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Spotlight:
House of Cards

How a Strong Policy Can Keep the Roof from Falling In

By Jeannie Foley – Public Affairs Staff Writer

In an effort to be more efficient, government agencies are using credit cards more and more to make small purchases. The use of credit cards reduces costs and delays associated with the traditional purchasing process. However, while these cards can decrease administrative costs, they also open the door for the possibility of fraud, waste or misuse of public money.

  • Bad Fortune
    Leads to a Best Practice

Two years after requesting a special audit of the school district’s finances, Superintendent Dr. Kevin Boys and the Loveland City School District Board of Education have worked to develop policies and procedures that will help prevent the future theft of public funds.

The new controls include a reduction of credit cards in the district, requiring two signatures to approve payment of credit card purchases and adhering to government standards of per diem costs for food and lodging.

The district now has an audit committee which meets with the superintendent and treasurer on a monthly basis to monitor the controls that are in place. This allows the district to continually ensure their policies are current and effective.

“Take a look at the controls you have, test the controls, and seek advice on how to strengthen them,” Dr. Boys urges. “Expend the effort upfront to prevent fraud. Realize that it can and does happen in schools, government and business.”

Creating a work environment that lets individuals feel comfortable reporting legitimate suspicions of fraud is also an important way to protect your agency. Dr. Boys suggests passing a whistleblower policy and making sure that it is clearly communicated to employees.

Lastly, do not hesitate to call the Ohio Auditor’s office if you have good reason to suspect fraud has taken place. Dr. Boys acknowledges that a special audit can be a difficult and time consuming process, bringing unwanted publicity on your organization; however, he maintains that “it is all about the public trust and being stewards of public dollars. Doing the right thing, in the end, is the very foundation of restoring the public trust.”

The special investigations unit at the Auditor of State’s office can be reached through the fraud hotline at 866-372-8364.

One recent example can serve as a warning. In 2007, Ohio Auditor of State Mary Taylor’s office received a call on its fraud hotline (866-FRAUD OH) regarding possible fraud involving the treasurer of Loveland City Schools, near Cincinnati. During the follow-up investigation and special audit, the Auditor of State documented nearly $20,000 worth of inappropriate charges on the school district’s credit card account. Late last year, the former treasurer pleaded guilty to felony charges of theft in office and is required to pay back more than $50,000 in restitution and court costs.

The investigation showed a lack of internal controls that made the theft possible. The monthly statements of district credit cards were never reviewed, allowing the treasurer to make personal charges without oversight. Additionally, the district lacked written policies on appropriate spending limits for district related activities such as travel related expenses for meetings.

According to a Government Accountability Office (GAO) report, weak internal controls, insufficient training of card holders and ineffective monitoring of card use are the primary contributors to an environment where card holders are able to make questionable or fraudulent purchases. Because of these dangers, it is imperative that local governments be proactive and develop strong internal controls that minimize opportunities for theft.

Bob Wilhelm, chief auditor of Ohio Auditor of State Mary Taylor’s Cleveland region, says that committing to these policies is more than half the battle. It is easy to adopt a policy, but without firm commitment and oversight, the policy on its own will do little to prevent credit card abuse.

Wilhelm points to the Westlake City School District, near Cleveland, which has been proactive in its development of sound credit card policies. Mark Pepera, the district’s chief financial officer and treasurer, says that the district’s credit card policies were implemented in 2004.

“Our policies are reviewed as needed, but at a minimum on a quarterly basis,” Pepera said. “This allows the district to ensure policies are continuing to meet the needs of the community.”

According to Pepera, the policies were developed using multiple sources, including the Auditor of State’s office, the Ohio Association of School Business Officials and the Ohio School Board Association. Westlake City Schools also benchmarked its policies against other districts that have similar demographics and operational procedures.

One of the key controls Westlake has adopted includes a monthly review of statements to monitor for potential fraud. Also, if an individual is using a credit card, they are required to sign it in and out from the treasurer’s office so activity during that period can be monitored.

Pepera explains there are multiple layers of oversight in place to prevent any individual from having uncontrolled power over the use of credit cards in the district. Purchase orders are used to approve expenses prior to using the credit cards, and these are reviewed by both the treasurer and the district superintendent. After a purchase has been made, itemized receipts are necessary and matched to the billing statements. According to Pepera, these are then double-checked, once by the payables clerk and then by the “check-run proofer.” Additionally, the superintendent has access to any of this information if there are questions about expenses.

Pepera suggests other entities revamp their policies on a regular basis. “Don’t let your policy manual sit on the shelf and collect dust,” Pepera said. “Take a proactive but manageable approach to updating and reviewing policies. It is important to keep in mind that many problems and issues can be avoided with solid policies and procedures.”

For those looking to improve their policies on credit card use, a number of helpful resources are available. The Government Finance Officers Association (GFOA) offers a recommended practice, which outlines both benefits and potential problems with using credit cards, along with ways to protect agencies against fraud. Additionally, Ohio Auditor of State Mary Taylor provides services to help develop policies and procedures through the Local Government Services section of the office. Also, the Association of Government Accountants has published a four-part series regarding best practices for government credit cards (Part 1, Part 2, Part 3, Part 4).

As governments move toward a less paper-based and more efficient business model, credit cards are likely to become increasingly common in the daily activities of local governments and school districts in Ohio. Because of this, officials should act now to ensure that appropriate policies are in place and are followed to prevent fraud.

For more information on appropriate policies and procedures, contact the Auditor of State’s Local Government Services at aoslgs@auditor.state.oh.us or 800-345-2519 or visit our Web site at www.auditor.state.oh.us.