Instructions to Prevent and Detect Fraud: Implementing Internal Controls

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Instructions to Prevent and Detect Fraud: Implementing Internal Controls Office of the State Auditor Nancy Bode Assistant Legal Counsel Presentation for the 2008 MMBA Annual Conference Copyright: 2008 Office of the Minnesota State Auditor

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Office of the State Auditor Role and Responsibility Oversight incorporates: -Counties -Cities -School Districts -Towns -Police and Volunteer Fire Relief Ass'n Pension Funds -Soil and Water Conservation Districts -Port Authorities -TIF Districts - As well as roughly 150 other unique areas Copyright: 2008 Office of the Minnesota State Auditor

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Office of the State Auditor Divisions Audit Practice Pension Tax Increment Financing Government Information Legal/Special Investigations Copyright: 2008 Office of the Minnesota State Auditor

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Legal/Special Investigations Division www.auditor.state.mn.us 525 Park St., Suite 500 St. Paul, MN 55103 Nancy Bode 651-297-5853 Nancy.Bode@state.mn.us The Legal/Special Investigations Division researches charges of burglary or abuse of open assets. It likewise gives lawful consistence data and preparing to nearby government authorities. Copyright: 2008 Office of the Minnesota State Auditor

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Types of Fraud Reviewed by the Office of the State Auditor Theft Minn. Detail. § 609.52 Includes transitory taking Even little measure of open assets is a lawful offense Embezzlement – Minn. Detail. §§ 609.445 and 609.54 – Refuse or discard to turn over open assets – Felonies Copyright: 2008 Office of the Minnesota State Auditor

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Type of Fraud Reviewed by the Office of the State Auditor (proceeded) False Claims - presenting (Minn. Detail. § 609.465) - allowing or paying (Minn. Detail. § 609.455) - felonies Forgery - altering an open record with plan to cheat (Minn. Detail. §§ 609.625 or 609.63) - felonies Misuse of Public Funds/Assets Copyright: 2008 Office of the Minnesota State Auditor

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Opportunity We can control Rationalization I'll pay it back They don't pay me enough They'll never miss it Motive/Incentive (Financial Pressure) Often betting The Fraud Triangle Copyright: 2008 Office of the Minnesota State Auditor

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Reduce Risk of Fraud: Tools of Protection Segregation of Duties Internal Control Procedures Environment Copyright: 2008 Office of the Minnesota State Auditor

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Segregation of Duties No representative ought to be in a position to confer misrepresentation and afterward disguise it Example: Person gathering/receipting money ought not: Post money receipts to the general record framework Process money distributions Prepare billings Make bank stores, wire exchanges Copyright: 2008 Office of the Minnesota State Auditor

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Segregation of Duties - Examples Rentals took care of by City Clerk Entertainment – City Clerk issues check Compensating Controls for Deposits Turn in Z-tapes to City Clerk with store data Each worker has possess drawer that the representative tallies toward the end of his/her day of work Liquor Store administrator supports all voids/discounts Mandatory excursion arrangement – requirement for broadly educating Copyright: 2008 Office of the Minnesota State Auditor

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Numbered receipts for all installments/deals Reconcile receipts with stores day by day Daily stores Do not leave receipts unattended Why? On the off chance that no receipt, nobody sees if not saved Detect receipts never kept Detect "lapping" (supplant money with check) Reduce danger of misfortune Internal Controls Receipt of Funds Copyright: 2008 Office of the Minnesota State Auditor

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Ring all deals into enlist Use money/check work Review voids or over-rings Honest report of over/short every day Why? Record of receipts Detect "lapping" Frequent voids may demonstrate money expelled Internal Controls Cash Registers Copyright: 2008 Office of the Minnesota State Auditor

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Endorse check for store as got Cash individual checks or 3 rd party checks? Sum over buy? Made out to open substance (e.g., not "money") Employee initials on checks got Nsf check strategy Why? Decrease chance checks will be taken and changed Public element is not a bank Reduce nsf checks Internal Controls Checks Received Copyright: 2008 Office of the Minnesota State Auditor

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Employee & chief validate hours worked See OSA's Statement of Position on Employee Timekeeping Procedures Why? Statutory prerequisite (Minn. Detail. § 412.271) Accurate & solid finance framework Internal Controls Employee Timekeeping Copyright: 2008 Office of the Minnesota State Auditor

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Detailed receipts Original receipts Reference claims endorsed (with sums) in minutes Why? Minn. Detail. § 471.38 Prevent unapproved installments Prevent "cut up" Internal Controls Employee Expenses Copyright: 2008 Office of the Minnesota State Auditor

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Internal Controls Work with Entity's Bank No money once again from stores No check getting the money for No reserve exchanges without Council determination Copyright: 2008 Office of the Minnesota State Auditor

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Check taking care of strategies Cell telephone Use of open substance's property Why? Stay away from issues Allow teach where proper Consistency for all representatives Internal Controls Written Policies Copyright: 2008 Office of the Minnesota State Auditor

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Environment similar principles apply to all Don't deprecate interior control methods Don't permit administration to supersede methodology Be aware of worker's outside advantages It's people in general's cash Copyright: 2008 Office of the Minnesota State Auditor

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Red Flags: Segregation of Duties No excursions Takes records home Takes on isolated obligations Works when others gone Time sheets not inspected or marked Only individual who knows the occupation/PC Copyright: 2008 Office of the Minnesota State Auditor

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Red Flags: Internal Controls Noncompliance with inner controls Missing or late reports Missing or late documentation Late stores Outstanding or out of succession checks Copyright: 2008 Office of the Minnesota State Auditor

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Red Flags: Environment Unexpected or ineffectively clarified misfortunes High level of discounts, returns, voids The "domineering jerk" Too occupied to manage "simple subtle elements" Copyright: 2008 Office of the Minnesota State Auditor

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Licenses Building grants Rentals Park & rec classes Swimming pool Water/service charges Liquor stores Know the sum in any change subsidize (beginning equalization) Internal controls Segregation of obligations Cash Receipts Special Risks Copyright: 2008 Office of the Minnesota State Auditor

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Suspected Fraud Criminal? Disciplinary Action? Get Advice Copyright: 2008 Office of the Minnesota State Auditor

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Suspected Fraud Minn. Detail. § 609.456 Report to: State Auditor (in composing) Law Enforcement Copyright: 2008 Office of the Minnesota State Auditor

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Bonds Have bonds set up Two primary sorts of authority or worker bonds Fidelity Bond: covers representative deceptive nature Faithful Performance (Surety) Bond : covers any misfortune to open element or individual from open brought about on the grounds that worker neglected to loyally perform obligation Copyright: 2008 Office of the Minnesota State Auditor

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www.auditor.state.mn.us Our NEW site incorporates: Statements of Position Investigative Reports Internal Control Letters E-Updates (Avoiding Pitfalls) Other Copyright: 2008 Office of the Minnesota State Auditor

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