Local government fraud rises

State Auditor Rebecca Otto said her office saw an uptick in financial fraud cases involving local government officials last year and warned that the economic downturn might spur even more cases.

Otto told members of the House State Government Finance Division on Jan. 13 that 64 cases of suspected misuse of taxpayer funds were reported to her office last year — up from 39 in 2007.

“There was approximately a 64 percent increase in the number of reports,” Otto said, but tempered that statistic by noting that it accounted for only a small fraction of the state’s approximately 4,300 units of local government.

“That’s the good news — there is a lot of good work going on in local governments around the state. But there are still some problems,” she said.

Otto said the state’s slumping economy will put additional pressures on local government employees’ personal finances that might serve as a temptation to commit fraud. She said gambling addictions and gambling debts among local officials are often a factor in such cases, as are health care expenses or the loss of a spouse’s job.

Nancy Bode, assistant legal counsel for the office, presented division members with several case studies.

She described how the Koochiching Economic Development Authority — a two-person agency — put one employee in charge of its entire financial operation, allowing her to write more than $334,000 in unauthorized checks to herself over a period of five years without anyone noticing.

In another example, Bode said a bookkeeper for a school district in northwest Minnesota managed to steal nearly $119,000 in public funds by taking cash out of deposits and replacing the money with checks for which there were no receipts — a scheme known as “lapping.”

Otto said that in most cases, the fraud or abuse occurred because of easily solvable problems, such as local governments putting too much control in the hands of one person rather than dividing important job duties. She said local governments need to implement strong internal controls that deny employees the opportunity to commit fraud, and that also prevent local governments from falling victim to financial scams from outside the organization.