On January 4, 2023 a former Spokane County employee was convicted of first-degree theft , second-degree theft and trafficking in stolen property for stealing over $1.3 million in public funds from Spokane County as reported by the Spokesman Review:
(https://www.spokesman.com/stories/2023/jan/04/justice-was-done-today-former-spokane-county-emplo/).
Theft of this kind grabs headlines and I hope gives us all pause to think, “Could something like this happen at my district?” The answer is yes, it could. Perhaps not to the extent of $1.3 million dollars, but in the absence of good internal accounting and cash handling controls, it can and probably will eventually happen.
Fraud occurs when three things align: opportunity, pressure, and rationalization. Fraud is prevented by using internal accounting and cash handling controls that communicate a clear standard, provide transparency of action, and provide accountability for actions. First and foremost, set the example for your district by having and communicating a clear code of conduct and professional standards. Your employees and contractors will look to the district’s leadership for guidance in conducting district business. Some of this guidance is what you say and share in the code of conduct. Much of this guidance is in how you act and uphold your district’s code of conduct in your day-to-day affairs.
The Fraud Triangle: Opportunity, Pressure and Rationalization
The first leg of the fraud triangle is opportunity. Take a moment to think of all the opportunities within your district where employees, management or contractors can steal money or property. Common areas are cash receipts, cash disbursements, inventory, and attractive assets like technology. In each of these areas, segregate the duties so that no one person does all the functions. For example, have one person open the mail and total up the checks received. Have another person verify the total and deposit the money. Have a third person review the bank statement reconciliations each month. Another common opportunity for fraud is the disbursement of funds. Establish a clear procedure for adding new vendors that are approved to pay. Instances of fraud have occurred by adding family members and related companies to the accounts payable vendor list then paying them. Consider a practice of having two people review the addition of vendors. Another option is to have one employee prepare payments and have another person approve the payments by either signing the checks or initiating the electronic transfers. Please know that blind trust is not an effective internal control.
The second leg of the fraud triangle is pressure. Everyone has good times and bad times. Get to know your employees and contractors and know when they are going through rough times. The pressure to steal can be high during times of financial stress experienced by illness, injury, loss of a spouse or partner’s income. Be compassionate and aware of the pressures that your people are experiencing. Good internal accounting and cash handling controls will help your honest employees stay honest. If they do succumb to the pressure to steal, good controls will help it to be caught before $1.3 million walks out the door.
The third leg of the fraud triangle is rationalization. When opportunity and pressure are present, our minds can think of all kinds of reasons to take what is not ours. Internal controls that segregate duties where one person performs a task and another reviews will help employees to resist the urge to rationalize theft and fraud.
Finally, take advantage of the resources available to your district to prevent fraud. Utilize the Washington State Auditor’s Office, especially their guidance on Fraud Prevention. This free resource may be found at https://sao.wa.gov/resource-library-fraud-prevention/ and https://sao.wa.gov/improving-government/preventing-fraud/
There is no substitute for a knowledgeable professional to provide advice and guidance. The Washington State Auditor’s Office (SAO) can do this for you as well. The SAO invites you to submit questions regarding fraud to fraud@sao.wa.gov.
~ Eric Swagerty, Financial Analyst