Special Reporting – Fraud And Misappropriations

The Louisiana Legislative Auditor’s (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 reporting fraud and misappropriations. These findings sometimes do not include all of the elements of a finding required by the Government Auditing Standards. 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.

Government Auditing Standards 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, but are still of interest to the users of the report because of the public nature of the funds?

In order to make the reporting of fraud and misappropriations more uniform and transparent, and to provide more useful information for the users of local auditee reports, LLA requires certain information to be included in a local auditee report that includes any instances of fraud or misappropriations that are $1,000 or greater. The information includes:

• 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.
• Is 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 is still employed by the agency, do they have access to assets that may be subject to fraud or misappropriation?
• Has the agency notified the appropriate law enforcement body about the fraud or misappropriation?
• What is 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, has the agency filed charges against that person?
• What is the status of any related adjudication at the date of the auditor’s/accountant’s report?
• Has restitution been made or has an insurance claim been filed?Has the agency notified the Louisiana Legislative Auditor and the District Attorney in writing, as required by Louisiana Revised Statute 24:523? (Applicable to local governments only)
• Did the agency’s internal controls allow the detection of the fraud or misappropriation in a timely manner?
• If the answer to the last question is “no,” 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.

A fraud reporting template with these eighteen elements in tabular format has been prepared by LLA. The tabular format may be used CPAs to report fraud and misappropriations, or the eighteen elements may be incorporated into the firm’s standard style for reporting findings.

However the template is used, LLA expects to see each of the eighteen elements in the template addressed in every finding reporting fraud or misappropriations. If one of the eighteen finding elements is unknown or is not applicable to a particular finding, LLA still expects to see the element addressed in the finding, with the statement that the element is unknown or is not applicable to the specific finding.