What Segregation of Duties?​​​​
A lack of checks-and-balances enables a local government CFO to embezzle public funds.​

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​​The former chief financial officer (CFO) of an Indiana township took advantage of his position to embezzle more than US$300,000, fueling a spending spree that included a new house, a pickup truck, Caribbean vacations, and jewelry, the Indianapolis Star reports. Alan Mizen was the township's CFO from 2001 to 2011. According to an audit by Indiana's State Board of Accounts, Mizen had authority to write and sign checks, and also balanced the township's books and wrote its annual report. This enabled him to cut a check for US$343,541 to a fictitious attorney general's account, fake an invoice in the accounting system, and then deposit the check into a bank account he had created. Mizen has pleaded guilty to federal corruption charges.

Lessons Learned

The amount of money embezzled in this case (less than US$500,000) may seem relatively small compared to many other fraud incidents I have written about in previous columns, but the potential impact of fraud committed by local government public officials is enormous. U.S. census statistics indicate that there are more than 16,000 different civil townships, each with its own governance, authority, and accountability structure. At the heart of this case is an almost complete lack of controls over the activities of the Center Township government's CFO during a period of several years, as noted by an Indiana State Board of Accounts audit.

In numerous other articles, I have shed light on some of the main types of controls and measures that internal auditors should be aware of and use in their work to combat this kind of fraud, including those intended to address gaps in internal controls over financial management, a lack of segregation of duties, and inconsistent background checks on employees. Auditors also need to be vigilant about fraud "red flags" such as changes in an employee's lifestyle that involve significant increases in personal spending on luxury items. For cases involving local governments, it is important for auditors to periodically review the adequacy of the basic governance and authority regime intended to direct the behavior and activities of officials and employees, as well as how well they are being followed, particularly by the lead trustee and the treasurer.

  • The Trustee: The duties and obligations of county/township officials vary widely from state to state and from one local government to another. For example, in some places, the county trustee has additional duties such as maintaining cemeteries and administering insulin to the sick. In many instances the most senior official, the trustee, has five major functions:
      1. Collect all state and county taxes on property.
      2. Keep a fair and regular account of all the money received.
      3. Receive the county's bills and maintain a record of all bills received and related details.
      4. Keep regular accounts of all payments made in relation to bills received.
      5. On leaving office, deliver all books and papers of the office to his or her successor.
  • The Treasurer/CFO: Duties include the receipt and payment of county/township funds. Typical state legislation governing township/county governments specify at least three major treasurer duties/obligations that are central to this case:
    1. Monies that the treasurer receives must be allocated to one of the township's approved funds. Other special purpose funds may be established, but they must be authorized by the entire township/county government.
    2. The treasurer must file a sworn, itemized financial accounting statement, typically monthly, with the county executive.
    3. All officials, including the treasurer, are prohibited from requiring or allowing checks or other forms of payment to be payable to the official in his or her own name, rather than the name of the governmental entity, the office, or the official's name and title.  

It is apparent that the Center Township CFO was defrauding its government and citizens with regard to the above obligations. However, the problem may not have been limited to this. Auditors looking into similar cases should consider whether the trustee played a role in the fraud, and whether his or her activities were reviewed.

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