Auditing and Fraud Prevention for Cities

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Auditing and Fraud Prevention for Cities

• September 15, 2005
• Presented by
• Susan D. Battani, CPA and Annette K. Campbell,
  CPA
• David A. Vaudt, CPA, Auditor of State of Iowa

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Why Audit?

• Chapter 11 of the Code of Iowa
• Based on City Population
• Citizen Petition
• Single Audit Federal Funds
• Special Circumstances/Special Reports
• Change in Personnel
• Fraud
• Management Tool

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INTERNAL CONTROL

• INTERNAL CONTROL is a process, effected by an
  entitys governing body, management, and other
  personnel, designed to provide reasonable
  assurance regarding the achievement of objectives
  in the following categories (1) reliability of
  financial reporting, (2) compliance with
  applicable laws and regulations and (3)
  effectiveness and efficiency of operations.

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Internal Control
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Segregation of Duties

• Term used in connection with the evaluation of
  internal control.
• The principle that no single employee should be
  placed in a position that allows that employee
  both to commit and conceal an irregularity in the
  ordinary course of the employees duties.

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WHAT IS FRAUD?

• Diverse means used ingeniously by people to get
  an advantage over another by suppressing the
  truth, misinformation, false suggestions,
  trickery, cunning, deceit, imposturing and other
  methods by which to cheat.

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Fraud Categories

• Fraudulent financial reporting
• Misappropriation of assets

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KEY ENVIRONMENTAL FACTORS

• Absence of Internal Controls
• Weak Control Environment
• Management Philosophy
• Lack of an Audit Presence
• Program Overload

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Materiality and Government Fraud

• Subject to more public scrutiny
• Negative publicity may arise if not pursued
• Fiduciary responsibility for public funds
• Fraud undermines public trust

• Any Fraud is Material to the Taxpayers!!!
• Criminal action more likely with public funds

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The Fraud Triangle
Perceived Pressure
Persons Rationalization
Perceived Opportunity
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Profile of a Fraudster

• Male
• Intelligent
• Egotistical
• Inquisitive
• Risk taker
• Takes Shortcuts
• Under stress
• Greedy or has financial need

• Disgruntled or complainer
• Big spender

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COMMON FORMS OF FRAUD

• Double Payments
• False Claims
• Payroll Fraud
• Charge-off Fraud
• Petty Cash Fraud
• Healthcare Beneficiary Fraud

• Kiting
• Lapping
• Bid Rigging
• Pilfering
• Travel Claim Fraud
• Disposal Fraud

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Characteristics That Make Computers More
Susceptible to Fraud

• Data is concentrated in one place
• The medium of storage is vulnerable
• The audit trail may be obscure
• Visible records may not exist
• Programs and data can be altered without leaving
  a trace
• Tampering can be carried out almost instantly

• Networks increase the risks
• Computer systems are not widely understood
• Security features are not always built in
• Internal control features may be inadequate
• Trusted personnel may circumvent controls

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Fraud in Governmental Entities

• Frequent cash collections with difficulty in
  predicting timing and collection
• Pressure from taxpayers to limit administrative
  personnel
• Lack of profit-motive
• Smaller entities may have low-wage workers with
  frequent access to cash
• Perception that money is unlimited

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5 Important Steps

• 1.Know fraud exposures in specific terms
• 2. Know specific symptoms of fraud for exposure
  areas
• 3. Be alert for fraud symptoms
• 4. Incorporate steps into routine periodic
  reviews that are likely to reveal fraud
• 5. Follow through on all observed symptoms

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FRAUD SYMPTOMS/INDICATORS

• Controls
• High level approval
• Adjustment entries
• Manual or computer detail not equal to the
  control totals
• Special handled transactions

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FRAUD SYMPTOMS/INDICATORS-Accounting-

• Missing documents
• Excessive voids/credits
• Altered documents
• Photocopied documents
• Questionable handwriting on documents

• Duplicate payments
• Second endorsements on checks
• Increased reconciling items
• Unexplained adjustments
• Entries w/o supporting documentation
• Entries that do not balance

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FRAUD SYMPTOMS/INDICATORS-Analytical-

• Unusual financial statement relationships
• Unusual checks
• Regular borrowing
• Excessive complaints on accounts
• Vendor addresses are same as employee addresses
• Goods are purchased in excess of needs
• Excessive write-offs
• Deposits in transit are increasing

• Unexplained shortages
• Significant increases/decreases in account
  balances
• Too many debit or credit memos
• Accounts recorded that do not reconcile to counts
• High number of past due accounts
• Excessive late charges
• Unreasonable expenses or reimbursements

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Inappropriate Disbursements

• Cash withdrawals
• Personal purchases
• Unauthorized paychecks

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Undeposited Collections

• Utilities
• Refunds and Rebates
• Miscellaneous fees
• Proceeds from State and County

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Misuse of Entity Assets

• Credit cards
• Vehicles / gas
• Supplies
• Cell phones
• Office telephones
• Computers/Internet

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Procurement Fraud

• Procurement Fraud is when the government is
  either over-paying for goods/services or paying
  for goods or services it is not receiving.

• Payments to fictitious vendors
• Payment of kickbacks

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Travel Reimbursement Fraud

• Mischaracterized expenses
• Overstated expenses
• Fictitious expenses
• Multiple reimbursements

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• QUESTIONS???