Municipal Employee Dishonesty: How to Create an Effective Fraud Prevention Program

The municipal world is rocked to hear that millions of dollars could be siphoned from local government. Boards, administrators and residents are incredulous and angry. All are suspicious that this crime could be happening under their watch and in their communities, and this suspicion eats at the trust that is essential in our system of government. A very loud wake-up call, it is clear that employee dishonesty can result in massive losses at a time when governments are burdened with fiscal shortfalls. Worse, this crime can happen in plain sight. Action is the order of the day and the urgency to address this issue is felt throughout the industry.

The good news is that asset misappropriation due to employee dishonesty is a manageable problem. The solution is to first understand the issue and second, create a program and culture that minimizes the opportunity for corrupt behavior.

The amount of stolen dollars from employee fraud is a very big number across the economy. The Association of Certified Fraud Examiners estimates that 7 percent of revenue across U.S. organizations is lost due to fraud (Report to the Nation on Occupational Fraud & Abuse, 2008). Annually, this amounts to nearly $1 trillion of wealth diverted from its lawful owner, which in many cases is the local government and the taxpayer. Research over the last decade has shown that it is extremely difficult to predict who in an organization will commit an act of dishonesty, although an extravagant lifestyle is often an indicator. Many times, the fraudster is a long-time employee and the most trusted person in a department. While violent crime tends to be committed by younger persons, white collar fraud is usually committed by middle-aged employees who are active in their communities and are otherwise responsible citizens. It is a crime that is overwhelmingly discovered either by accident or a tip from a vendor or another employee. It is a crime that can be well covered and can go undetected for many years. To the surprise of many, the books can still balance. The fraudster will often rationalize his or her behavior, and will act on impulse to steal when he or she perceives that controls are weak, no one is really looking, management is overly trusting and/or prone to manipulation, and the rewards greatly outweigh the risk of capture and punishment.

Employee dishonesty will not be eliminated, but it can be minimized with a strong program of awareness and prevention. The very top of the organization must make it clear, through publicly proclaimed policies, that asset misappropriation including vendor fraud will not be tolerated and, when discovered, fraudsters will be prosecuted to the fullest extent of the law. From this policy flows a well-constructed and comprehensive procedure, including extensive employee screening during the hiring process that puts in place a culture that deters this type of crime. Regular training, which instills the letter of these procedures and heightens awareness, is the heart of the prevention program. Properly written and promoted, these policies and procedures can be positive to employee morale and create a highly attractive work environment. The only employees who will not favor these changes may be the crooks.

The bedrock of a good prevention program is a thorough look at the system as it exists. This is an opportunity to review the system of internal controls, separate duties to the extent possible, and rotate positions and responsibilities. It is a time to educate employees to see irregular behavior and report it through an anonymous, independent and reliable whistleblower system from which employees feel no fear of retaliatory action by management. It is a time to create a safe and secure environment for all of the organization’s assets—passwords under control, checks safely stored, desks clear of sensitive information, vendor files and payroll scrubbed, and receiving docks free of theft opportunities are only a few examples from a much longer list. Vendor contracts should be reviewed to include the organization’s right to audit should they suspect vendor fraud. Often, departments will have separate electronic data systems with manual interfaces. Organizations should eliminate these or put controls in place to stop any larceny at these transfer points. Simply put, this is the time to clean house top to bottom and make the organization as secure and efficient as possible. Draw on the skills of many professionals in this process including attorneys, public relations professionals and accounting specialists.

We know that people steal from their employers or the organizations with which they do business because they believe that they can without getting caught. The risk/reward equation tells the fraudster that it is a victimless crime that probably has no consequences. The answer to this view is a system that becomes dedicated to saying no to this type of behavior—a system that makes it very clear employees are monitored and the organization values and demands integrity. There is no need to reinvent the wheel in this regard because countless organizations have met this challenge and have become stronger as a result. It takes purpose, a solid program and the will of determined leadership.