January 24, 2012
Disabled Financial Controls
A state audit has cited questionable expenditures at Michigan Rehabilitation Services, which helps disabled people find jobs, according to an article published in the Detroit Free Press. Michigan's auditor general said the state agency failed to show public funds were spent appropriately and failed to recover expensive equipment from people with physical or mental disabilities who left the program and no longer needed it. The head of the agency said she's taking steps to correct weak financial controls that led to questionable spending and that the agency has reviewed and clarified policies, as well as increased staff training.
When an audit uncovers weak financial controls — that permit various types of abuse and wasteful practices — and poor documentation and control over expenditures, it is surprising that fraudulent activities are not identified. Abuse is the breeding ground for fraud, and control weaknesses often lead to criminal acts.
The state agency should be commended for acting swiftly on the audit findings and strengthening the financial controls. However, this case reminds us of the importance of an annual fraud risk assessment that involves senior management and staff. Annual risk assessments often identify:
- Unclear policies and procedures.
- Insufficient staff training.
- Inconsistent documentation to support purchase, use, and tracking of equipment.
- Lack of clarity as to what constitutes a valid expense.
- Wasteful purchase decisions (e.g., new versus used equipment).
It is important for internal auditors to verify that an organization's policies and procedures clearly identify appropriate transactions, that staff training is provided on regular (e.g., yearly) basis, and that management is monitoring activities. Auditors also should strive to make management understand that a few hours spent on identifying and assessing fraud risks can go a long way toward ensuring that controls are adequate and functioning as intended.