Fraud risk is nothing new to tribal governments, but in these challenging economic times, the risk of fraud has increased. Tribal government fraud is a significant issue that affects both tribes and their members. Like all organizations, tribal governments must be prepared to manage these risks and their potential impact.
First, let’s look at some of the facts surrounding fraud. According to the Association of Certified Fraud Examiners’ (ACFE) 2014 Report to the Nations on Occupational Fraud and Abuse:
• A typical organization loses 5 percent of its revenue each year to fraud.
• Fraud among governmental entities accounted for 10.3 percent of all fraud—the second-highest rate for all industries.
• The median loss caused by misappropriation-of-assets fraud is $130,000.
• The typical amount of time between the onset of a fraud and its detection is 18 months.
• Organizations with a fraud hotline were able to detect fraud 50 percent faster than those without.
• Only 3 percent of fraud instances are detected by an organization’s annual audit, making this among the least effective antifraud controls.
In a recent case of fraud perpetrated against a large tribe, the opportunity for fraud was present—and it allegedly allowed the executive director of construction to lead an effort to defraud the tribe of $7 million. This tribe’s lax tone at the top and its lack of effective internal controls and proper procedures cost the organization dearly, and not only in money. But the story doesn’t need to end this way. Preventative measures can save your tribe time, money, and heartache.
Let’s look at the top five tips that can help your tribal government in the prevention and detection of fraud.
STRONG TONE AT THE TOP
Intolerance of fraud by your governing body is a strong deterrent. Elected officials must be required to hold themselves to the highest standards of ethics and integrity—which should be outlined in a clear code of conduct—and deal with fraudsters swiftly and fairly. When the governing body walks the talk, so to speak, those who might consider committing fraud will think long and hard about the consequences of their actions. Conversely, without a strong tone at the top, individuals may feel they have nothing to lose by trying to defraud the tribe.
EFFECTIVE INTERNAL CONTROLS AND POLICIES
Prevention is the most effective fraud-fighting measure. Approach it proactively, starting with a fraud risk assessment, which can then be used to implement control activities that mitigate any risks it identifies. Both preventive and detective controls should be implemented, especially in any area that’s been identified as posing a higher risk of fraudulent activity. Antifraud controls include a large range of activities, including:
• Multiple levels of approvals
• An audit committee composed of council members and others but not the CFO or others in executive management
• Job rotation or mandatory vacations
• Timely account reconciliations (at least monthly)
• Segregation of duties
• Physical security of assets
• Background investigations on prospective employees
• Antifraud training
• An effective, well-trained internal audit function
The ACFE offers a free fraud-prevention check-up test on its Web site to help entities test their fraud health and identify major control gaps. Taking this test can help you address issues before it’s too late.