms. Crundwell is now serving a 19+ year prison sentence).  Ms. Crundwell’s fraud will be one of the cases described on next week’s episode of CNBC’s show “American Greed.”  Earlier this week, five of Bernie Madoff’s former employees were convicted for their roles in Madoff’s record setting Ponzi scheme.

Closer to home, the Greater Cincinnati area has seen a recent flurry of cases involving frauds or potential frauds in local governments.  Three former Northern Kentucky officials have been convicted and an investigation is continuing into the former fiscal officer of Hamilton Township in Ohio.  Are local governments particularly susceptible to fraud or financial irregularities?  According to the Association of Certified Fraud Examiners, the answer is “yes.”  Governmental units were the second most victimized industry in the ACFE’s most recent fraud survey.

Fortunately, none of the local cases involve as much money as the Crundwell case.  The three N. Ky. cases all involved less than $1 million and Hamilton Township is trying to sort out a potential $2.5 million overstatement of its funds.  Regardless of the amount, as citizens we are often two-time victims of government frauds – once when our tax dollars are stolen or misused and a second time when public services are cut to make up for budget deficits caused by the fraud.

So what can be done?  Fraud investigators talk about two key fraud prevention tools – “tone at the top” and “segregation of duties.”  How do these terms apply to local governments?  In a business setting, the “tone at the top” describes upper management’s attitude toward policies and procedures (and adhering to such).  For example, is there zero tolerance for fraud or other unethical behavior?  As voters, we need to hold our elected officials accountable and let them know that frauds and other misuse of public funds will not be tolerated.

Adequate “segregation of duties” means that no one person can perform all of the functions that would allow them to both carry out a fraud and cover up their actions by manipulating the accounting records.  Completely segregating incompatible duties can be difficult for smaller organizations (such as many local governments) but failing to do so increases the opportunities for fraud.  Oversight of employees by elected officials – and of elected officials by informed voters – can help to mitigate these risks.

Are you aware of a fraud that occurred in a local government – who was the perpetrator and how was the fraud uncovered?  Share your stories in the comment box below.

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