person in suit hiding dollar bills inside jacket

Ask the Experts: Are My Fraud and Embezzlement Limits High Enough?

Fraud And Embezzlement Claims Can Put Members In Tight Spot

The answer to this depends on what your district stands to lose in the case of fraud.

Ask yourself this: what if a long-time employee embezzled money from you? What if an employee wired money based on an email that appeared legitimate but was in fact fraudulent? What would happen if an employee misused a credit card by purchasing personal items?

These examples are real and happen with increased frequency. It’s in your best interest to consider how these scenarios might impact your district financially. Consider also how your community could lose trust in you as a result.

Over the past ten years, we have had twenty-one embezzlement claims. In most cases, however, the member only had minimum limits of $5,000. This means that they lost anything in excess of that amount. Here are a few examples of some incidents that can put this into perspective:

  • A fire chief used his district’s finances to purchase personal items. This included guns, electronics, cameras, and musical instruments. All told, he embezzled nearly $650,000 over a three-year period.
  • An email misled a district employee to wire $30,000 to an unknown account. The email suggested the need for funds was urgent, and the employee processed it quickly to avoid issues with a vendor.
  • A district manager embezzled more than $120,000 through a series of forged checks and false invoices. The district had a small budget and afterward had no funds for payroll or other monthly obligations.
  • A developer created a special district to sell bonds to fund a development project. Upon receiving an initial $8,000,000, he spent it on real estate projects not associated with the district.

Evaluating Your Risk

Take a moment to do a quick assessment to evaluate your risk and review your safeguards. Thinking about things from a different perspective can be an effective way of doing that. Ask yourself or your team some of these questions:

  • How much petty cash does the district have on premises? Recognize that any petty cash is at risk of theft.
  • Does the district provide credit cards to employees? How are you monitoring their usage? Think about whether the controls on those accounts are adequate to ensure all purchases are appropriate.
  • Do you have a strong separation of duties policy? Does only one employee handle all financial transactions? How can you divide these duties to ensure proper oversight? It is best to have more than one person oversee every transaction. Divide duties so no one person has total control over any transaction.
  • Do you require verification of wire transfers by multiple forms of contact? It is best to require the use of a minimum of two— such as email, phone call, fax, or in-person request.
  • Do you offer anti-fraud training to employees that handle money? Do you offer anti-phishing training?

Utilizing the techniques mentioned above helps manage the threat of loss. It also discourages employees from stealing. As the leader of a public entity, ensuring the security of public funds is your duty.

Increase Your Limits

All public entities build their reputation with their community on trust. That is why the state requires a $5,000 fidelity bond and a public official personal surety bond of more than $1,000 for each director. This ensures that the district can perform its duties even if fraud occurs.

Right now, around ninety percent of Pool members purchase crime coverage. Even so, an overwhelming majority only buy enough to satisfy the statutory bond requirement. Of the districts that purchase higher amounts, less than ten percent have limits over $100,000.

In 2018, the Association of Certified Fraud Examiners detailed that sixteen percent of organizations affected by fraud are public entities. The median loss was $118,000. Ask yourself whether your district can afford to lose that much of its budget.

There are several types of losses to consider. You should ensure you have Crime limits high enough for all of them. These include employee theft, forgery, computer fraud, funds transfer fraud, fraudulent impersonation, social engineering, and ERISA compliance (insure 10% of the total assets in a 401k benefit plan).

We offer coverage limits from $5,000 to $5,000,000. Contribution is determined on several factors including your current head count.

Making an informed decision about the right limits will not just protect your district’s assets. It will also safeguard the public’s trust in you.

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