The original version of this article was written by J. Evan Goulding and republished with permission from the Special District Association of Colorado
The U. S. Department of Commerce has released figures indicating that employee theft costs U.S. businesses over $40 billion per year, playing a significant role in 95 percent of business failures and nearly a third of all business bankruptcies.1
Special districts, like most other governmental and business entities, are always vulnerable to internal threats that can come from employees, including managers and even board members. Yet, many organizations still believe it couldn’t possibly happen to them. For a special district, the damage is two-fold; first, the cost of the loss, and second, the loss of public trust.
Recently, several well-publicized cases of employee embezzlement and dishonesty of public workers in Colorado have put special districts in the spotlight. In one instance, a former fire chief was charged with the theft of over half a million dollars in online purchases, and in another, the man in charge of recording financial transactions for two water districts was arrested for embezzling more than $1 million from them.2, 3
In hindsight, it may appear that fraud cases like these should have been fairly obvious to their employers, with little effort employed by the perpetrators to conceal their crimes. But often, employee fraud can be well-hidden with extensive efforts made to cover up crimes. Fake receipts and reports can be easily manufactured. Non-existent vendors can be set up without being questioned or properly vetted. These things are not easy to discover, and on average, investigations of fraud take approximately eighteen months.
The SDA has compiled an excellent list of tips for special districts to implement internal controls to help prevent this type of crime from occurring:
1. Segregation of Duties. When it comes to handling money, the person who receives the funds should be different than the person making the deposit. In small districts with small staffs, it is not always easy to accomplish, but even if the board secretary or board chairman has to perform part of the operation, it should be considered.
2. Regular Reconciliation of Records. Not only should receipts be reconciled with deposits, but such reconciliations should be regularly reviewed by someone in higher authority than the ones making the records and doing the reconciliations. Talk with your auditor about what to look for in reviewing reconciliations.
3. Accounting Software. Whenever possible, use accounting software that will not allow override of controls, such as backdating or forward dating documents, or issuing receipts, checks, or deposits with the same number.
4. Checks and Balances. Especially in small districts where more sophisticated accounting checks and balances are difficult to implement, require that the person preparing checks not be able to sign the checks or use a signature blank without oversight.
5. Payroll Verification. The manager or finance manager should check on payroll calculations before payroll is distributed. The amount of salary or wages due to each employee should be clearly documented in personnel files, and regular reviews should verify that someone hasn’t written their paycheck for substantially more than their authorized salary or wage.
6. Outsource. If your district is too small to apply adequate safeguards, consider outsourcing key financial functions. There is cost involved that must be considered. But in many cases, bookkeeping payroll services can be retained for less than it can be done for internally, and it may even free up an employee for other tasks.
7. Culture is Key. A key to success in avoiding embarrassing losses is in creating an attitude and culture of ethical behavior, and a clear understanding among board members, management, and all employees that such behavior is not acceptable and will not be tolerated. It should be very clear that unethical behavior should be reported, the behavior will be investigated, and appropriate action will be taken. Finally, employees who report misconduct should be assured that the investigation will be handled discretely and without the threat of retaliation.
8. Mandatory Leave. Employees in key financial or accounting positions should be required to take at least one consecutive week of vacation each year. When employees are reluctant to take such vacation, it may be that they are simply dedicated and don’t feel that they can be away, but on the other hand, they may be concerned that if someone else fills in to do their job, their scheme may be discovered. A fresh set of eyes can be an excellent tool.
More than 75% of Pool members carry only the minimum $5,000 Crime limit, which is clearly inadequate to cover this type of loss. In those cases, the district is financially responsible for losses beyond that amount. If you would like to opt for higher Crime limits, consult with your broker or call us for more information.
Resources:
Internal Threats: Employee Fraud
Former Bookkeeper Accused of Embezzlement
Two Water Districts Lose $1 Million in Alleged Embezzlement
Former Inter-Canyon Fire Chief Pleads Guilty to Theft and Embezzlement
