Last summer, officials in a small Centre County township discovered the apparent theft of more than $500,000 in public funds. State Police eventually accused the township’s now-former secretary and treasurer of the alleged embezzlement, detailing a five-year conspiracy that turned a few small purchases into a sports betting slush fund.
Gregg Township faced challenging questions about how such a substantial sum of taxpayer dollars remained unaccounted for for so long, particularly from auditors who evaluate the township’s finances on a yearly basis.
Most Pennsylvania towns are required to submit an audit and financial report to the state each year. However, experts argue these audits are not intended to detect fraud.
Rather, a forensic audit would reveal such a major issue. However, because such audits are not required and can be costly, Pennsylvania local governments rarely conduct them unless there is suspicion of wrongdoing.
“I think there’s a huge misconception between what an audit is versus what a forensic audit is,” forensic fraud examiner Scott Koman told Spotlight PA in a December interview.
Pennsylvania’s boroughs, townships, cities, and home-rule municipalities are required to file basic, internal financial tallies with the Department of Community and Economic Development every year. Counties and school districts are required to submit detailed annual audits conducted by independent certified public accountants.
“DCED relies on this data to help determine the financial health of a municipality, and that data is provided to the public,” a department representative told Spotlight PA in an email.
While the agency does not audit those documents, it does evaluate balance sheets, state-allocated tax funds to local governments, and appropriate signatures, the spokeswoman stated.
“If the DCED is notified that data is inaccurate, we take the necessary steps to confirm and, if true, request that the report be amended,” the representative said, but she couldn’t give an example. Furthermore, if communities do not comply, the agency may deny them access to desired funding it administers, such as community block grants.
Internal audits often include data on a local government’s assets, liabilities, revenue, and expenditures. Typically, an elected auditor or controller completes the report. They do not need to have a professional background in finance.
“That audit is generally just a standard to make sure they are accounting for things properly, especially when dealing with public funds,” Ben Kafferlin, a partner at the consulting firm Kafferlin Strategies, told Spotlight PA. That type of internal examination may be all a smaller municipality requires to keep its finances in order, he added.
However, for larger municipal governments, particularly those that receive various state and federal subsidies, “a full-blown external audit” by professional accountants is required, according to Kafferlin, a former Warren County commissioner.
An in-depth third-party audit would examine not only critical financial files such as accounts payable and receivable, invoices, the general ledger, and previous audits, but also meeting minutes, contracts, and records that document decisions about how public funds are spent, according to Lisa Hagberg, another partner at Kafferlin Strategies.
“They’re going to look at internal controls and how we manage who does what,” Hagberg, who has worked in government finance for almost 30 years, told Spotlight PA. “It’s our job as managers to make sure that we aren’t putting our people in a position for fraud, and the auditors help in that by making sure that we’re following good internal controls for how the money flows.”
A normal audit can detect fraud, but that is not its primary purpose, according to Koman. “The auditor, in performing their audit and preparing their audited financial statements, will disclose that the purpose of their audit is not to detect fraud,” according to him.
In contrast, a forensic audit looks into whether there has been fraud, negligence, or noncompliance with the standards. Following the discovery of an occurrence, it can also reveal how fraud was committed, according to Koman.
A forensic audit is unnecessary for the majority of municipal governments, according to Kafferlin. He noted that external audits continue to provide an objective view of a company’s financial situation.
According to Kafferlin, any substantial concern, also known as a material weakness, discovered during an external audit must be addressed. Additionally, experienced auditors would make broad recommendations. “You’ll take all these recommendations, sift through them, see what is and is not actionable, what you can and can’t afford, and… give the tasks to people that make the most sense,” he told me.
Kafferlin anticipates more local governments to rely on professional finance management in the coming years as the legalese and technology get more sophisticated.
“Gone are the days of your local secretary-treasurer just being able to handle everything in QuickBooks,” he told me.
While audits are not intended to detect fraud, financial professionals and government experts suggest specific methods to assist in preventing it, such as dividing roles among government employees.
That could imply ensuring that the person getting the money differs from the person spending it. Another option could be to require elected leaders to publicly evaluate and approve expenses.
In Gregg Township, the alleged fraud was mostly carried out with municipal credit cards, with years of statements indicating $322,185 in transactions to sports betting platform DraftKings.
Township supervisors had never seen them.