Real Frauds Found in Governments

Solutions

Chapter 1

Suggested solutions to Case 1

1. By misstating the interim quarterly information, the city appeared to be in compliance with its bond covenants when in fact it was not. In this case, management override occurred when Michael used his system access to adjust the utility billing and collection records. In this case, no one appears to review transactions executed by the finance director. Even if the city manager were reviewing the adjustments made by the finance director, he may not have understood them. In this case, it is likely the city manager would have agreed with what Michael did to avoid the potential the bonds were called. It is also likely he might have further involved himself in the fraud as he felt his job was in jeopardy.
2. The following preliminary procedures might have detected this situation:
   • Review of transactions occurring outside the normal billing and collection cycle in the integrated utility system
   • Inquirie of the city manager as well as other managers (for example, public works or utilities staff) and administrative staff
   • Reviewing bond covenants for potential pressure on management (management pressure or incentive to meet the covenants)
   • Review of the controls over manually billings and customer write offs (potential for management override by the finance director)
3. Other procedures, that might have detected this situation, would include the following:
   • Review of quarterly information (including tracing amounts to reports, documentation, ...