Elected officials’ offices in County governments are commonly referred to as “small offices.” These offices include those of the Tax Commissioner, Sheriff, Superior Clerk of Court, Magistrate Court, Probate Court, Juvenile Court, etc. Small offices are the gateway for the majority of cash flowing into a county. Therefore, they are inherently high-risk. Unfortunately, they often are inadequately staffed or staff is inadequately trained. This limits their ability to implement proper internal controls, such as segregating duties or monitoring compliance.
Although County governments are usually subjected to financial audits, these audits often do not disclose problems that exist in small offices. Pursuant to generally accepted government auditing standards, auditors consider the risks from an entity-wide financial perspective. Thus, the auditors invest time in testing the controls and financial records of the largest revenue sources of the County. These usually include the Tax Commissioner’s office, Clerk of Court, and whatever office is processing the traffic citations in that county. The entity-wide financial perspective doesn’t allow extensive testing of all of the transactions that are processed through the small offices. This is reasonable and appropriate from the perspective of a financial statement audit.
However, problems can occur in small offices that are immaterial to a financial statement audit and cause huge problems for elected officicals. If a county employee abuses his unchecked access to cash at a small office, the political fall-out can be costly even if the amount misappropriated is immaterial in the scope of a financial audit.
When small offices have inadequate internal controls and elected officials are implicated, the media is quick to judge and advertise management’s deficiency. Consider the detriment one Magistrate Court Judge suffered when his deputy clerk, who had served him for 15 years, abused his trust. She stole over $50,000 over the course of two years because she had unfettered access to payments from defendants, helped managed case files, and managed the monthly bookkeeping. The court didn’t have adequate segregation of duties due to limited staffing capacity and the judge didn’t monitor all her activities because she was like family to him.
What can elected officials do to protect themselves?
1. Don’t depend on the auditor to prevent or detect fraud. They can’t possibly do so within the context of the audit objectives and budget.
2. Make sure the auditor is informing the elected official of any internal control recommendations they have. Sometimes, an auditor works with the deputy clerk during fieldwork and communicates with the elected official through the clerk. Most often, this is the same clerk with the most opportunity. Require that all internal control recommendations be communicated directly to and signed off by the elected official.
3. Require all bookkeeping and deposits be completed in a timely manner. A backlog creates opportunity. If current staffing is not meeting demand, report to the Board of Commissioners with an urgent request for additional staffing, explaining that the county risks losing money and its good image if there is not adequate staffing to support the timely accounting of transactions. An elected official may have more success in getting this request fulfilled if (s)he is supported by the Finance Director and an auditor’s recommendation. The auditor will often include a recommendation in an internal control finding for more staff or staff training if that’s what is needed, especially in cases in which a deficiency has existed for a prolonged period.
4. Consult with the Finance Director or another qualified accountant who can advise the elected official in devising adequate controls and cost-effective ways to monitor compliance.
5. Brainstorm and be cognizant of what procedures and systems need to change in order to compensate for changes in demand, such as a growing volume of transactions or change in personnel. Read our case studies and Fraud & Forensic posts to help brainstorm and learn about new trends in government fraud.
6. Above all, don’t ignore red flags and don’t bend rules. Unquestioned trust in long-time employees is the number one cause of theft. No matter who works at an office or for how long, always stick to the procedures that best limit the opportunity for fraud.
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