When leadership fails.

• Author: Dycus, Dennis F.

When the governing board of a governmental entity fails to carry out its oversight responsibilities, fraud or related problems can result. Most fraud is committed by basically honest people. However, when leadership fails, an environment is created in which people can be tempted to commit illegal acts.

For a political subdivision of a states--be it a county, city, town, utility district, or a local board of education--the buck stops with the governing body The members of a governing body or board are responsible for the entity's operations, which includes establishing the policies and procedures the governmental entity operates under. They are also responsible for seeing that the entity is operated in accordance with those policies and procedures. The board may delegate such responsibility, but in the end, they are ultimately responsible.

But sometimes governing boards rail to adopt adequate policies and procedures. Or they adopt inadequate policies and procedures. Or they do adopt adequate policies and procedures but fail to see that fail to ensure compliance. In such cases, bad things can happen, and often do. The entity might operate inefficiently, or fail to adequately maintain its infrastructure, or assets may be misappropriated.

WHEN FRAUD OCCURS

For an honest person to commit fraud, three things must be present: opportunity, need, and rationalization. Opportunity can exist for years, often because duties are not sufficiently segregated or because the entity is lacking basic internal controls. If an individual does not also have a need, however, that person will not usually act on the opportunity. Needs can manifest in a very short period of rime, though, and someone who may not have a need today may have one tomorrow. In this situation, rationalization is soon to follow.

In one example, the city recorder in a small Tennessee town had tremendous opportunities for years to steal money from the city because she did all the accounting. It was a one-person operation, and the city had a lot of money She never took advantage of the situation, though, because she never had a need. Then, on a weekend trip with a friend, she gambled for the first time and won $45,000. The gambling bug bit hard and she started going back to the casino on the weekends, losing her $45,000, and then $72,000 of the city's money. When confronted, her response was, "I'm going to win it all back, and I'll repay the city." She was a basically honest person, so she had...