Special Reporting – Fraud And Misappropriations

The Louisiana Legislative Auditor (LLA)’s mission statement includes a commitment to foster accountability and transparency in Louisiana government. LLA’s primary vehicle to accomplish this objective for local auditees is through receiving these agencies’ annual financial reports.

There has traditionally been a wide disparity in the reporting of fraud and misappropriations in local auditees’ reports. Local auditees do not want information about fraud and misappropriations to be made public, and may not be entirely forthcoming about these matters to the CPA performing the local auditee’s audit or other attest engagement.

CPAs use professional judgment in writing findings as well as reporting fraud and misappropriations. These findings sometimes do not include all of the elements of a finding required by Government Auditing Standards (GAS) paragraph 6.17. When one or more of these elements are missing, it is difficult for the user of the report to have a clear picture of what happened. Fraud and misappropriation may require two levels of reporting: reporting the act to the District Attorney and the Legislative Auditor, and reporting the incident in the audit report.

Reporting Fraud and Misappropriations to the Legislative Auditor and District Attorney Required by R.S. 24:523

R.S. 24:523 requires the following:

An agency head of an auditee who has actual knowledge of or reasonable cause to believe that there has been a misappropriation of the public funds or assets of his agency shall immediately notify, in writing, the legislative auditor and the district attorney of the parish in which the agency is domiciled of such misappropriation. “Reasonable cause” shall include information obtained as a result of the filing of a police report, an internal audit finding, or other source indicating such a misappropriation of agency funds or assets has occurred.

Therefore, all frauds or misappropriations, regardless of the amount, are required to be reported in writing to the legislative auditor and the district attorney.

Reporting Fraud and Misappropriations in the Annual Financial Reports

GAS paragraph 7.44 requires the auditor to report fraud that is material, either quantitatively or qualitatively, to the financial statements or other financial data significant to the audit objectives in the Independent Auditor’s Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards.

What about instances of fraud or misappropriations that are determined to be immaterial to the local auditee’s financial statements?

To determine whether fraud or misappropriation should be reported in the annual financial report (e.g., compilation, review/attestation, or audit report), the auditor must consider whether the local auditee incurred a financial loss as a result of the fraud or misappropriation and whether the control deficiency rises to the level of significant deficiency or material weakness.

If there was no financial loss as a result of the fraud or misappropriation to the auditee AND the control deficiency did not rise to the level of significant deficiency or material weakness, LLA does not require reporting the fraud or misappropriation in the annual financial report. If not included in the annual financial report, the auditor must consider whether the fraud or misappropriation should be communicated in writing to management per GAS paragraph 6.44.

Although not required, the auditor and auditee may choose to report fraud or misappropriation that does not meet the threshold for reporting in the annual financial report as an audit finding to provide transparency, promote corrective action, ensure proper handling, etc.

When the fraud or misappropriation is reported in the annual financial report, the LLA requires including all of the following eighteen descriptive elements (Louisiana Governmental Audit Guide Section 600-1280):

• A general statement describing the fraud or misappropriation that occurred.
• A description of the funds or assets that were the subject of the fraud or misappropriation (ex., utility receipts, petty cash, computer equipment).
• The amount of funds or approximate value of assets involved.
• The department or office in which the fraud or misappropriation occurred.
• The period of time over which the fraud or misappropriation occurred.
• The title/agency affiliation of the person who committed or is believed to have committed the act of fraud or misappropriation.
• The name of the person who committed or is believed to have committed the act of fraud or misappropriation, if formal charges have been brought against the person and/or the matter has been adjudicated.
• If the person who committed or is believed to have committed the act of fraud still employed by the agency.
• If the person who committed or is believed to have committed the act of fraud still employed by the agency, if they have access to assets that may be subject to fraud or misappropriation.
• If the agency has notified the appropriate law enforcement body about the fraud or misappropriation.
• The status of the investigation at the date of the auditor’s/accountant’s report.
• If The investigation is complete and the person believed to have committed the act of fraud or misappropriation has been identified, if the agency filed charges against that person.
• The status of any related adjudication at the date of the auditor’s/accountant’s report.
• If restitution been made or has an insurance claim been filed.
• If the agency’s internal controls did not detect the fraud or misappropriation in a timely manner, describe the control deficiency/significant deficiency/material weakness that allowed the fraud or misappropriation to occur and not be detected in a timely manner.
• Management’s plan to ensure that the fraud or misappropriation does not occur in the future.

The auditor can choose to report the eighteen descriptive elements in a schedule in the Supplementary Information section and refer to the schedule in the finding or management letter comment.

Annual financial reports that include reports of fraud are provided to the district attorney of proper jurisdiction by the Legislative Auditor in compliance with R.S. 24:516 and R.S. 24:519.