A former auditor for the Minnesota Department of Revenue was sentenced to five years in federal prison after defrauding taxpayers of nearly US $2 million, according to an article published in the Star Tribune. The woman, who said a gambling addiction caused her to devise a fraud scheme, created more than 200 phony state tax refunds and conspired with her sister and niece. The former auditor had worked for the department since 1981 processing legitimate tax overpayments.
Lessons Learned

This case illustrates several important attributes of fraud schemes. First, the architect of the scheme had a serious gambling problem, which was a red flag. Second, fraud often involves a person abusing a position of trust, and may include collusion. This scheme included manually creating more than 200 phony state tax refunds with the help of two outsiders.

Monetary theft is only one way an organization suffers when a fraud is committed. In this case, there was a detrimental effect on other employees as well as a loss of goodwill and an erosion of public trust. In many cases, intangible costs can be more damaging than financial loss. This is particularly true in cases where charitable organizations suffer financial losses as a result of employee fraud.

It is important for organizations to implement and enforce a strong anti-fraud policy that takes actions against employees who commit fraud. Employees need to understand that management will not tolerate any act of fraud and will prosecute offenders to the full extent of the law. Organizations must take action to address the control weaknesses that allow a fraud to occur. Conducting a post-mortem can help identify weaknesses and fraud risks, as well as ensure both preventive and corrective measures are in place, and should include an assessment of whether the control weaknesses exist in other locations.

On a personal note, every time I read about fraud schemes, I ask: Where was the supervisory review? Where were the internal auditors? Further, I believe the audit committee has an important role to play in advising senior management on the effectiveness of risk management processes, the adequacy of the risk-based audit plan, and the number and quality of audit resources. Has anyone examined the audit committee’s roles and responsibilities?

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