DEFRAUDING A TOWN IN FINANCIAL CRISIS

Auditors have alleged that shoddy and deceptive bookkeeping allowed an employee to bilk CAD $113,000 from a Nova Scotia town, The Globe and Mail reports. The province of Nova Scotia took over Bridgetown after the entire town council resigned due to overwhelming financial problems earlier this year. According to the audit report, an employee took advantage of existing loopholes and benefitted from a conversion to a new accounting software system — for which the town relied on on-the-job training rather than formal staff training. Although the audit report does not name the former employee alleged to be responsible, it does state that the individual has admitted to fraud.

Lessons Learned

Much is made of the fraud triangle — opportunity, motive, and rationalization — and with good reason. The elements of the triangle often are present when a fraud occurs. However, not all elements will be obvious or are necessary for fraud to happen. In the Bridgetown case, the opportunity was the conversion to a new accounting system. After a decision was made to forgo formal training, a single employee, according to the auditors, was “most knowledgeable about the system and was frequently the ‘go-to’ person.” This situation demonstrates the importance of segregation of duties.

The cost of controls must be weighed against the potential risks. Control weaknesses — such as a lack of segregation of duties — often exist because the perceived cost of addressing the issue is too high. However, it is important to take a fraud risk perspective and consider the possible costs if the control weakness is exploited. For example, using on-the-job training for a new accounting system may save money in the short term, but it could be more expensive in the end.

Ensuring appropriate controls exist can not only protect an organization from monetary loss but also maintain confidence in its reputation.


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