View the entire newsletter for more articles: 2020 – NJAC County Biz – August
by Steven Pasichow, Executive Managing Director for DeLuca Advisory Services
When the United States experiences disasters, including natural ones such as floods, hurricanes, tornadoes, and earthquakes, or man-made catastrophes, such as the 9/11 terrorist attacks on the World Trade Center and Pentagon, federal recovery aid flows in their wake. Disaster relief funds are vital in helping communities recover, but there is a dark side whenever millions – or billions – of federal dollars suddenly flow into a community: Fraud.
In our experience, the one common theme among disaster recovery efforts is the fraud perpetrated by individuals who seek to leverage disasters for personal benefit. Communities throughout the U.S. today are vulnerable once again. Because of the huge impact the Coronavirus (“COVID-19”) has had on the U.S. economy, Congress enacted the Coronavirus Aid Relief and Economic Security Act (the “CARES Act” or “Stimulus Funds”), providing more than $2 trillion to individuals and businesses. An environment in which financial assistance is distributed quickly increases the vulnerability of risks to fraudulent activities.
While those government officials tasked with disbursing Stimulus Funds to other municipalities should be concerned with approving only eligible expenditures, and protecting their governing body by ensuring maximum reimbursement, they need to also give serious consideration to the risk of fraud. Here’s how to manage this increased risk.
Federal Oversight
From the outset of the pandemic, federal officials recognized that fraud, waste, and abuse of the relief funds was inevitable. The federal government implemented a robust oversight program to monitor, investigate and audit COVID-19 spending. This program includes: a new Special Inspector General for Pandemic Response; a Pandemic Response Accountability Committee comprised of 20 Inspectors General; a U.S. House of Representatives Select Committee on the Coronavirus Crisis; and the U.S. General Accountability Office. There are also state and local authorities (e.g., Comptrollers; Inspectors General; and prosecutors).
Make no mistake: The wave of enforcement is coming. Now is the time to prepare by strengthening your internal controls.
Local governments find themselves having to quickly distribute millions of dollars to third-parties whom they most likely never dealt with before. All the while, these governments must continue to provide essential services to their constituents, as they did before COVID-19. Therefore, they should be asking themselves: “Are we prepared?” If not, they risk losing COVID funding through audit disallowances, and/or criminal or civil prosecutions. The first line of defense for an agency or company responsible for quick delivery of emergency funding is effective management and strict accountability procedures.
Fraud on the Rise
Numerous investigations and prosecutions of COVID-19 fraud are ongoing. There are no limits to the schemes that are being utilized. For those in government distributing Stimulus Funds, it might be useful to have an insight into the schemes, so they know what to look for in their review of funding applications. The schemes range from contracting with government to provide COVID-related supplies and/or equipment, but failing to provide those items and/or providing inferior products, to applying for government assistance for businesses that either don’t exist, or that misrepresents the size of the business and number of employees to maximize the financial assistance.
Becoming more aware of fraudulent schemes may assist in increasing mitigating controls and minimizing systemic problems that could infect any fast-moving government program and claims of neglect or carelessness in the execution of that program.
The important point is that local governments are on the front lines of fraud prevention, and they need to perform adequate due diligence in reviewing applications for assistance.
Prevention is Worth its Weight in Gold
In managing and disbursing large sums of federal money, you want to manage internal and external risks so that when auditors show up months or years later, you are able to minimize negative audit findings and retain full reimbursement. Sometimes during emergency situations, oversight controls may not be on everyone’s mind taking a back seat to providing critical services to the public. But it is essential that you can demonstrate the mechanisms in place to prevent, detect, and mitigate risks associated with receiving federal aid.
A new or updated Financial and Operations Risk Assessment is critical to your preparation for receiving and disbursing the federal aid. As you do the risk assessment, nobody is asking for perfection, particularly in an emergency situation. Experience has shown that the federal government is often going to rely on the reasonableness of the expenditures you make, so long as they are transparent and have an audit trail.
Lessons learned from prior disasters suggest the following critical actions:
- Establish a clear structure in place that details roles and responsibilities, including oversight of third-parties. Impose basic rules of accountability.
- Have proper segregation of duties.
- Stand up a central database that tracks all third-party relationships and expenditures.
- Build a culture of integrity by having a code of conduct, reporting hotline, and training for employees and third-parties.
- Conduct due diligence on all third-parties.
- Monitor recipient usage of funds by monitoring their performance and financial status.
- Avoid applying for a duplication of federal assistance.
- Conduct independent audits, site visits and authentication practices.
- Code COVID-19 related expenses from the get go; avoid comingling of expenses and funds.
In making sure you are prepared for an audit, it might help if you look through the eyes of an outside auditor, and reverse engineer the audit, to determine what items that you might be expected to produce.
Documentation… Documentation… Documentation!!!
In the audit world, if it is not documented, it did not happen! Examples of good documentation include: time and payroll records; what staff worked on to reflect that it was COVID-related; third-party procurement solicitation documents; invoices to support the purchase of services, equipment, and supplies; and inventories of supplies and equipment, to whom they were distributed; and how they were utilized.
If you have no documentation to support an expense, document reasons why. Transparency might convince the auditors that the oversight is forgivable.
Takeaways
Prepare early. Don’t wait for a scandal to occur. Perform your risk assessment and implement best practices to the greatest extent possible during a crisis. Maintain a culture of integrity. Mistakes will occur. Don’t cover them up. Correct them in a timely fashion. Recover inappropriate or fraudulent claims before the funds are reconciled.
Adhering to the above guidance will minimize disallowances; claw backs due to fraud; systemic vulnerabilities; and possible civil liability and/or claims against your municipality. It will enable you to implement best practices; instill public confidence; avoid reputational damage; and establish a successful auditable environment.
Now is the time to decide whether you have the expertise and resources to respond effectively to protecting the federal funds you are disbursing to hundreds, if not thousands, of businesses and other entities. If not, and notwithstanding the controls that exist through the New Jersey Division of Local Government Services, and annual audits required by the New Jersey Administrative Code, then serious consideration must be given to engaging a private consulting firm with relevant experience to assist in the management and oversight of the funds. Federal grantors in the past, including FEMA, HUD and FTA, oftentimes require the services of independent overseers or monitors, and allow for reimbursement of their services.
For more information contact Steven Pasichow, Executive Managing Director at DeLuca Advisory Services, at spasichow@delucaadvisory.com.
DeLuca Advisory Services is an industry-leading expert consulting firm with decades of government and private sector experience in risk management, post-disaster response, investigation, forensic auditing, procurement best practices, internal controls, integrity monitoring, and ethics and compliance programs.