The Office of the Auditor General conducts investigative financial audits of cities, towns, schools, separate legal entities, and political subdivisions in the state of Arizona.
Payson Needs to Implement Fraud Controls
The Office of the Auditor General serves as an independent source of impartial information concerning state and local governmental entities and provides specific recommendations to improve the operations of those entities. The Office has audit responsibility for State agencies, special districts, counties, universities, community college districts, fire districts and school districts. Our current Auditor General, Lindsey Perry, was appointed April 18, 2018. Ms. Perry is responsible for carrying out all Office audit, consulting, and investigation activities and interacts with the Legislature, state and local officials, community leaders, and other stakeholders.
The Joint Legislative Audit Committee, which oversees all audit functions of the Arizona Legislature, provides direction for the Auditor General’s Office. Subject to approval by a majority vote of both legislative houses, the Committee also appoints the Auditor General for a 5-year renewable term.
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The Auditor General states that very few of the governments that they audit have implemented effective fraud reporting systems to collect and respond to fraud tips, which is surprising given that nearly half of all frauds are detected this way. An effective system, such as a fraud hotline, allows employees and others to report fraud, waste, and abuse by phone or through a Web-based portal. Effective systems are well publicized and are designed to ensure anonymity and confidentiality. People are unlikely to report suspicious activity if they fear retaliation. The Association of Certified Fraud Examiners (ACFE) found that organizations that implemented fraud hotlines reduced their loss per case by nearly 60 percent and detected fraud schemes 7 months earlier than organizations without hotlines.
For government organizations, tips uncovered over three times as many frauds as any other method of detection. In every study conducted by the ACFE since 2002, tips have been the most common means of fraud detection.
Controls to Prevent and Detect Fraud
An organization can, and should, implement a number of internal controls to prevent and detect fraud, waste, and abuse. Lack of internal controls, override of existing controls, and lack of management review are the primary factors that allow fraud to occur. Following are a few controls that will eliminate weaknesses we commonly encounter during our audits:
Policies and Procedures—Ensure that these are in writing and that employees are familiar with policies regarding cash disbursements; attendance and leave; travel expenses/reimbursement; purchasing guidelines; petty cash; and conflicts of interest.
Preventive Controls—Require that
Receipt and Deposit Controls—from
Procurement fraud schemes result from awarding contracts for goods and services without the benefit of full and open competition. The effect can result in a government paying more for goods and services than they are worth. In some cases, kickbacks such as cash, free travel, free sporting events, or other gifts can be given to the employee who carries out this scheme against the government. In other cases, the employee decides to expedite the purchasing process to help a vendor who is a friend or relative, or just to make his or her job easier. Some of the more frequent procurement fraud schemes encountered are described as follows:
Emergency Procurement/Sole Source: An employee responsible for purchasing waives required steps in the process claiming an emergency or that goods or services are only available from a single vendor.
Split Purchases: Purchasing policies generally require that bids are solicited for purchases over a set dollar amount. To avoid competitive selection, an employee breaks a large purchase into several smaller pieces that fall below the mandatory bidding level.
Bid Manipulation: An employee manipulates bid specifications, sometimes with the help of a vendor, to give an unfair advantage to a favored contractor or supplier. Often the contract awarded does not reflect the actual goods or services needed. Change orders are then used to modify the contract.
Override of Controls: This happens when senior management intentionally over-rides purchasing policies to award contracts to favored vendors.
In 2016 the Show Low Fire Department was investigated for theft and misuse of public monies (See Report No. 16-402), in June 2016 the Pine/Strawberry Water Improvement District was investigated for theft and conflict of interest (See Report No. 16-403), and in 2017 the Pine/Strawberry Water Improvement District was investigated for theft and misuse of public monies (See Report No. 17-405).
Payson needs to protect itself from corruption by implementing some of the suggested controls by the Auditor General. We need to develop a fraud tip network including a fraud hotline as suggested by the ACFE. The potential for major conflicts of interest currently, and from the recent past have not been addressed or reported. There have been unanswered financial questions, incomplete or ignored FOIA requests, and an ongoing disrespect for our elected officials by the Town’s administrative staff. The acting Town Manager is in charge of hiring our new town manager? Is this why the process is taking so long?Why would the Town hire back our Town Clerk that retired in December “to answer phones” without informing the Mayor or council what the cost would be to the Town? It seems the town employees don’t offer support for information freely, and may have their own agenda. There are many of us looking for answers, and maybe the answer is requesting an audit by the Auditor General’s Office. The citizens of Payson deserve to know the truth. A financial investigation would demand answers to our questions, and has the authority to provide consequences for any malfeasance. You can find more information about the Auditor General’s Office HERE and to contact the Auditor General directly by email: lperry@azauditor.gov ★
