Aftermath of fraud: What happens after SAO publishes its fraud report?
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
If your organization has ever been a victim of fraud, you know how intensive and time-consuming investigations can be, and how much work goes into publishing a fraud investigation report. When the investigation work is done and the report is published, we often have governments ask us, “What comes next?”
To help you plan for the aftermath of a fraud investigation, our Special Investigations Team has outlined what governments can expect after we’ve published our report.
Seeking recovery and restitution
Our investigation reports frequently recommend the affected government seek recovery of misappropriated funds and related investigation costs. This is often initiated through a written restitution agreement that acknowledges the investigation subject’s obligation and commitment to repay the affected government.
The creation of the agreement, and the specific terms laid out, are the responsibility of the affected government and its legal counsel. However, if a government decides to pursue any amount other than SAO’s determined loss amount plus investigation costs, state law (RCW 43.09) requires our Office and the Attorney General to provide written approval of the restitution agreement.
If the investigation subject does not comply with the terms of the restitution agreement, governments can consider pursuing legal options to collect the outstanding amount owed. Restitution ordered in a criminal legal proceeding does not require approval from SAO and the Attorney General’s Office.
Additional information about the restitution process can be found in our article, “How and when to seek SAO approval for a restitution agreement.”
Responding to public and media attention
After an investigation report is published, it is common for governments to receive inquiries from the public and media outlets. It’s important for governments to establish a plan to effectively respond. Consider the following tips from SAO’s fraud-prevention guide, Trust, but Verify:
- Act and respond quickly: Designate a spokesperson (if you have not already). This can be an executive leader or an elected/appointed leader. Do your best to find someone who has had some media training.
- Be transparent: Try to have as many facts confirmed as possible before speaking publicly. Once you do speak publicly and you get a question that you do not have an answer to, it is to say that you do not have the information at the moment but will find out.
- Tell the truth the first time: Make sure your facts are nailed down. Changing your facts after you have gone public with them breaks trust. If possible, tell the whole story at once. Try your best to avoid trickling out information.
- Keep the audience as the focus: Remember, reporters are trying to inform the same people you are. Do not argue with them. Ignore intentionally antagonistic people online. Do not block them, but do not engage with them either.
As a civil reporting agency, SAO does not have the authority to initiate prosecution or litigation on behalf of governments. As a courtesy, at the end of our investigation, we refer our work to the appropriate county prosecutor who may elect to pursue prosecution at their discretion.
County prosecutors receive referrals from not only SAO, but also from law enforcement, the Washington State Patrol, state agencies, and even cities that have contracted with the county for misdemeanor prosecution services. With a substantial number of referrals being made, the decision process can take time, and not all referrals will be selected for prosecution.
You should route any questions about the status or decisions related to prosecution through your legal counsel and the applicable county prosecutor’s office, as appropriate. While the decision to prosecute or pursue litigation is pending, governments should ensure all investigation and evidentiary documents are preserved under a litigation hold.
Implementing corrective controls
While restitution and prosecution are reliant on external parties, it’s critical that governments take internal action to address the loss as soon as possible. You should take the following steps to prevent future losses and restore trust with employees, leadership and the public:
- Address the control weakness: The first step in corrective action is assessing the fraud scheme and pinpointing what processes, or lack of, allowed the loss to occur. The assessment should consider relevant control factors such as adequate segregation of duties, effective secondary review, appropriate user access, and other physical and technical safeguards. You should fully address the weaknesses identified in the assessment by strengthening and/or implementing effective internal controls over those areas. If you are looking for resources to assist in improving controls, SAO provides a variety of free guides, checklists, best practices and tools in our Resource Library.
- Set the tone: Due to the nature of investigative work, some employees may only learn about the fraud within their organization once it becomes public. Governments who are the victims of fraud are encouraged to set the tone by adopting anti-fraud measures through policy, staff trainings and leadership communication.
- Confirm the effectiveness of controls: If a loss resulted in a fraud investigation report, SAO will follow up on the control weakness in the government’s next scheduled audit. This follow-up will address the area where the loss occurred and determine if the government has fully or partially resolved the weakness. If our audit finds the government has not adopted changes, or the changes adopted would not be effective in preventing future fraud, we may include a secondary recommendation in the audit report. Rather than waiting for an external audit, we recommend governments test the effectiveness of their controls through an internal audit or assessment.
Looking for additional anti-fraud resources? SAO’s Preventing Fraud page has a variety of trainings and resources geared toward preventing and detecting fraud. Outside of SAO, the Association of Certified Fraud Examiners is an excellent resource for fraud-related trainings, publications and media.