Thefts of Cash From Local Governments are Common

By Charles Hall | Asset Misappropriation , Local Governments

Thefts of cash from local governments are common, are they not? 

How many times have you seen a local newspaper article like the following?

Johnson County’s longtime court clerk admitted today to stealing $120,000 of court funds from 2015 through 2016. Becky Cook, 62, faces up to 10 years in federal prison after pleading guilty to federal tax evasion and theft.

Thefts of Cash from Local Governments

Usually, the causes of such cash thefts are (1) decentralized collection points and (2) a lack of accounting controls.

1. Decentralized Collection Points

First, consider that governments commonly have several collection points.

Examples include:

• Recreation department
• Police department
• Development authority
• Water and sewer department
• Airport authority
• Landfill
• Building and code enforcement
• Courts

Many governments have over a dozen receipting locations. With cash flowing in so many places, it’s no wonder that thefts of cash are common. Each cash receipt area may have different accounting procedures – some with physical receipt books, some with computerized receipting, and some with no receipting system at all. 

A more centralized receipting system reduces the possibility of theft, but many governments may not be able to centralize the receipting function. Why? Here are three reasons:

1. Elected officials, such as tax commissioners, often determine how monies are collected without input from the final receiving government (e.g., county commissioners or school). Consequently, each elected official may decide to use a different receipting system.
2. Customer convenience (e.g., recreation centers and senior citizen centers) may drive the receipting location decision.
3. Other locations, such as landfills, are purposely placed on the outer boundary of the government’s geographic area.

What’s the result? Widely differing receipting systems. Since these numerous receipting locations have varying controls, the risk of theft is higher. 

2. Lack of Accounting Controls

Second, consider that many governments lack sufficient accounting controls for cash.

It’s more likely cash will be stolen if cash collections are not receipted. If the transaction is recorded, then the receipt record must be altered, destroyed or hidden to cover up the theft. That’s why it’s critical to capture the transaction as early as possible. Doing so makes theft more difficult.

Additional steps that will enhance your cash controls include the following:

1. If possible, provide the government’s administrative office (e.g., county commissioners’ finance department) with electronic viewing rights for the decentralized receipting locations (e.g., landfill).
2. Require the transfer of money on a daily basis; the government’s administrative office (e.g., county commissioners’ finance department) should provide a receipt to each transferring location (e.g., landfill).
3. Limit the number of bank accounts.
4. Deposit funds daily.
5. Periodically perform surprise audits of outlying receipting areas.
6. Use a centralized receipting location (and eliminate the decentralized cash collection points).
7. Persons creating deposit slips and handling cash should not key those receipts into the accounting system.
8. The person reconciling the bank statements should not also handle cash collections.
9. Don’t allow the person billing customers to handle cash collections.

If segregation of duties is not possible (such as 7., 8. and 9. above), consider having a second person review the activity (either an employee of the government or maybe an outside consultant).

Final Thoughts About Fraud Prevention for Cash

When possible, use an experienced fraud prevention specialist to review your cash collection procedures. Can’t afford to? Think again. The average incidence of governmental fraud results in a loss of approximately $100,000.

Finally, make sure your government has sufficient fidelity bonding. If all else fails, you can recover your losses through insurance.

For more fraud prevention guidance, check out my book on Amazon; click the book below. Also, see my free slide deck titled Finding and Preventing Fraud in Local Governments. Additionally, here’s a post concerning how to audit cash.

 

Omission of MD&A from Governmental Financial Statements

By Charles Hall | Auditing , Local Governments

Can a government exclude the management, discussion, and analysis from its financial  statements? This article answers that question.

According to AU-C 730, the auditor’s report on the financial statements should include an other-matter paragraph that refers to the required supplementary information (RSI). In governmental financial statements, the management, discussion, and analysis (MD&A) is considered RSI. Though the MD&A is “required” supplementary information, governments can–strangely enough–exclude it from the financial statements.

Omitting the MD&A – Effect on an Audit Opinion

If the required supplementary information is omitted, the auditor should include an other-matter paragraph in the opinion such as the following:

Management has omitted the management, discussion, and analysis that accounting principles generally accepted in the United States of America require to be presented to supplement the basic financial statements. Such missing information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. Our opinion on the basic financial statements is not affected by this missing information.

Notice the omission of the MD&A does not affect the opinion rendered (in other words, it does not result in a modified report).

RSI Audit Standard

AU-C 730 is the audit standard for required supplementary information. Click here for an overview of the supplementary information audit standards. The former supplementary information standards were SASs 118, 119 and 120; those standards are now–under the Clarity Standards–AU-C sections 720, 725, and 730.

Omitting the MD&A – Effect on a Compilation Report

In compilation reports, the language is as follows:

Management has omitted the management, discussion and analysis that accounting principles generally accepted in the United States of America require to be presented to supplement the basic financial statements. Such missing information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board which considers it to be an essential part of financial reporting and for placing the basic financial statements in an appropriate operational, economic, or historical context. 

How to Make Your Business More Profitable by Funding Depreciation

By Charles Hall | Accounting and Auditing , Local Governments

From time to time, I have clients ask me “What is funding depreciation?” And more importantly, they ask, “How can this technique make my organization more profitable and less stressful?”

Here’s a simple explanation.

Funded depreciation is the setting aside of cash in amounts equal to an organization’s annual depreciation. The purpose: to fund future purchases of capital assets with cash.

Funding Depreciation

Suppose you buy a $10,000 whiz-bang gizmo – a piece of equipment – that you expect to use for ten years, and at the end of the ten years you expect it to have no value. Your annual depreciation is $1,000.

In this example, a $1,000 depreciation expense is recognized annually on your income statement (depreciation decreases net income) even though no cash outlay occurs. The balance sheet includes the cost of the whiz-bang gizmo, but at the end of ten years, the equipment has a $0 book value, being fully depreciated.

The smart manager will annually set aside $1,000 in a safe investment – such as a certificate of deposit or money market account – for the future replacement of the whiz-bang gizmo.

If the company does not annually invest the $1,000, it has a few options at the end of the ten-year period:

• Borrow the full amount for the replacement cost
• Seek outside funding (e.g., grants)
• Use other funds from within the organization
• Ask U2 to do a special benefits concert – just kidding

Obviously, if you borrow money to replace the equipment, you will have to pay interest – another cash outlay. Suppose the rate is 10%. Now the organization must pay out $1,100 each year. If the organization funds the depreciation (invests $1,000 annually), it earns interest. If the entity chooses not to fund depreciation, it will pay interest.

Businesses that fund depreciation are always making money from interest (granted not much these days) rather than paying for it.

Another advantage to funding depreciation: you know you will have the money to purchase the capital asset. You’re not concerned with whether a creditor will lend you the money for the acquisition. You’re financially stronger.

Why Doesn’t Every Entity Fund Depreciation?

So why doesn’t everyone fund depreciation?

• Some don’t understand the concept
• Some had rather spend the cash flows for the ten years (e.g., owners taking too much in distributions)
• Some need the money just to run the organization
• In governments, elected officials desire to keep tax rates low while they are in office
• In growing businesses, the owners may need the money to fund the growth of the company
• Most importantly, it may require two cash payments (more in a moment)

Concerning the last point, if the business had to borrow money to purchase the initial capital asset, then it must make the debt service payments (cash outlay 1). If the company also funds depreciation for that same asset (making investments equal to the annual depreciation), another cash flow occurs (cash outlay 2).

If the business can ever get into a position where it pays cash for new equipment, it will be better off. Then only one cash outlay (investment funding) occurs, and the company is making–not paying–interest.

What if the organization cannot–due to cash flow constraints–fund depreciation for all new equipment purchases? Consider doing so for just one or two pieces of equipment–over time, the entity may be able to move into a fully funded position.

Who Should Fund Depreciation?

So, who should fund depreciation?

Organizations with sufficient cash flow and discipline. It’s the smart thing to do.

Imagine a world with no debt, a world where you don’t have to wonder how you will pay for equipment. Dreaming? Maybe, but funded depreciation is worth your consideration.

25 Products I Use as an Accountant

By Charles Hall | Accounting and Auditing , Local Governments

Here’s a list of accounting products that I use as an accountant and auditor:

1. Governmental Accounting, Auditing, and Financial Reporting GFOA Blue Book
2. Evernote (as my digital cloud library)
3. Sharefile (as my secure means to transfer information)
4. Caseware (electronic trial balance and working papers)
5. Excel
6. Word
7. Adobe Acrobat Pro DC (PDF maker)
8. Apple iPhone
9. Apple iPad
10. Dell laptop
11. Three extra monitors
12. Standup desk
13. Zoom (conferencing software)
14. Checkpoint (Thomson Reuter’s electronic guides)
15. CheckpointLearning (Thomson Reuter’s online CPE)
16. WordPress (blogging software)
17. LinkedIn (to participate in accounting groups)
18. Fujitsu i500 scanner
19. Keynote (an alternative to PowerPoint)
20. Outlook (for email)
21. Fantastical (iPad calendar app)
22. Basecamp (cloud project management software)
23. Livescribe 3 Smartpen
24. 1Password (to store and retrieve passwords)
25. Amazon Tap (for music)

I use all of the above products with the exception of the stand-up desk. The desk I use is from Levenger; it appears they’ve discontinued that model.

What products do you recommend for accountants?

Note: I do receive affiliate commissions on Amazon products.

Red Flags of Governmental Fraud

By Charles Hall | Accounting and Auditing , Fraud , Local Governments

Do you know the red flags of governmental fraud? Today I tell you what they are.

Fraud is detected by tips more than any other way–over 40% in the most recent Association of Certified Fraud Examiners’ survey. And many of those tips came from employees who knew the signs of fraud.

How can governments make employees aware of fraud signals? Education.

Would your employees recognize fraud if it were occurring? Some red flags are obvious. Others are not. Here are some sample governmental fraud red flags:

External Red Flags

• Unexplained increases in the wealth of an accounting employee or elected official
• Employee personal problems such as a divorce, substance abuse, financial difficulties, legal problems
• Employee living beyond his or her means
• Unusually close employee association with a vendor

Cash Receipts and Billing Red Flags

• Taxpayer complaints concerning nonpayment notices (even though payment has been made)
• A pattern of customer complaints in the utility billing and collection process
• Substantial write-offs of receivables without support
• Unexplained decreases in revenues
• A pattern of missing receipt forms

Disbursements and Purchasing Red Flags

• Altered or incomplete supporting documentation for disbursements
• Purchasing party (e.g., department head) picking up processed vendor checks rather than accounts payable personnel mailing them
• Unexplained increases in expenses
• Excessive expenses when compared to the budget
• Vendors without physical addresses

Payroll Red Flags

• Employees with no or little payroll deductions
• Excessive overtime expenses
• Excessive payroll expenses when compared to the budget

Capital Assets Red Flags

• Winning bid appears too high; all contractors submit consistently high bids
• Qualified construction contractors not submitting bids
• Reports of missing capital assets
• A lack of accountability for capital assets

General Red Flags

• A refusal by accounting personnel to take vacations
• Unwillingness to share accounting duties
• Employee irritability or defensiveness
• Complaints about inadequate employee pay
• A lack of transparency in accounting
• Rumors of unethical conduct
• A history of corruption in the government
• Financial decisions made by one person with little or no accountability
• Undocumented journal entries
• Untimely bank reconciliations
• Inexperienced or lax accounting personnel
• Missing accounting records

Just because a red flag exists does not mean that fraud has occurred, but it’s still important to know the signs. Often where there’s smoke, there’s fire. Teaching employees the signals of fraud can save your government a great deal of money.