Hi,
When money goes missing in a small government structure, the question the board always asks afterwards is the same one: “why didn’t the auditors catch it?”
The uncomfortable answer is that they were never looking for it. A financial statement audit is designed to give reasonable assurance that the statements are fairly presented, not to detect a long-running theft. Auditors test balances and samples. A careful person moving small amounts steadily, who also writes the receipts, will sit comfortably below every threshold the audit uses. Boards routinely assume the annual audit is a fraud check. It is not, and it never was.
Small public entities are unusually exposed, for reasons that have nothing to do with the people involved:
- Cash arrives in person. Utility payments, permit fees, court fines, transfer station charges, parks and recreation registrations, library fines. Cash with a paper trail written by the same hand that takes it.
- One person does everything. In a two or three person office, the same clerk bills, collects, deposits, records, and reconciles. That is not negligence, it is arithmetic.
- Elected officials may have no accounting background, and asking a long-serving treasurer for documentation feels like an accusation in a town where everyone knows everyone.
- Turnover is low. The same person holds the same role for twenty years, and nobody has ever seen the work done any other way.
The single most reliable warning sign costs nothing to look for: someone who will not take time off. Not dedication. A scheme that requires daily maintenance cannot survive two weeks of somebody else opening the mail.
A handful of controls stop most of it, and none of them need budget or headcount:
- Split the duties. Whoever handles money should not also record it and reconcile the account. Even splitting one step across two people closes most of the gap.
- Have the bank statement opened by someone outside the process. A board member or second staffer reviewing the unopened statement each month catches an enormous share of problems.
- Require mandatory time off for anyone handling cash or reconciliations, with the work genuinely covered by someone else.
- Second approval on payments above a set amount, and on every new vendor added to the system.
- Give the board real monthly financials, not an annual summary. Oversight that happens once a year is not oversight.
- Provide a way to report anonymously. Tips are the most common way this gets discovered, but only where people have a safe route to raise one.
There is also a liability edge that catches boards by surprise. Public official bonds and crime insurance policies frequently condition payment on reasonable controls being in place. A loss in an office with no segregation of duties can be a loss the policy declines to cover, which is the point at which the conversation turns to whether the governing body met its own oversight duty. State comptrollers and attorneys general take a particular interest in these cases, and the findings are public.
None of this is about distrust. It is about protecting the entity, the board, and the honest staff who deserve a system that clears them automatically instead of leaving them the only person who could possibly have done it.
This is the work we do alongside the audits: designing controls that fit a three person office, reviewing reconciliations with an outside set of eyes, and building board and council reporting that actually supports oversight.
Reply to this email by Friday and we will set up a free 15-minute call with one of our senior government specialists. Tell us how many people touch money in your office, and we will tell you on the call which duty to split first and what it would take to do it without hiring anyone.
Sincerely,
—
George Dimov, CPA
Licensed and Insured
(833) 829-1120 toll free
(212) 994-8081 Fax
www.dimovtax.com