The Perfect Storm

The Perfect Storm Public Fraud & Theft In the Workplace

Why The Perfect Storm? • Economic Downsizing in Local Governments

Why The Perfect Storm? • Employee Wage Freezes, Furloughs, and Reduced Benefits

Why The Perfect Storm? • Economic Hardships on Individual EmployeesLoss of Dual IncomesLoss of Investments or Home ValuesIncreased Expenses or Medical CostsLooming Retirement Date

Why The Perfect Storm? • Justification/Anger Due To “Wall Street” Bailout or Actual/Perception City Management not Sharing the Cutting Pain

Why The Perfect Storm? • Rapid Changes in Financial Systems; including speed, volume, and complexity of transactionsandImprovements to technology and improved access to personal information.

Why The Perfect Storm? • Changing Societal Values Symantec Smart Phone Honey Stick Project Planted 50 “lost” phones and tracked their movement, return rates, and pilferage of personal data • 89% Accessed Personal Data • 72% Accessed Personal Pictures • 57% Accessed Password Folders • 43% Tried to Access Banking Apps • Less than 50% tried to return the phone

“Secretary Cameron would not steal a red hot stove.” Thaddeus Steven , 1861 Frauds in My Career Number Type 8 Theft/Gift of City Service 4 Purchasing Fraud 3 Cash Stealing 3 Other Types 2 Payroll Fraud 2 Property, Equipment, Small Tools 2 Friends and Family Plan – Loans and Checking 1 Asset Conversions 25 Total

“Where do people steal the money? They steal it on the way in and the way out.Joe Derives, SAO Recent Frauds in the News $1.6 (m) – Franklin CountyPublic Works Manager Accused - Payables Fraud Took Over Bankrupt Company ID Created Quasi Bank Account Approved Invoices payable to Company 8 years

Recent Frauds in the News $1.0 (m+) - City of Seattle Project Engineer Accused - Connection/Late Comers Fees And Other Development Fees Quasi Bank Account – City of Seattle’s Name6 Years

Recent Frauds in the News $468(k) – Birch Bay WSD Finance Manager Credit Cards, Payables, Travel Fund, Quasi Bank Account 8 Years

Recent Frauds in the News $1.3 (m) – City of Arlington Finance Accounting Clerk Accounts Payable - Manual Warrants Quasi Bank Account 8 Years

Recent Frauds in the News $151(k) – City of Lakewood Police Guild Police Officer Accused - Donations for Memorial Trust Fund Quasi Bank Account 2 Years ?

“Ability is nothing without opportunity. Napoleon Bonaparte Internal Controls Strong internal controls will not stop fraud!

Internal Controls Strong internal controls will decrease the likelihood of fraud; and,

Internal Controls Strong internal controls will decrease the likelihood of fraud; and, Increase the speed in which the fraud is identified; and,

Internal Controls Strong internal controls will decrease the likelihood of fraud; and, Increase the speed in which the fraud is identified; and, Create a better record trail to identify and determine who committed the fraud, its duration, and the amount.

“Trust, but verify” Ronald Regan Good Internal Controls Dual Controls, Segregation of Duties, Four Eyes Principle

Good Internal Controls Pre Employment Background Checks • In the Franklin County fraud, the employee was hired 8 months after being released from Federal prison for creating a fake company to steal from the Federal Government.

Good Internal Controls Pre Employment Background Checks • A former Deputy City Clerk, arrested for $7.5 (k), then hired as a bookkeeper for a local roofing company and was later convicted for a $200(k) fraud.Should be noted that she said stole for a psychological need to help other people by giving them money.

Good Internal Controls Pre Employment Background Checks • Follow your background checks, and don’t hire people that do not pass the background.

Good Internal Controls • Daily DepositsDaily Cash CountsCheck and Cash CompositionDual Verification of Deposits and Posting ReportsDaily Verification of All Deposits

Good Internal Controls • Check Issue and RedemptionControl of Check StockInvoice Approval by Non-Check IssuerDetailed Receipts/Invoices for PaymentCheck Redemption by Non-Check IssuerFinal Payments and Invoices Reviewed by Non-Check IssuerPositive Pay with Bank by both Check # and Amount

Good Internal Controls • Bank Reconciliation & Online Banking Templates Setup (Quasi Bank Accounts)Daily Cash Management to Posting DepositsFormal Program Monthly of all Bank and Investment AccountsDeposit Composition(Checks/Cash/ACH/Autopay/Credit Card)Check Redemptions and EndorsementsDual Review with Supporting DocumentationDual Approval for All Online Transfer TemplatesStrong Password ProtectionUnique User NamesEmailed Alerts

Good Internal Controls • Accounts ReceivablesUtility Billing RegistersOff Book ReceivablesConnection, Latecomer, and ULID PaymentsReconciliation between Payments and Services

Good Internal Controls • PayrollWritten Documentation and Approval of Pay Rates and BenefitsReview of Check IssuesReconciliation of Taxes PaidReview of Key Employee Payroll and Paid Time Off ReportsRandom Review of Time Reporting RecordsVerification of Checks Issued to Actual Employees

“All war is deception” Sun Tzu Inside a Fraud All fraud is based on deception • Most frauds are larger than initially thought;

Inside a Fraud All fraud is based on deception • Most frauds are larger than initially thought; • Not uncommon to have “stumbled” on the fraud prior to detection;

Inside a Fraud All fraud is based on deception • Most frauds are larger than initially thought; • Not uncommon to have “stumbled” on the fraud prior to detection; • Fraud will have a civil element and may have a separate criminal element;

Inside a Fraud All fraud is based on deception • Most frauds are larger than initially thought; • Not uncommon to have “stumbled” on the fraud prior to detection; • Fraud will have a civil element and may have a separate criminal element; • Fraud auditing and resolution take a significant amount of time;

Inside a Fraud All fraud is based on deception • Most frauds are larger than initially thought; • Not uncommon to have “stumbled” on the fraud prior to detection; • Fraud will have a civil element and may have a separate criminal element; • Fraud auditing and resolution take a significant amount of time; • Rare that a person doing fraud will admit to the fraud.

Inside a Fraud Expect Counter Claims to Arise • Americans with Disabilities Act

Inside a Fraud Expect Counter Claims to Arise • Americans with Disabilities Act • Hostile Work Environment and Sexual Harassment

Inside a Fraud Expect Counter Claims to Arise • Americans with Disabilities Act • Hostile Work Environment and Sexual Harassment • Washington State Whistleblowers

Inside a Fraud Expect Counter Claims to Arise • Americans with Disabilities Act • Hostile Work Environment and Sexual Harassment • Washington State Whistleblowers • The Everyone Else is Doing Theory

“By failing to prepare, you are preparing for failure” Benjamin Franklin Your Protections When Fraud is Up the Chain Washington State WhistleblowersR.C.W. 42.40.030 protects State employees when they file a whistleblower complaint R.C.W. 42.41 Local Government Whistleblower Act Protection for Counties, Cities, and Special Purpose Districts is their own Agency’s Whistleblowers Policy, or the County Prosecutor’s Officer if the agency has not adopted a Whistleblower Policy

Reporting Requirements R.C.W. 43.09.185 – Requires state and local agencies to report immediately to the State Auditor’s Office known or suspected loss of funds or assets or other illegal activities.

Reporting Requirements R.C.W. 43.09.185 – Requires state and local agencies to report immediately to the State Auditor’s Office known or suspected loss of funds or assets or other illegal activities. Management Representation Letter – Chief Executive Officer and Chief Financial Officer are fiduciary responsible to disclose any loss of funds, or assets or other illegal activities.

Special Note – On Settlements R.C.W. 43.09.260 (7)– Requires any compromise or settlement of any claim arising from malfeasance, misfeasance, or nonfeasance, or by any action therefore, or for any court to enter upon a compromise or settlement of such action without the written approval of the attorney general and the state auditor.

Internal Fraud Team City Manager or Chief Executive Officer Police Chief or Sheriff City Attorney Human Resources State Auditor’s Office WCIA (Pre-Defense Review on Personnel Action) Colleagues (with reservations)

Final Thoughts The cost of fraud is not only measured in the in the lost dollars. • Stress • Time Consuming • Emotionally Demanding and Draining • Divisive • Tarnishes the reputation of the agency and all the other hard working honest employees All Public Employees Carry Each Other’s Honor

The Perfect Storm