1. Copyright: 2008 Office of the Minnesota State Auditor How to Prevent and Detect Fraud: Implementing Internal Controls Office of the State Auditor Nancy Bode Assistant Legal Counsel Presentation for the 2008 MMBA Annual Conference

2. Copyright: 2008 Office of the Minnesota State Auditor Office of the State Auditor Role and Responsibility Oversight includes: - Counties - Cities - School Districts - Towns - Police and Volunteer Fire Relief Ass’n Pension Funds - Soil and Water Conservation Districts - Port Authorities - TIF Districts - As well as approximately 150 other special districts

3. Copyright: 2008 Office of the Minnesota State Auditor Office of the State Auditor Divisions Audit Practice Pension Tax Increment Financing Government Information Legal/Special Investigations

4. Copyright: 2008 Office of the Minnesota State Auditor Legal/Special Investigations Division www.auditor.state.mn.us 525 Park St., Suite 500 St. Paul, MN 55103 Nancy Bode 651-297-5853 Nancy.Bode@state.mn.us The Legal/Special Investigations Division investigates allegations of theft or misuse of public funds. It also provides legal compliance information and training to local government officials.

5. Copyright: 2008 Office of the Minnesota State Auditor Types of Fraud Reviewed by the Office of the State Auditor Theft – Minn. Stat. § 609.52 – Includes temporary taking – Even small amount of public funds is a felony Embezzlement – Minn. Stat. §§ 609.445 and 609.54 – Refuse or omit to turn over public funds – Felonies

6. Copyright: 2008 Office of the Minnesota State Auditor Type of Fraud Reviewed by the Office of the State Auditor (continued) False Claims - presenting (Minn. Stat. § 609.465) - allowing or paying (Minn. Stat. § 609.455) - felonies Forgery - altering a public record with intent to defraud (Minn. Stat. §§ 609.625 or 609.63) -felonies Misuse of Public Funds/Assets

7. Copyright: 2008 Office of the Minnesota State Auditor The Fraud Triangle Opportunity – We can control Rationalization – I’ll pay it back – They don’t pay me enough – They’ll never miss it Motive/Incentive (Financial Pressure) – Often gambling

8. Copyright: 2008 Office of the Minnesota State Auditor Reduce Risk of Fraud: Tools of Protection Segregation of Duties Internal Control Procedures Environment

9. Copyright: 2008 Office of the Minnesota State Auditor Segregation of Duties No employee should be in a position to commit fraud and then conceal it Example: Person collecting/receipting cash should not: Post cash receipts to the general ledger system Process cash disbursements Prepare billings Make bank deposits, wire transfers

10. Copyright: 2008 Office of the Minnesota State Auditor Segregation of Duties - Examples Rentals handled by City Clerk Entertainment – City Clerk issues check Compensating Controls for Deposits – Turn in Z-tapes to City Clerk with deposit information – Each employee has own drawer that the employee counts at the end of his/her shift Liquor Store manager approves all voids/refunds Mandatory vacation policy – need for cross training

11. Copyright: 2008 Office of the Minnesota State Auditor Internal Controls Receipt of Funds Numbered receipts for all payments/sales Reconcile receipts with deposits daily Daily deposits Do not leave receipts unattended Why? If no receipt, no one notices if not deposited Detect receipts never deposited Detect “lapping” (replace cash with check) Reduce risk of loss

12. Copyright: 2008 Office of the Minnesota State Auditor Internal Controls Cash Registers Ring all sales into register Use cash/check function Review voids or over- rings Honest report of over/short each day Why? Record of receipts Detect “lapping” Frequent voids may indicate cash removed

13. Copyright: 2008 Office of the Minnesota State Auditor Internal Controls Checks Received Endorse check for deposit as received Cash personal checks or 3 rd party checks? Amount over purchase? Made out to public entity (e.g., not “cash”) Employee initials on checks received Nsf check policy Why? Reduce chance checks will be taken and cashed Public entity is not a bank Reduce nsf checks

14. Copyright: 2008 Office of the Minnesota State Auditor Internal Controls Employee Timekeeping Employee & supervisor attest to hours worked See OSA’s Statement of Position on Employee Timekeeping Procedures Why? Statutory requirement (Minn. Stat. § 412.271) Accurate & reliable payroll system

15. Copyright: 2008 Office of the Minnesota State Auditor Internal Controls Employee Expenses Detailed receipts Original receipts Reference claims approved (with amounts) in minutes Why? Minn. Stat. § 471.38 Prevent unauthorized payments Prevent “slice and dice”

16. Copyright: 2008 Office of the Minnesota State Auditor Internal Controls Work with Entity’s Bank No cash back from deposits No check cashing No fund transfers without Council resolution

17. Copyright: 2008 Office of the Minnesota State Auditor Internal Controls Written Policies Check handling procedures Cell phone usage Use of public entity’s property Why? Avoid problems Allow discipline where appropriate Consistency for all employees

18. Copyright: 2008 Office of the Minnesota State Auditor Environment The same rules apply to all Don’t belittle internal control procedures Don’t allow management to override procedures Be alert to employee’s outside interests It’s the public’s money

19. Copyright: 2008 Office of the Minnesota State Auditor Red Flags: Segregation of Duties No vacations Takes records home Takes on segregated duties Works when others gone Time sheets not reviewed or signed Only person who knows the job/computer

20. Copyright: 2008 Office of the Minnesota State Auditor Red Flags: Internal Controls Noncompliance with internal controls Missing or late reports Missing or late documentation Late deposits Outstanding or out of sequence checks

21. Copyright: 2008 Office of the Minnesota State Auditor Red Flags: Environment Unexpected or poorly explained losses High level of refunds, returns, voids The “bully” Too busy to deal with “mere details”

22. Copyright: 2008 Office of the Minnesota State Auditor Cash Receipts Special Risks Licenses Building permits Rentals Park & rec classes Swimming pool Water/utility bills Liquor stores Know the amount in any change fund (starting balance) Internal controls Segregation of duties

23. Copyright: 2008 Office of the Minnesota State Auditor Suspected Fraud Criminal? Disciplinary Action? Get Advice

24. Copyright: 2008 Office of the Minnesota State Auditor Suspected Fraud Minn. Stat. § 609.456 Report to: State Auditor (in writing) Law Enforcement

25. Copyright: 2008 Office of the Minnesota State Auditor Bonds Have bonds in place Two main types of official or employee bonds – Fidelity Bond: covers employee dishonesty – Faithful Performance (Surety) Bond : covers any loss to public entity or member of public caused because employee failed to faithfully perform duty

26. Copyright: 2008 Office of the Minnesota State Auditor www.auditor.state.mn.us Our NEW website includes: Statements of Position Investigative Reports Internal Control Letters E-Updates (Avoiding Pitfalls) Other