It’s been a week of fraud—how to prevent it, spot it, and what to do once you’ve found it. This is a serious topic, so let’s end the week as we often do: with movie night! Grab some popcorn and wrap up International Fraud Awareness Week 2023 with a list of movies and podcasts that offer a glimpse into the emotional side of fraud.
Every year, the Special Investigations Team at the Office of the Washington State Auditor investigates frauds in all types of governments, from large state agencies to small towns and special purpose districts. In fiscal year 2022, our Office published 13 fraud reports, representing nearly half a million dollars in misappropriated or questionable use of public resources
One of the best tools in your fraud-fighting toolbox is a bank statement review. Whether you are a finance professional, a department head, or even an elected or appointed official, reviewing the bank statements can greatly increase your odds of deterring and detecting fraud.
State and local governments should be familiar with RCW 43.09.185, which requires them to immediately report all known or suspected losses to SAO. But the statute's long history has come with a lot of questions and confusion. For example, what constitutes a “loss”? Are there times when “immediately” doesn't make sense for the situation?
Local governments rely on predictable and stable revenues from things like property and sales taxes, various charges and fees, and transfers from state and other local governments.
But not every revenue is predictable. Most governments also receive revenues from rebates, donations, collection agency payments, agreements with annual payments, or one-time fees. These revenues are infrequent or unanticipated, making them a prime target for misappropriation.
Every year, the Special Investigations Team at the Office of the Washington State Auditor investigates frauds in all types of governments, from large state agencies to small towns and special purpose districts. In fiscal year 2022, our Office published 13 fraud reports, representing nearly half a million dollars in misappropriated or questionable uses of public resources.
Reporting fraud in government
We encourage all local governments, state agencies, and citizens to report fraud allegations directly to the State Auditor's Office (SAO).
Washington state law (RCW 43.09.185) requires all state agencies and local governments to immediately notify the State Auditor’s Office if staff know or suspect a loss of public resources or other illegal activity, including certain cyberattacks. In 2022, the Legislature amended this law to require the State Auditor’s Office to establish policies that further define the loss reporting requirements. Our General Loss Reporting Policy is outlined below, and a PDF copy can be found here. State and local government employees should alert us to known or suspected incidents through the online Report a Suspected Fraud or Loss form linked below. This form is specifically to report instances where a state or local government is the target or victim of loss or illegal acts. Any citizens wishing to report other concerns about a state agency or local government should file a citizen hotline.
What to do if you suspect fraud
State agencies and local governments should take the following actions when they suspect or detect a loss of public resources or other illegal activity:
- Report the loss to SAO using the form on our website.
- Protect the accounting records. Secure all original records related to the loss in a safe place until we have completed our investigation.
- Notify others who need to know. This may include the governing body, agency head or deputies, chief financial officer or internal auditor, depending upon the circumstances.
- Notify your legal counsel.
- File a police report with the appropriate local or state law enforcement agency when advised to do so by SAO.
- Read and follow SAO’s guidance before entering into any restitution agreement with an employee.
General Loss Reporting Policy (effective August 17, 2023)
SAO is in the process of adding additional sections to this policy, which will clarify fraud reporting requirements for specific government entities and agencies. We will publish new sections of the policy on this page as they are finalized.
Governments have the primary responsibility to prevent, detect and respond to fraud, loss and other illegal activity, and should have effective policies and procedures in place to accomplish these fiscal responsibilities in the service of protecting public resources.
State law (RCW 43.09.185) requires all state agencies and local governments to immediately report known or suspected losses of public funds or other illegal activity to the Office of the Washington State Auditor (SAO). In 2022, the Legislature updated this law to require the SAO to adopt policies that further define the loss reporting process.
SAO takes seriously all instances of misappropriation and loss of public funds in government and reserves the right to investigate any potential loss or illegal activity, regardless of its nature. SAO receives reports and information about known or suspected losses through several channels, depending on the nature of loss. These channels include but are not limited to the fraud loss submission process, whistleblower submission process, citizen hotline, and risk assessment inquires with the government’s management as part of regular audit planning.
SAO has now updated this policy with the goal of clarifying which losses should be reported to SAO specifically through the fraud loss submission process.
If after reviewing this policy you still have questions, please contact the Special Investigations Division at: firstname.lastname@example.org
Section 1: Losses or Illegal Activities Exempt from Reporting Requirement
As stated in the policy overview, SAO receives reports and information about known or suspected losses of public funds through several channels, depending on the nature of loss. These channels include but are not limited to the whistleblower submission process, citizen hotline, and risk assessment inquires with the government’s management as part of regular audit planning.
Additionally, although certain losses are exempt from reporting to SAO under this policy, these losses should be documented somehow, such as in a government’s accounting system or inventory system, to name just two examples. Governments also should bring these matters to the auditor’s attention during the regularly scheduled SAO audit. Finally, governments should determine whether communications or notifications to other parties are necessary for any potential loss of public funds, including those listed here. For example, if losses involve federal funds or programs, the government should contact their federal grantor (or follow their grantor’s prescribed loss reporting procedure).
If employee involvement cannot be ruled out in any of the listed exemptions, governments should then report the loss or illegal activity to SAO even if the loss or activity is on the exemption list. “Employee involvement” means the scheme involved or was carried out by an employee of the affected government.
The following is a list of losses or illegal activities that state agencies and local governments are NOT required to report to the SAO through the fraud loss submission process.
- Normal and reasonable “over and short” situations from cash receipting operations. We recommend governments record these transactions in the accounting system as miscellaneous income and expense, respectively, and monitor this activity for any unusual trends.
- Reasonable inventory shortages identified during a physical count. We recommend governments record inventory adjustments in the accounting system.
- Unauthorized credit card attempts and/or transactions initiated by an external party, that are determined fraudulent by the bank and refunded.
- Breaking and entering or vandalism of property, including assets stolen out of government vehicles. We recommend governments report these to the police.
- Loss of cellphones, tablets, laptops or similar type assets assigned to employees that were stolen by an external party. We recommend governments report these to the police.
- Non-Sufficient Funds (NSF) checks accepted by the government. We recommend governments document these in their accounting records.
- Counterfeit currency accepted by the government. Governments should report these to the FBI.
- Eligibility-based funding provided to an external party based on incorrect or falsified eligibility information. (See additional considerations below). Examples include, but are not limited to:
- Families misreport their income to become eligible for free-reduced lunch
- Tenant or client falsifies their income or other eligibility criteria to receive housing assistance funding
- Claimant submits a fraudulent unemployment claim for payment
- We recommend governments document these items and notify interested parties depending on the source of funds.
- Cybersecurity incidents that did not have an impact on finances or financial records. See Section 2: Clarification of Losses to Report – Cybersecurity Incidents for additional details.
Losses to report directly to the audit team as part of the regular audit process
- With the exception of cyber losses defined in Section 2, losses or illegal activity resulting from actions made by parties external to your government – including vendors, contracted service providers, sub-recipients and other non-government parties – should be reported to your audit team.
Section 2: Clarification of Losses to Report Cybersecurity Incidents
State agencies and local governments must report cybersecurity incidents that involve the finances or financial records in some way. Below are some examples of activity you must report:
- Your government experiences a ransomware attack and makes a payment to the criminal actors to regain access to your data, even if your insurance company either pays the ransom or reimburses your government for the payment. This extortion payment is a financial loss as a result of illegal activity.
- Your government falls victim to a ransomware attack. You can restore your data from backups and do not pay the ransom. You should report this incident if it’s possible the attackers accessed any financial records. Keep in mind that even though attackers may have only encrypted non- financial records, they could have accessed financial records and are waiting to ransom them at a later point. Determining which records the attackers accessed involves more than simply evaluating which records the attackers ransomed.
- Your staff relies on a fraudulent email to change banking information and an electronic payment is sent to a criminal, instead of to a vendor or employee, even if your insurance company covers the loss, or the bank is able to recover your funds.
- Someone gains unauthorized access to your computer system and they may have accessed your financial records, even if those records were not harmed or impacted in any way.
- You have a security incident that might have impacted your financial records or systems, but you are not certain.
For questions about fraud procedures or the fraud program, contact us at email@example.com.
When was the last time you looked at your finance team's vacation patterns? It may surprise you to learn that many frauds and other breaches of internal controls come to light only after employees go on vacation and other staff take over their tasks.
FOR IMMEDIATE RELEASE
Dec. 1, 2022
OLYMPIA – The Pierce County Housing Authority has taken steps to improve its financial safeguards since a $7 million misappropriation two years ago, but more needs to be done, according to an accountability audit released today by the Office of the Washington State Auditor.
The world of fraud is complex and expansive—so much so that doctoral dissertations could be written on the subject. To truly understand fraud, we must examine these four key angles: