Protecting Public Funds:
Excise tax poses high risk for fraud

(from Maine Townsman, January 1998)
By Michael L. Starn, Editor

Municipal officials have a legal and moral responsibility to protect public funds. "You will be held to a higher level of accountability because of your role as a steward of public funds," Kathy Tyson, a principal with the accounting firm Runyon, Kersteen & Ouellette, told a large crowd of municipal officials attending a session on "Protecting Public Funds" at the 1997 MMA Convention in Bangor.

Headlines citing embezzlement, theft, fraud and missing money in Maine municipalities have become all too common in newspapers across the state during the past few years. These situations, whether officials have been convicted of wrongdoing or not, have done damage to the reputation of all Maine municipalities.

"Everyone (all municipalities) gets a black eye," says John Eldridge, finance director for the Town of Brunswick and former president of the Maine Government Finance Officers Association (MGFOA).

"Anyone can commit fraud," says Stephen J. Gauthier, author of the GFOA publication Evaluation Internal Controls: A Local Government Manager’s Guide. Gauthier says that most fraud is committed by "otherwise honest" individuals who find themselves caught in situations where the anticipated rewards of fraud appear to be much greater than the perceived risk of detection and punishment.

This perceived ability "to commit fraud and not get caught" is often brought on by lax internal controls within a municipality’s financial management system.


Internal controls, according to the GFOA publication, "are techniques used by management to achieve its objectives and to meet its responsibilities." In other words, if your objective is to safeguard town funds, then you must have controls (or administrative procedures) in place that will enable you to meet that objective and thereby fulfill your responsibility as an elected or appointed municipal official.

Two prerequisites to establishing a framework of internal controls in a municipality are the municipal officers (selectmen, councilors) commitment to such controls and their willingness to implement and maintain them. While town managers and other administrative staff are primarily responsible for the day-to-day implementation of internal controls, the governing body is ultimately responsible for ensuring that the administrative staff fulfills that responsibility, according to GFOA’s Evaluating Internal Controls.

Risk assessment, determining where the greatest potential for fraud exists in a municipality, is a critical step in establishing internal controls. Where are the risks (of fraud occurring)? How great are these risks?

Once you have answered these two questions, internal controls to minimize each risk are evaluated. A basic assumption underlying all internal controls is the notion that the cost of controls should not exceed their benefit. In other words, first target areas that pose the greatest risk and those that require the least amount of administrative effort to minimize the risk.


In most Maine municipalities, motor vehicle excise tax collection poses the greatest risk for fraud. The high risk comes from the potential loss to the municipality (statewide municipalities collect over $120 million) and because many communities have inadequate internal controls for excise tax collections. Ironically, the cost of instituting internal controls to protect excise tax collections is minimal compared to the potential loss due to fraud.

Flaws In The System

The excise tax collection system has some obvious flaws. One problem, or risk, is that many people still pay their excise tax in cash. Another flaw is that many towns do not have a strict policy on the issuance of receipts. Non-segregation of duties is also a problem in many communities.

Gilberte Mayo of Lincoln, president of the Maine Municipal Tax Collectors & Treasurers Association, says that it has been a common practice among municipal excise tax collectors to use the town copies of the vehicle registration form as the receipt for excise tax collection. A registration form is not a receipt, says Mayo. "You are receiving money for the town and therefore you should have a town receipt."

In Maine, motor vehicle registrations are done on a four-part form. One copy is given to the individual, one is sent to the Division of Motor Vehicles (DMV), and two copies (pink and green) are kept by the municipality. The amount of the local excise tax is entered on the registration form. Individuals must pay the local excise tax before they can register their vehicles

Municipalities are involved in motor vehicle registration at one of four levels. Some communities collect excise taxes but provide no registration service; some handle registrations for transfers and new vehicles (Maine dealers only); some do all new registrations for cars and trucks up to 6,000 lbs.; and some do new registrations including trucks over 6,000 lbs.

With a cash transaction and the lack of a receipting policy, the following defrauding scenarios are possible.

Under scenario #1, the collector runs the risk of an individual driving around with an invalid registration. If the person is stopped by the police and a check is run on the registration, the officer would get a report that it was invalid. Individual, police officer and DMV would all be aware that a problem existed with the registration. DMV’s Mary Pongonis says that DMV is now starting to notify towns when such situations occur.

Under scenario #3, the collector and the taxpayer would have to conspire to fraud the system or the collector would run the risk of the individual not seeing the discrepancy between what he had paid and what was written on the registration form.

Without separate town receipting and reconciliation procedures, Scenario #2 puts town funds in the greatest peril. Under scenario #2, the individual and state would have record that the person had paid his excise tax and registered his vehicle, but the town has no record of the transaction.

A cumbersome and inadequate reconciliation system exists between the state motor vehicle records and local documentation of excise tax payments. The state does send monthly pre-printed registration forms to municipalities six weeks prior to the month that these registrations are due for renewal. Along with the pre-printed forms is an alphabetical computer printout of those who may be renewing that month.

This computer printout could be used for reconciliation with the prior year’s municipal records, since it documents what the state has for registration information in that particular community. If a municipality’s pre-printed registration forms from the state do not match up with the town copies of the registration form, there may be a problem.

Municipal officials and municipal auditors can request specific reports, that are more current, from the DMV that list motor vehicle registration information that the state has in its data base. Presently, there is a lag time of about two months for DMV to enter the data. However, municipal officials could, for example, in March request a printout of registrations made in January (as opposed to waiting for the pre-printed registrations that would not come until mid-November). This printout could be used to cross-check the municipal copies of the registration forms with the state’s records.

A Town Receipting Policy

The best way of controlling excise tax fraud is through a strict town receipting policy.

North Haven Town Manager Sally Crowley says it best, "My policy is simple, you take money, you issue a receipt."

"This is basic bookkeeping that exists in any business," says Crowley. "Why shouldn’t it exist in a town office?"

The opportunities to bypass a receipt system are limited, particularly one that has the backing of the town’s selectmen and one that is strictly enforced.

"Receipting is a non-negotiable item in my office," says Crowley. "I don’t want any suspicions raised, and basically I don’t want any mistakes made. We have a responsibility to account for that money."

Receipts have a clear recordkeeping advantage over the registration forms. "A (motor vehicle) registration form is just that . . . a form, not a receipt," says Lincoln’s Mayo.

Receipts are sequentially numbered and identify the date of the payment, person making the payment, type of payment (cash or check); and what the payment is for.

Ideally, the town should use a three-part receipt: one for the customer, and two for the town. One of the town receipts goes with deposits; the other is kept as documentation for the transaction.

When receipts are used properly they are reconciled with bank deposits. In other words, receipt totals should equal the bank deposit. Again, no exceptions should be permitted.

Segregation of Duties

According to GFOA, a single individual should not be in a position to both perpetrate a fraud and then conceal it. For many small Maine communities, one or two people control all collections and deposits. Segregation of duties therefore becomes difficult.

Richard Fairfield, investigator for the Maine Attorney General’s Office, advises municipalities to have a different person reconciling receipts with deposits from the person who handles the cash and makes the deposit.

In other words, it is not advisable to have the same person as your tax collector and treasurer. Other people who collect money, such as the town clerk, should also not be allowed to reconcile their own receipts and deposits.


Segregation of duties, as described above, may be difficult for a small municipality. In situations where segregation of duties cannot be accomplished, the selectmen or manager will need to get more involved.

While much of the administrative work of collecting taxes, recording transactions and making deposits is done by other municipal officials or municipal employees, internal control policies and procedures need the support and oversight of the elected officials and managers.

Overseeing the administrative work can be a time-consuming and tedious job. Nevertheless, it is one of the most important jobs that managers and selectmen have.

Internal controls that are not enforced have the same effect as having no internal controls. If municipal officials and employees are required to document transactions, then someone must ensure that these accounting rules and procedures are followed.

Detecting Fraud

Elected officials and managers must also develop an inquisitive mind when it comes to fraud. The publication Evaluating Internal Controls identifies a number of techniques and approaches to detecting fraud.

Following up on hints and rumors. It is important that elected officials and managers keep their "ear to the ground" for hints and rumors of fraud and abuse. Most fraud, says GFOA, is discovered because of tips.

Applying analytical review procedures. Logical relationships and a certain level of predictability exists with revenues and expenditures. Analytical review of revenues and expenditures is an easy and practical way for managers and elected officials to identify "red flags". (e.g., are the revenues for excise taxes reported reasonable given historical patterns and what similar municipalities collect?). There may be good explanations for deviations, nevertheless it is important to ask the question.

Investigating adjusting entries and unusual transaction. Those who commit fraud often try to cover it up. Managers and elected officials should be on the look out for irregularities in bookkeeping.

Examining the details of documentation. Often there is something "just not right" about documentation supporting fraudulent transactions. One obvious red flag would be repeated, unaccounted for receipts (missing from the numerical sequence) that had to be destroyed because of clerical error. Oversight of documentation means continually asking yourself if the documentation supporting transactions "makes sense".

Brainstorming the possibilities of fraud. GFOA recommends that management and internal auditors try to place themselves mentally in the position of a dishonest individual seeking to find ways to steal from the government. This is particularly useful, according to GFOA, for uncovering some of the less typical and more innovative types of fraud.

Using An Audit Committee

Another approach to oversight is for the elected officials to appoint a municipal audit committee made up of residents from the community who are knowledgeable in finance and/or auditing. GFOA recommends that the audit committee’s purpose be three-fold: 1) to ensure that the (municipal) auditor is truly independent of management; 2) to provide an objective perspective on matters of internal controls and the audit of the financial statements; and 3) to provide a communications link between management, the independent auditor and the governing board.

Reviewing Employees Work

Vacation is a good time to review a municipal employees' adherence to administrative procedures. Many banks require their employees to take consecutive days off for vacation (e.g., two weeks) and while they are on vacation, bank managers have time to review their work to see if they are following proper procedures and to see if any discrepancies occur while they are on vacation.

Municipal Auditor’s Responsibility

In the past some local officials have relied on the municipal auditor to uncover fraud. It is important to remember that the ultimate responsibility for prevention and detection of fraud lies first and foremost with the management of the community.

The American Institute of Certified Public Accountants (AICPA) recently issued Statement on Auditing Standards (SAS) No. 82, which provides expanded guidance to public accountants in considering fraud when conducting financial statement audits. Under this new guidance, public accountants doing municipal audits are being directed to provide more documentation (do more testing) in order to obtain "reasonable assurance that the government’s financial statements are free from material misstatement, as a result of error or fraud."

SAS 82 puts more emphasis on fraud detection and gives more specific direction to public accountants doing municipal audits. If auditors think the risk is high, they will need to do additional testing for fraud. This new standard clearly places an increased responsibility on CPAs to look for fraud.

This enhanced responsibility for municipal auditors should not necessarily translate into higher auditing costs for municipalities. Those municipalities that have prudent and systematic internal controls will have the necessary documentation to help the auditor with this increased responsibility. On the other hand, municipalities with lax internal controls may face higher auditing costs.


If the municipal officers of a community suspect fraud has occurred they should contact the Maine Attorney General’s Office or other law enforcement officers, according to Richard Fairfield from the AG’s Office. "If they know money is missing," he says, they have a legal responsibility to report it to the law enforcement community.

Fairfield says that his office will help the municipal officers investigate the missing money. He would first recommend an investigative audit. Once the AG’s office is certain that fraud has occurred, investigators will then interview the appropriate people, clear those who have committed no wrongdoing, and try to find out who is responsible for the missing funds.

Fairfield says that the AG’s Office has worked on several cases where a lack of administrative procedures have made it impossible to prove that somebody has committed fraud. They have proven that money was missing, but they were unable to determine who was responsible for that missing money.

Fairfield believes that some municipal officials fail to adopt internal controls because they believe them to be too costly. He doesn’t buy that line of thinking, however, saying the upfront cost of instituting controls is cheaper, and far less damaging to the community, than having to deal with a fraud situation.

"When you (a municipal officer) see me come through the door, you’re going to say I should have had internal controls," says Fairfield.