Spring 2009 issue of Horizons

Raise Your Expectations CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS CONSULTANTS

Internal Audit Many large governments have a formal internal audit department. While small governments generally find this cost-prohibitive, these governments can still achieve the same objective by creating an internal audit committee, as many small not-for-profit organizations do. Such a committee should be headed by a member of the government’s ruling body or an independent financial expert appointed by the ruling body. The following are procedures that the internal audit committee should perform, as recommended by Edward J. McMillan, CFE: • Review the prior month’s bank reconciliation detail. • Ensure that the organization’s internal control policies are effective and, more importantly, being followed. • Meet with representativesof thebank to reviewsignature cards to ensure that all signers are authorized and that there are no unauthorized accounts. • Meet with the insurance agent to ascertain that coverage is adequate for all policies, with particular attention to fidelity bonds. • Test the payroll by comparing payroll records to personnel files. • Contact each employee directly to ensure that there are no “ghosts on the payroll.” • Interview all employees who are responsible for receiving and disbursing checks to ensure that policies and controls are adequate and being followed. • Test disbursements to ensure that invoices have been approved for payment properly. • Check the accounts payable files and physically contact new vendors to ensure that they exist. The internal audit committee should report its findings to the governing body and external auditors. Developing an internal audit committee may be a government’s best and, in many cases, only way to determine that internal controls are functioning properly. In addition, the ACFE study noted that 18 percent of uncovered fraud schemes were detected as a result of internal audit procedures.

Promoting Tips The ACFE study noted that 50 percent of uncovered fraud schemes in the government sector were initially detected through employee tips. Governments should encourage such tips by developing a formal whistleblower policy. This policy should describe the method in which employees can report fraud without fear of retaliation. In order to make the process more confidential, the government should consider using a third party “whistleblower hotline.” Under such a system, a vendor receives phone calls directly from whistleblowers, logs the information gained from these calls, and reports the issues to the appropriate government official. Whistleblowers may report their tips anonymously if they so choose. For most such hotlines, the costs of implementation and ongoing usage are not significant. Conclusion Fraud is prevalent in the government environment, and the current economic crisis has given employees all the more reason to consider attempting a fraud scheme. While the risk that fraud will occur can never be completely eliminated, governments do have an obligation to constituents to minimize this risk to the extent possible. Developing strong internal controls, ensuring an active internal audit function, and encouraging employee tips are the most effective ways of accomplishing this objective.

Questions? Contact:

Jeff Winter, CPA, CGFM Partner-in-Charge Public Sector Services Group 314.290.3408 jeff.winter@rubinbrown.com

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