Fraud risk is nothing new to tribal governments, but in these challenging economic times, the risk of fraud has increased. Tribal government fraud is a significant issue that affects both tribes and their members. Like all organizations, tribal governments must be prepared to manage these risks and their potential impact.

First, let’s look at some of the facts surrounding fraud. According to the Association of Certified Fraud Examiners’ (ACFE) 2014 Report to the Nations on Occupational Fraud and Abuse:

• A typical organization loses 5 percent of its revenue each year to fraud.
• Fraud among governmental entities accounted for 10.3 percent of all fraud—the second-highest rate for all industries.
• The median loss caused by misappropriation-of-assets fraud is $130,000.
• The typical amount of time between the onset of a fraud and its detection is 18 months.
• Organizations with a fraud hotline were able to detect fraud 50 percent faster than those without.
• Only 3 percent of fraud instances are detected by an organization’s annual audit, making this among the least effective antifraud controls.

In a recent case of fraud perpetrated against a large tribe, the opportunity for fraud was present—and it allegedly allowed the executive director of construction to lead an effort to defraud the tribe of $7 million. This tribe’s lax tone at the top and its lack of effective internal controls and proper procedures cost the organization dearly, and not only in money. But the story doesn’t need to end this way. Preventative measures can save your tribe time, money, and heartache.

Let’s look at the top five tips that can help your tribal government in the prevention and detection of fraud.

Strong Tone at the Top

Intolerance of fraud by your governing body is a strong deterrent. Elected officials must be required to hold themselves to the highest standards of ethics and integrity—which should be outlined in a clear code of conduct—and deal with fraudsters swiftly and fairly. When the governing body walks the talk, so to speak, those who might consider committing fraud will think long and hard about the consequences of their actions. Conversely, without a strong tone at the top, individuals may feel they have nothing to lose by trying to defraud the tribe.

Effective Internal Controls and Policies

Prevention is the most effective fraud-fighting measure. Approach it proactively, starting with a fraud risk assessment, which can then be used to implement control activities that mitigate any risks it identifies. Both preventive and detective controls should be implemented, especially in any area that’s been identified as posing a higher risk of fraudulent activity. Antifraud controls include a large range of activities, including:

• Multiple levels of approvals
• An audit committee composed of council members and others but not the CFO or others in executive management
• Job rotation or mandatory vacations
• Timely account reconciliations (at least monthly)
• Segregation of duties
• Physical security of assets
• Background investigations on prospective employees
• Antifraud training
• An effective, well-trained internal audit function

The ACFE offers a free fraud-prevention check-up test on its Web site to help entities test their fraud health and identify major control gaps. Taking this test can help you address issues before it’s too late.

Keep Detailed and Current Accounting Records

Inadequate or irregular recordkeeping can keep fraud hidden for months or even years. For fraud to be detected and then proven, you must keep good accounting records and ensure that key accounts—such as cash, investments, and accounts payable—are independently reviewed and reconciled at least monthly. If your records are reconciled only in preparation for your annual audit, your chances of catching fraud are greatly decreased.

Segregation of Duties

Segregation of duties is critical to effective internal control, because it reduces the opportunity and therefore the risk of both erroneous and inappropriate actions. The general rule of duty separation is this: the approval function, the accounting or reconciliation function, and the asset custody function should be separated among employees. If the size of your tribal entity doesn’t warrant this separation, you can implement a more detailed supervisory review of related activities as a mitigating control.

Ethics Hotline or Whistleblower Program

According to the ACFE’s 2014 Report to the Nations on Fraud and Occupational Abuse, tips were by far the most common way fraud was uncovered in 2014. Employees, as well as other parties, such as customers and vendors, are an invaluable source of information for discovering potential fraud.

However, it’s common for individuals to keep quiet due to a fear of reprisal. Providing individuals with a safe and anonymous method to report suspicions of fraud encourages a beneficial flow of information. It’s important these programs operate independently of management, which can be achieved in several ways. You might, for example, use a third-party vendor to operate your hotline; alternatively, you could establish a neutral party within the organization who reports directly to the audit committee or governing body, such as an ethics or compliance officer.

We’re Here to Help

By using these five tips as a starting point, you’ll be able to better protect your tribe from the risk of fraud. Moss Adams also offers a wide range of services aimed at helping your tribe fight fraud, from helping you assess your tribe’s risk of fraud to suggesting comprehensive controls and bringing in our certified fraud examiners to investigate if you believe fraud has been perpetrated. To learn more, contact your Moss Adams professional.