By now every good government accountant is well aware of the largest municipal fraud in American history. That is the fraud perpetrated at City of Dixon, Illinois, where the Comptroller for the City successfully misappropriated over $53 million in City funds using an elaborate scheme of transferring monies out of the Town’s Money Market account to various other legitimate Town accounts, then into the Town’s legitimate Capital Development Fund Account and finally wired monies to a fraudulent bank account opened by the Comptroller using the City’s name and naming it after a City Sewer Project. However, she was the only individual that knew about the account and the only individual that was a signor on the account.
It turns out that this fraud could have easily been detected and prevented early on by implementing a few internal controls. Segregation of duties is everything. If someone separate from the Comptroller opened the bank statements when delivered in the mail each month, they may have noticed more bank account statements than were presently accounted for in the general ledger. In fact, this is how the Comptroller was detected. She went on vacation, and when a Town Clerk opened the bank statement delivered to the City, they noted that it was not a bank account they had ever heard of before. Vacations do benefit both the employee and the employer in the case of shared responsibilities when someone is gone. Second, no one should underestimate the importance of a good bank reconciliation and review. Had someone reviewed the Comptroller’s bank reconciliations to ensure the transfers between bank accounts agreed with each bank statement, they would have eventually noticed transfers out to a bank account with no corresponding bank statement, or a bank statement without a bank reconciliation to go along with it. Let’s recap four easy controls that could have prevented and detected this enormous fraud:
- Someone separate of check writing and wire functions should have received bank statements directly.
- Require all employees, regardless of title, to take vacations.
- Have two individuals review the bank statements every month for unusual activity.
- Scrutinize the bank reconciliation transfers and wires to frequently paid accounts.
A few simple, cheap, yet effective internal controls can go a long way in detecting and preventing frauds like that at Dixon, Illinois from happening to your City, Town, School or Organization.
By Brian Hemmerle, CPA, CFE