Safe Guarding Your System’s Finances

by Gaylene Riley, Community Environmental Management Specialist

Every utility system’s management and governing Board wants to believe that their employees are honest, hard-working people that would never take advantage of the trust that has been placed with them, and that is usually the case.  However, even the most unlikely candidates can sometimes be found to be untrustworthy.  Board members, even those who are successful business owners, often miss signs that these trusted individuals may not be so deserving of their confidence.

Over the past two decades, the instances of embezzlement from small municipalities and rural water districts has increased dramatically.  In an effort to provide training to board members on signs to look for and steps to take to improve the safety of small system finances, research was conducted into several cases of misappropriation of funds.  In some cases, there was a lack of knowledge or training on the part of the governing Board, but in all cases, there was a lack of proper oversight.

In one small town, a utility billing clerk took advantage of billing software that was easily manipulated to switch an active account to inactive. She could manually prepare the bill for a higher usage to create an unaccounted for check, and then change the status back to active.  She would also post “credit adjustments” to customer accounts where cash payments were pocketed to manipulate past due accounts reporting.   Customer accounts reflecting payments all showed payment by check, which allowed collection reports to reflect that no cash payments had been received.  The inexperienced town treasurer lacked confidence in dealing with the utility software systems. She allowed the utility billing clerk to prepare the reports.  Audits were not being conducted due to the inability to provide records in an acceptable manner.  The Board took this as being entirely the town treasurer’s fault and let her go.  They hired a person with an accounting background who instituted internal control measures including accountability for consecutively numbered receipts, posting of payments reflecting whether cash or check was the payment method and confirmation and reconciliation of daily collection reports from the utility software.  For the next year, deposits increased by an average of $8,000 per month, with an increase in cash deposits of $6,300 per month.  For the year following the resignation of the utility billing clerk, the deposits increased an additional $4,300 per month, with an increase in cash deposits of $3,500 per month.

In another case, a rural water district office manager was able to steal more than $45,000 over 30-months.  This was done by not providing customers with numbered receipts.  She stopped using the numbered receipt books and started giving the customers a receipt on a scrap of paper or telephone message slip.   Payments were posted showing payment by check rather than by cash.  Reports presented to the Board were of a temporary type and were not intended by the software provider to act as a reconciliation. Deposit slips did not provide a list of customers whose payments were being deposited.  In addition to the theft of customer cash payments, the office manager was in control of the payroll system, and reports show direct deposits to her personal account over time that amounted to more than $20,000.

In yet another instance, the governing Board began noticing questionable transactions following their change in policy to a “no cash; check or money order only” basis for payment of utility bills, due to a decline in cash deposits.  The Board Chairman was contacted by the bank that the system’s checking account was overdrawn, and the savings account had been drawn down to a very low balance.  The Chairman requested a report from the bank as to what vendors had been paid by check or debit card. The Chairman realized that many payments had been made that had not been approved by or reported to the Board.  An estimated $33,000 in unauthorized or undocumented purchases were made using the system’s checking account.  The savings account was depleted by making transfers to the checking account to cover the unauthorized purchases.

What do these situations have in common?  One person held too much control of the system’s finances.  In each case, the Board thought they were taking an active role in the management of the handling of the finances by requiring reports.  Getting reports is not always enough.

Lessons learned from these cases:

  • When looking at collections against deposits, look at the composition of the deposits for a mix of both cash and checks. Look at previous years’ bank records to see if cash payments are declining significantly.
  • Look at customer account history to assure payments are posted accurately as cash or check, as shown on deposits. Are there credit adjustments being made to the account rather than payments being shown?  Are there instances of account status being changed from active to inactive and back again?  Have customer account histories been deleted?
  • Assure that numbered receipts are given for all payments received, and accurately posted into customer accounts. If numbered receipt books are used instead of system generated receipts, maintain control of books so that only one book is used until exhausted.  Receipt books should be safeguarded against loss or misuse.
  • Consider implementing a no-cash policy.
  • Consider investing in a billing and accounting system that has built-in safeguards that do not allow deletion of account history, that track changes to entries, and provide adequate reports.
  • All expenditures should be reported to the Board for approval, even those within a set limit that has been authorized, with details as to the date, purpose, and purchaser.
  • Payroll reports to the Board should include details as to the number of hours paid, dates and times for any overtime, and the reason for overtime worked.
  • Bank statements should be provided monthly to all board members as part of the board meeting packet so they can be reviewed as part of the financial reports. The bank should be requested to provide bank statements directly to a designated board member for review.
  • A comparison of actual income and expenses should be compared to the budget on at least a quarterly basis.
  • Make sure that all persons handling monies of the system are adequately bonded.

In almost all small systems, the board members volunteer their time to attend board meetings and make decisions.  Their responsibility does not end there.  When a breakdown of internal controls occurs, and oversight is weak, the loss of funds that may occur is a burden on utility customers when rates are increased to cover the losses.  Implementing the safeguards shown above will take more time for both employees and board members, but will protect the finances of the system and the trust placed in the Board by the customers.