Fraud

OLYMPIA – Emergency federal unemployment programs launched early in the COVID-19 pandemic included provisions that opened state unemployment benefits to fraud, the Office of the Washington State Auditor found in three audits released today.

While Washington was not alone in being targeted, the state Employment Security Department continues to struggle in answering customer questions, investigating suspected fraud and retrieving important data from its systems, the audits found.

This presentation tells the story of Washington's Unemployment Insurance program during the COVID-19 pandemic in 2020, from the first American coronavirus patient diagnosed January 21 through the end of the year.

OLYMPIA – An audit released today provides the first, high-level accounting of some of the circumstances surrounding the major fraud scheme that targeted Washington state's unemployment benefits in the spring.

As part of its annual audit of the state's financial statements, the Office of the Washington State Auditor found that the Employment Security Department (ESD) did not have adequate internal controls to prevent the fraud. The Department also reported inaccurate fraud and recovery numbers for the state's financial statements.

Consider this recent case study. A smaller local government had a limited number of staff working in its finance department. The finance director had broad access and authority over many of the agency's financial operations, including wire transfers. As such, someone else reconciled the bank statement each month. A key element to the agency's control structure was a simultaneous review of the bank activity itself, looking for fraud red flags such as odd, unusual or unexpected activity or vendors.

Everyone knows a strong system of internal controls is the best way to deter fraud in your organization, or detect it quickly should it occur. But designing and evaluating internal control systems can be overwhelming. The system needs to be robust enough to detect and deter fraud, but it must also be functional, cost effective and efficient. So where do you start?

Failure to perform bank statement reviews might seem like a small oversight, but it could have drastic consequences. Bank account activity is the core source of a government's money flow in and out. Reviewing this activity through the bank statements is key to preventing and/or reducing the risk of fraud. If the employee misappropriating funds is the same employee reviewing the bank statement and performing the reconciliation, the loss of funds could go undetected for years.

Imagine this scenario: A school district employee observes a co-worker taking the deposit home each night. The employee knows it's a problem but struggles with how they might go about reporting it and how it might affect their job in the future. The employee is fearful of the backlash from the co-worker if it becomes known who shared the concern.

Or how about a payroll clerk told to process an unsupported payment to the general manager who is giving this direction? Where does an employee go when it's the head of the organization that they have an issue with?

International Fraud Awareness Week runs from November 15 through 21 this year, when it might be more important than ever to focus on fraud prevention and detection. As we learned early in the pandemic with the large scale unemployment fraud, fraudsters are not taking a break during the pandemic. Fraudsters know state and local governments are working harder than ever in 2020 as they adapt to the pandemic, new employee leave programs, new funding and more. And fraudsters are all-too-happy to take advantage of this busy time.

Welcome to readers who found their way here during the 2021 International Fraud Awareness Week! We first posted this article in September 2020, and the threat of bad actors diverting paychecks or vendor payments remains acute since so many of us are working remotely and doing business electronically. Please take a moment to understand how these schemes work, and consider our tips on how to protect your organization.

Update, January 12, 2021: Some of the audits related to the state Employment Security Department have new timeframes.

The accountability audit now will include examining fraudulent claims through the end of December 2020. It is scheduled to be issued in the first quarter of 2021.

The federal government is allowing a three-month extension for federal and financial reporting to grant recipients who have received some form of COVID-19 funding. The State has decided to use this extension. Subsequently, our federal audit will now be issued in May 2021.