My office just finished two large reports, one being our yearly audit of federal money flowing through Mississippi and the other a review of all the investigations we’ve completed in the year that I’ve been State Auditor. The takeaway from both is that theft of public money and the lack of controls to prevent fraud are still big problems in our state. This year we issued 64 “demands” (mandates that misappropriated public money be returned), which is 24 more than last year. Our audit of federal money also had 63 “findings,” or audit issues to be addressed, which is almost double the number of findings
from five years ago.
If these issues are worsening in the public sector, my fear is that they are also a problem in Mississippi’s private sector.
The same sorts of underlying factors that cause theft of public dollars in Mississippi are present in private businesses here. We identify these factors through something called the “fraud triangle.” The triangle states that when you see employees who 1) have a financial need, 2) have the opportunity to steal, and 3) have rationalized theft of other people’s money, then you have a fraud risk.
In Mississippi, long-standing challenges with poverty often create financial need, both in the public and private sector. Small government offices (and small business) tucked away in far-flung areas can create opportunities for theft. This is because, in offices like that, too few employees often have too much control over money with too little oversight from co-workers.
All that remains is for an employee to decide that stealing isn’t all that bad, or that everyone is doing it, or that there really are no victims when they steal from a big pool of money, or that they are owed more than they are being paid, or any other rationalization that is common in white collar crime, and boom—the conditions for fraud are there, and your office can lose money.
So what lessons can your business learn from our audit reports and the examples of fraud we’ve seen in the last year?
The first is that controls, particularly the separation of duties, are important. Take this example: the state uses software to manage pay, hiring, and firing of public employees. If too few employees have too much control over that software in an agency, then an employee might be tempted to create a “ghost employee” in order to funnel money into their own pocket. If our audit finds this lack of controls, a good solution would be to separate the duties related to the software—so separating out the responsibility for entering employees into the software from the responsibility for managing payroll—in order to prevent fraud.
You might think about the employees in your own business who have a lot of control over handling money, and you might require multiple employees to sign off on big transactions or different employees to take over parts of their job. Remember that it doesn’t matter how much you trust your individual employees. Many of our cases involve well-respected members of the community who had the complete trust of their bosses.
The second lesson is that employees who are living outside their means are a fraud risk. For instance, a recent audit revealed a school administrator had used his position to pay for personal benefits for himself, like a car allowance, a credit card for fuel, a stay in a luxury hotel room, a subscription to in-flight internet service, etc. without proper approval. Clearly this employee used public money to live a lifestyle higher than what he could afford on his own.
A third lesson is that employees with too close of a relationship with your vendors can be a problem. Good relationships are critical in business, but if two people are too close, they may be tempted to engage in a conspiracy to defraud you. Our large federal money audit, for example, showed an agency where employees were close friends with some grantees who received money from the agency. The result was the agency ignored questions about whether grant money was being spent appropriately by those friends. At minimum this created the potential for fraud and kickbacks.
These lessons are, of course, just the tip of the iceberg. Our audits, including the 2018 Single Audit and the 2019 Exceptions Report that I’ve discussed here, are all publicly available online at www.osa.ms.gov if you want to take a deeper dive. My hope is that these lessons that we have learned the hard way will help you prevent fraud in your business and prevent money from being stolen from you, your employees, and your customers.
» SHAD WHITE is the 42nd State Auditor of Mississippi
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