Financial Protections for Small Jurisdictions: What Local Government Leaders Need to Know About Fraud

While the purpose of this blog is to address internal theft/fraud in small jurisdictions, I am going to start by sharing one of my core beliefs, and that is that the vast majority of people, including public employees, are honest, ethical, and hard working. What we (and hopefully you) want to do is support those people while keeping the few who may not fit the above description from causing damage to your city (I am using “city” throughout, but this applies to any governmental entity).

Whether you are an elected official, department director, or supervisor, there is likely not a worse feeling than to discover an employee has taken advantage of your trust by committing an act of theft/fraud. If, upon such discovery, you are the type of person to ask, “How could they do that to me?”— I can say with almost certainty that whatever happened likely had little to do with you personally.

And, if you are also the type of person who would say “But we trusted them completely!”, take advice from the Washington State Auditor’s (SAO) office to “trust, but verify,” which is also the name of their key guide for preventing fraud.

It is not fair to employees to have you only say that you trust them — of course you do, who would hire someone they did not trust? But trust should also come with support. This is done by setting examples of high ethical standards, honesty, and transparency from the top down, adopting relevant policies, and assuring they are followed, having a basic understanding of the work your employees do, and requiring ongoing training, not just passively allowing it.

What Is Fraud?

Before we get into specifics about preventing theft/fraud, it is important to consider all the ways in which these can happen. For example, theft is often defined as the physical taking of cash, but there are many other forms of theft. I have worked in a number of jurisdictions and have seen a number of instances in which a local government lost resources, including:

• Private vehicles were filled with gas from the city’s pumps.
• Employees took vacation/sick time but did not record it.
• Employees accruing/taking comp time but the agency has no policy that supports it      
• Individuals stole city tools and a vehicle to haul them away in.
• Employees operating a personal business on employer time using employer resources.

And just as there are ways to commit theft without taking cash, there are many ways to simply take the cash, like these examples:

• Personal purchases using an agency credit card.
• ATM withdrawals using an agency debit card.
• Manipulating receipts and taking the cash.
• Using refund and void functions to take cash proceeds from legitimate payments.
• Setting up fake vendors and invoices to pay oneself for goods/services not provided.

Who Commits Fraud?

Logically, we may believe theft is isolated to where the money is, the finance department, but that would be shortsighted, as the examples above show. Cases of fraud/theft have been perpetrated by elected officials and individuals holding a wide range of positions throughout local government including in the courts, police, parks and recreation, public works, and more.

Not convinced your agency should take action? Here are some examples of losses that happened in our state which might change your mind:

• In less than a year, the Town of Cusick lost all of its money (bank account went from $233,822 in August of 2023 to $249 by March of 2024) to a newly appointed (and now former) clerk/treasurer who was also a councilmember. Total loss was in excess of $277,000.
• Over an eight-year period, the Town of Morton lost at least $937,000 through misappropriation by the (now former) clerk/treasurer.
• The (former) Mayor of Springdale was responsible for the loss of more than $15,000, taken over a 10-month period.

If you need more convincing, I encourage you to read SAO’s publication: Top 5 fraud reports from 2024.

Still need more? Rita Crundwell, former employee of the City of Dixon, IL (population approximately 16,000) is responsible for the largest municipal fraud case in U.S. history — stealing $53.7M from Dixon over the two decades she served as the comptroller/treasurer.

Ok, I Am Convinced. What Can Be Done Next?

To mitigate the risk of this happening to your agency, the first step is to understand the mechanics of theft. In this case, reading about how fraud happened in other local governments can be very instructive for finding potential problems with your own agency. As they say, the devil is in the details: Did the theft happen because of poor or no oversight? Lack of policy or procedures? Understanding how fraud happens can guide your agency in deciding which steps to take and in what order.

Questions to Ask

Which safeguards are already in place at your agency and where could potential problems arise? Review the 10 questions below, each of which addresses a safeguard that can help agencies mitigate instances of fraud. For any question that you answer “No” to, consider the best possible steps to take to develop a more robust system. While your agency may not be able to implement everything all at once, something is better than nothing so long as the goal is to implement as many safeguards as possible.

Question 1: Financial policies and practices

Does your agency have policies regarding cash handling, banking, accounts payable, payroll, and inventory tracking? And can you verify that staff follow these policies? (You can find examples of local financial policies in MRSCs sample document library.)

Question 2: Bank statements

Does someone in your agency (other than the person reconciling the bank statement) understand and review monthly transactions on the bank statements? (See SAO’s advice on how to review bank statements.)

Question 3: Reconciliation

Does someone in your agency verify the cash transaction report to the bank reconciliation? These should match, and if they do not, exceptions should be noted (Read SAO’s Segregation of Duties Guide).

Question 4: Accounting software

Is someone in your agency (other than the person entering transactions) reviewing the accounting software to verify all transactions have been fully processed each month?

Question 5: Void and refund transactions

Are void and refund transaction lists run and reviewed by someone other than the person issuing them? (A supervisor should be reviewing and signing off on all voided and refunded transactions)

Question 6: Reimbursement requests

Is every person in your agency (including elected officials and department directors) required to submit supporting documentation for any/all reimbursement requests? (No one should be exempt from providing detailed receipts.)

Question 7: Invoices, vouchers, and credit cards

Does someone in your agency (other than the person preparing them) review invoices and/or vouchers and credit card receipts? An agency’s credit card receipts require extra scrutiny, and its’ debit card receipts require extra, extra scrutiny (or avoid using this payment method altogether).

A local government’s governing body is ultimately responsible for agency funds. Someone from your governing body or a finance committee member should be reviewing vouchers, credit, and debit card receipts, and supporting documentation prior to issuing payment.

Question 8: Capital purchases

Once a capital purchase is made, does someone in your agency — other than the person who ordered it — verify delivery of the item? (Take a walk over to public works and see that new backhoe.)

Question 9: HR paperwork

Does someone in your agency (other than the person doing payroll) regularly review important HR documentation (like timesheets) to verify leave balances, overtime, employee pay, and supporting materials (union contract, salary schedule, etc.)?

Having another level of scrutiny for HR-related paperwork can not only catch fraud, it can also help you catch mistakes in employee payroll records.

Question 10: Comp time policies

Is compensatory (comp) time allowed and verified? Your agency needs a policy/approved procedure on comp time — the process cannot simply be, “The mayor said I could take it.”

Conclusion

I know this blog was longer than usual, so thanks for sticking with it. It is an extremely important issue, and you cannot be too vigilant in protecting your agency. Trust your employees and show them you want to protect them by implementing all the safeguards against agency fraud that you can.

MRSC regularly hosts many resources related to local government budgeting and finance, including the following upcoming trainings: Municipal Finance Bootcamp 2025 (several locations/dates); Annual Financial Reporting Webinar Series (April 1-2); and Fundamentals of Budgeting for Local Government (April 23). For tailored advice on a specific topic, you can always Ask MRSC.

SAO also has the following recommended resources:

• The Audit Connection Blog, which features regular blogs on topics related to a number of things, including fraud prevention
• Resource Library
• Preventing Fraud