Fraud Risks in Public Finance: Where Vulnerabilities Arise and How Boards Can Strengthen Oversight

Recent high-profile cases in New York continue to highlight the real and ongoing dangers of occupational fraud within public-sector and nonprofit entities. These incidents serve as stark reminders that even trusted insiders can exploit routine processes when safeguards lag, underscoring the critical need for robust governance and vigilant oversight.

In February 2026, a former New York State auditor pleaded guilty to second-degree grand larceny, admitting to diverting more than $405,000 from the Town of Wallkill’s bank accounts to his personal business accounts. This elaborate scheme unfolded while the auditor was ostensibly tasked with scrutinizing the municipality’s finances. The auditor’s position of trust and access to sensitive financial data provided the perfect cover for his illicit activities, which reportedly spanned an extended period before detection. The case involved sophisticated methods of siphoning funds, likely through the creation of fictitious vendors or the manipulation of payment approvals.

Earlier that same month, the New York State Comptroller’s office charged the former mayor of the Village of Dannemora with tampering with public records. The charges stem from allegations of falsifying time sheets, which in turn allowed state correction officers to inflate their service credits. This manipulation was allegedly designed to secure increased pension benefits for these officers, potentially at a significant cost to the state pension fund. This case points to a different modus operandi, one involving collusion and the deliberate manipulation of official records for personal gain, impacting both public trust and the financial integrity of retirement systems.

These two incidents, occurring within weeks of each other, underscore a persistent and evolving threat to public finances. For professionals in the accounting and auditing fields, as well as those serving on governing boards, these cases amplify the imperative to understand how fraud infiltrates everyday workflows and how governance bodies can proactively strengthen oversight to identify such issues much earlier.

Unique Vulnerabilities in Public and Non-Profit Sectors

Local governments and nonprofit organizations often face distinct operational challenges that can heighten their exposure to fraud. A common characteristic is the reliance on lean staffing models. This can lead to a decentralization of financial responsibilities, where a single employee might oversee multiple critical steps in a financial process. For example, an individual might be responsible for approving purchases, recording transactions, and reconciling accounts. This concentration of authority within a single role, while sometimes necessary due to resource constraints, creates significant opportunities for misuse of funds and assets. Such dynamics can allow misconduct to persist for extended periods before detection, as the checks and balances inherent in more robust internal control environments are absent.

The Association of Certified Fraud Examiners’ (ACFE) Occupational Fraud 2024: A Report to the Nations provides crucial insights into the prevalence and impact of these crimes. The report consistently identifies asset misappropriation as the dominant form of occupational fraud across all sectors. Within government organizations, the median loss per incident stands at a substantial $150,000. For nonprofit organizations, which often operate with even tighter budgets and rely heavily on donor contributions, the median loss is $76,000 per incident. These figures represent significant financial strain, impacting the ability of these entities to deliver essential services or fulfill their charitable missions.

Furthermore, the ACFE report highlights that these schemes often go undetected for a year or more. This extended period of undetected fraud allows for greater financial damage and can erode public trust. Notably, employee tips remain the most common method of discovery, underscoring the importance of fostering a culture where employees feel safe and encouraged to report suspicious activities. This suggests that internal reporting mechanisms and a culture of ethical conduct are paramount in fraud prevention.

These realities compel governing boards and financial leaders to look beyond formal policies and meticulously evaluate how financial controls function in practice. The effectiveness of a policy is only as strong as its implementation and enforcement.

Key Areas of Fraud Vulnerability

Fraud tends to concentrate in several interconnected financial workflows where volume, complexity, or limited oversight create openings for illicit activity. Understanding these common risk areas is the first step toward implementing targeted preventive measures.

• Procurement and Vendor Management: This area is ripe for fraud through inflated invoices, fictitious vendors, or kickback schemes. When procurement processes are not clearly defined, or when approvals are not adequately segregated, individuals can exploit these weaknesses to defraud the organization. This could involve creating shell companies to bill for goods or services not rendered, or colluding with legitimate vendors to overcharge. The Wallkill case, where funds were diverted to the auditor’s personal business accounts, exemplifies how vendor relationships can be manipulated.

• Payroll and Human Resources: Fraud in this domain often involves ghost employees (paying individuals who do not work for the organization), inflated hours, or falsified expense reimbursements. The Dannemora case, involving falsified time sheets, directly illustrates how payroll systems can be exploited. In public entities, the sheer volume of employees and the complexity of time-tracking systems can create opportunities for manipulation if not meticulously managed and audited.

• Cash Handling and Revenue Collection: Organizations that handle significant amounts of cash are particularly vulnerable to theft. This can range from outright pilferage of incoming cash to the manipulation of records to conceal missing funds. Weak internal controls over cash receipts, inadequate segregation of duties in cash handling, and infrequent bank reconciliations can all contribute to this risk.

• Expense Reimbursements and Travel Claims: Inadequate review and approval processes for employee expenses can lead to fraudulent claims for non-business-related expenses or inflated travel costs. A lack of clear policies, insufficient documentation, or a failure to cross-reference claims with actual travel can create opportunities for abuse.

• Financial Reporting and Record Keeping: While less common in terms of direct asset misappropriation, manipulation of financial records can obscure fraud or misrepresent the financial health of an organization. This could involve deliberately misstating revenues or expenses, or altering financial statements to conceal losses or hide illicit activities. The Dannemora case, involving tampering with public records, highlights the potential for fraudulent record-keeping to facilitate other types of financial crime.

• Information Technology and Data Security: As organizations increasingly rely on technology, the risk of cyber-enabled fraud grows. This can include unauthorized access to financial systems, data breaches that expose sensitive financial information, or the use of technology to automate fraudulent transactions. Weak cybersecurity measures and a lack of proper access controls can leave systems vulnerable.

Strengthening Oversight: Proactive Prevention Strategies

Addressing these fraud risks requires more than simply adding more policies. Effective prevention involves aligning governance practices, financial processes, and organizational culture to create an environment where irregularities are identified quickly and decisively. Governing boards and oversight bodies are responsible for shifting the focus from reactive detection to proactive prevention. Drawing on established forensic research and public-sector risk frameworks, the following governance actions can help identify issues sooner and reduce exposure without requiring extensive resources:

1. Enhance Segregation of Duties: Where feasible, ensure that no single individual has control over all aspects of a financial transaction. For instance, the person authorizing a payment should not be the same person who records it or reconciles the bank account. In smaller entities where full segregation may be impossible, compensating controls, such as enhanced management review and independent oversight, are crucial.

2. Implement Robust Whistleblower Mechanisms: Establish and actively promote confidential and accessible channels for employees, vendors, and the public to report suspected fraud or misconduct without fear of retaliation. A well-publicized and trusted whistleblower program can be a powerful deterrent and a primary source of fraud detection.

3. Conduct Regular Risk Assessments: Periodically identify and assess the organization’s exposure to fraud. This involves understanding the specific vulnerabilities within each financial process and prioritizing areas for enhanced controls. These assessments should be dynamic, adapting to changes in operations, technology, and external threats.

4. Strengthen Internal Audit Functions: If an internal audit department exists, ensure it is adequately resourced, independent, and empowered to conduct thorough and objective reviews of financial controls and operational efficiency. For entities without a dedicated internal audit function, consider engaging external auditors for periodic reviews focused on fraud risk.

5. Mandate Comprehensive Background Checks: For employees in positions of financial trust or access to sensitive information, rigorous background checks are essential. These should include verification of employment history, criminal records, and financial standing where appropriate and legally permissible.

6. Promote a Culture of Ethics and Accountability: Leadership must set a clear tone at the top, emphasizing ethical conduct, integrity, and zero tolerance for fraud. This involves regular communication about ethical expectations, comprehensive ethics training, and consistent enforcement of policies. A culture of accountability ensures that individuals understand the consequences of their actions.

7. Utilize Data Analytics for Anomaly Detection: Employ technology to analyze financial data for unusual patterns, outliers, or transactions that deviate from established norms. Data analytics can flag potential red flags that might otherwise go unnoticed during manual reviews, such as duplicate payments, unusual vendor activity, or significant variances in expense patterns.

8. Engage Independent Oversight: For boards, regular and substantive engagement with external auditors and, where applicable, forensic accountants is vital. Beyond the annual audit, consider periodic consultations or targeted reviews to assess fraud risks and the effectiveness of internal controls. This independent perspective can identify blind spots and ensure accountability.

Implications and the Path Forward

Organizations that implement these layered approaches to fraud prevention can anticipate substantially lower median losses and significantly faster fraud detection. By treating fraud prevention as an integral part of governance and operational management, rather than a mere periodic compliance exercise, boards in local governments and nonprofits can more effectively protect community assets and donor resources. This is particularly crucial in an era of tightening budgets and heightened public scrutiny, where every dollar counts and trust is a paramount asset.

As organizations adopt new technologies or expand programs, their financial processes inevitably evolve, and with them, the associated risks. The rapid advancement of technology and the dynamic evolution of staff roles mean that fraud prevention cannot be a static, one-time initiative. For accounting professionals and governance leaders working with local governments and nonprofits, maintaining effective oversight requires a commitment to periodically reassessing financial workflows and ensuring that controls remain aligned with current operations and emerging threats.

The Wallkill and Dannemora cases serve as potent reminders that trusted insiders can exploit routine processes when safeguards lag. However, boards equipped with deliberate, proactive strategies can not only identify fraudulent activities earlier but also significantly preserve organizational integrity and public trust. By focusing on common risk areas, strengthening internal oversight, and fostering a robust culture of accountability, organizations can dramatically improve their ability to detect fraud earlier and safeguard the invaluable resources entrusted to them. The long-term health and credibility of public and non-profit entities depend on this unwavering commitment to ethical financial stewardship.

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Timothy Doyle is a Consulting Partner for The Bonadio Group’s Public Sector & Not-for-Profit Industry. He provides audit, accounting, and consulting services for various government clients, such as counties, cities, towns, villages, public school districts, BOCES, community colleges, and tax-exempt organizations. Tim has developed extensive experience in compliance and reporting requirements for these organizations and the evaluation and design of internal accounting systems.

Timothy Ball is a Partner and leader of the Bonadio Advisory & Consulting group. Tim directly oversees a portfolio of 15 businesses. His primary objectives are quality, excellence, and innovation related to The Bonadio Group’s consulting services. Tim is responsible for ensuring consulting professionals are highly trained, capable, and accessible to assist clients with all of their business and organizational needs. He is current on technical matters and business objectives related to services provided by Bonadio Advisory and Consulting and maintains heavy involvement in training, service innovation, and talent acquisitions.