Protection Against Fraud: Advice On Guarding the Public Purse

(This article appeared in Maine Townsman, October 2012 and was written
by Douglas Rooks)

The headlines can be unsettling. A town treasurer, clerk or tax collector is suspected of stealing money from municipal accounts. The offense may have happened over many years. It may have been in a small town with few employees, or one where several different people handle money daily.

Whenever it happens, it sends shock waves through the municipal community. As Kennebunk Town Manager Barry Tibbetts puts it: “If one person fails, the whole organization takes a hit. And if one town fails, it reflects on the entire municipality community.”

Prosecutions for fraud and misappropriation of funds are uncommon in Maine, but they do happen. Businesses can be victimized but in recent years there have been cases involving Little Leagues, Boy Scouts, snowmobile clubs and other non-profits. No organization seems immune.

Still, there’s an added sting when a municipal official or employee is involved. “We don’t own this money,” said Tibbetts. “We’ve been entrusted with it by the people, and it’s our job to keep it 100 percent safe.”

Ron Smith is an auditor whose firm, RHR Smith & Co. of Buxton, does the books for many Maine towns and counties. He’s also an expert on forensic audits and has worked with law enforcement agencies on investigations involving Maine municipalities.

He minces no words in describing some of the flaws he’s found both in hiring and financial management. “Everybody thinks it can’t happen in their town, but it can. These are crimes of opportunity and that opportunity is there in too many cases,” Smith said.

Most people are honest, he agreed, but people can be tempted, and municipal government should take steps to guard against financial misconduct.

Maine towns and cities are required by statute to have annual audits, but Smith said selectmen and councils shouldn’t assume that receiving an audit certificate means everything is OK.

“Every town is different. No two are alike,” he said. “You have to have systems of financial controls and you have to make sure they work.”

MORE EYES = MORE SECURITY

Smith said very small towns, which may have few or no employees, may be more vulnerable to certain kinds of fraud because there are so few checks made on financial transactions.

“If one person is handling all the money and making all the deposits, there’s always that possibility, even if the selectmen are signing off,” he said.

In fact, until 2009 it wasn’t illegal for town treasurers, clerks and tax collectors to deposit municipal funds into their own personal bank accounts.

Smith speculates that, years ago, when it was difficult to get to a bank from remote areas of the state, commingling personal and public funds may have seemed like a reasonable practice. But when his firm helped bring this to the Legislature’s attention, he said some lawmakers were “dumfounded” that it wasn’t already prohibited.

Now it is. The bill prohibiting the practice was sponsored by Rep. Diane Tilton (R-Harrington), who also works for RHR Smith part-time. When the topic came up at the firm, Tilton listened.

“We’d been lamenting that in some towns the same bad decisions kept being made even after auditors had told them about the problem,” she said. “Then somebody said, ‘Maybe we could change the law.’ ” As a new legislator, she volunteered for the assignment.

She recalls little debate at the State and Local Government Committee, which unanimously endorsed it when the bill came up for a hearing as LD 331. “One of the committee members spoke right up, and said, ‘How can they still do this? It should be against the law,’ ” Tilton recalled.

BILL MOVED QUICKLY

The bill moved swiftly through both houses and was signed by the governor. The relevant sections of the statutes governing treasurers, clerks and tax collectors now state that each “is prohibited from commingling personal funds with any funds collected for a municipality.”

 

Smith says that the new provision is not academic. When he investigated possible frauds earlier, the fact that an official had deposited public money in his or her account could not be used as proof. In some cases, “the perpetrator knew this and knew that it provided an out for them.”

Some towns that have professional managers who are trained in financial issues, elect their treasurers and clerks. “I had people tell me that they didn’t need to follow the rules the administrators laid down, that they were accountable only to the people,” Smith said. “And I couldn’t really dispute that.”

Rep. Tilton said she’s heard discussion among lawmakers about whether towns should be allowed to continue electing treasurers, or instead requiring appointments with specific job requirements. She’s not prepared to sponsor such legislation, though.

“Towns already have the option to appoint treasurers if they want to. I don’t feel like we should be forcing them to change,” she said.

Tibbetts, in Kennebunk, suggests a different approach. “If you have more than one account, require them all to be audited,” he said. “If you’re not auditing all the accounts, there’s the possibility of wrongdoing.”

Along with good financial practices, towns and cities need to look hard at who they’re hiring.

“It all starts there,” said Rick Dacri, an organizational development consultant from Kennebunkport, who advises municipalities on human resources issues. “You’ve got to hire the right person.”

That should include not only background checks – which are sometimes still neglected – but also a review of credit history and other public record data, he said. “There’s a whole series of check-offs that you need to have for anyone who is going to be touching dollars,” he said.

‘YOU’D NEVER SUSPECT’

In his experience, Dacri said there are certain red flags for an employee who could be mishandling funds, and often it is “the person you’d never suspect.”

One flag is someone who never takes a vacation. What seems like a stellar work ethic might really be caused by an employee realizing that, if someone else took over temporarily, the new person could discover how funds are being misappropriated.

The simplest and best check within an office is to make sure that more than one person is involved with overseeing all transactions, Dacri said. “You should never have only one person who both writes and sign checks,” he said. “You should always be looking to have multiple people involved.”

Municipal managers say they take the idea of financial stewardship seriously right from day one.

“I wasn’t quite sure what to expect, but I knew I needed to learn quickly,” said Mike Starn, who after a long career at MMA became a city manager for the first time, in Hallowell, last year. “It became clear very quickly how large a responsibility I had to make sure everything financial was done correctly.”

Starn said computers can play a big role in making sure administrators have a handle on day-to-day financial operations.

“There’s a wealth of information in these reports. You don’t have to do the reconciliation yourself. It’s just a lot easier to see what’s going on, and where that might be a problem,” he said. Software packages that can be used in any town’s computer system are readily available, he noted.

Towns sometimes receive outside help, too. A bank where Hallowell maintains its checking account has an officer who sometimes reviews deposits where questions have arisen. “I’m not sure it’s part of her job description, but it does help us,” Starn said.

Hallowell has at least three people handling financial transactions in the clerk’s office, which makes for daily accountability.

Tibbetts, who came to Kennebunk a dozen years ago, said it’s up to towns to constantly review and improve their systems. Sometimes it may take new funding – always scarce and even more so now – but often it can come from simplifying the system.

CENTRALIZE ACCOUNTS

“When I arrived, the town had a lot of different accounts that were all being managed separately,” he said. “There were accounts for the clerk’s office, the fire department and others.” Under Tibbetts’ direction, the accounts were centralized into one, which makes it easier to scrutinize and review transactions.

Little things count, too. “It used to be you could pay bills in several different departments. People would stop you on the street and say, ‘Could you take this in for me,’ ” offering a permit fee, Tibbetts said. “Now we just tell them they’ll have to bring it to the office.”

Although many more transactions are now made by check or electronic transfer, Tibbetts says many towns still handle cash – which can be vulnerable to diversion without strict controls.

“If you operate a municipal parking lot, you’ll get a lot of cash.” Kennebunk doesn’t charge for parking, but Tibbetts estimated that neighboring Kennebunkport brings in $250,000 a year and Ogunquit even more, up to $1 million.

Computer security also needs attention, he said. When a local business lost money when someone acquired their account passwords, Tibbetts asked the bank, where the town also had its deposits, what could be done. The answer: a USB (Universal Serial Bus) interface device that must be plugged in to make a transfer, in addition to the password protection. Kennebunk typically transfers $60,000 to $70,000 for each payroll, and only two people – Tibbetts and the finance director – have the USB device.

Both town officials and the financial experts insist that while nothing can be guaranteed 100 percent, municipalities can sharply lower the odds that they’ll be victimized by fraud if they apply basic precautions.

Ron Smith said no town should assume, after a problem occurs, that it won’t happen again on the theory that lightning doesn’t strike in the same place twice.

If the culture and procedures don’t change, it can, he said.

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One response to “Protection Against Fraud: Advice On Guarding the Public Purse

  1. Pingback: Evaluating Your General Manager in a Public Utility | Uncomplicating Management

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