Minimizing Your Government’s Risk to Billing Fraud

When reviewing government internal controls, we frequently find weaknesses in controls over billing. Unfortunately, unscrupulous employees sometimes find these weaknesses and exploit them.
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Billing fraud scenarios we have encountered among California local governments include:

1. A county was asked by a film company for permission to film in the County hospital. The hospital’s public relations manager was asked to coordinate with the film company. He negotiated a filming fee but pocketed the check instead of turning it over to the county. No one at the County knew to expect the check so the fraud was not quickly uncovered.
2.  A government leased a portion of its downtown building to commercial tenants. The government’s rental manager collected rent checks but pocketed some instead of submitting them to the Finance Department for deposit. Finance did not discover the fraud for years because they relied on the rental manager to track actual receipts vs. expected receipts, instead of doing this independently. Even though the checks were properly made payable to the government, the rental manager was able to deposit them via ATM into a non-profit account for which she served as volunteer treasurer.

​These two fraud scenarios demonstrate how important it is for Finance to be aware of every bill that goes out, and to assure that every bill gets collected in a timely manner. Your government should conduct an inventory of all “bills” that it issues. In practice, it may be challenging to identify all bills a government sends out because there are many different types prepared in lots of locations, in various formats, using various software, by different people. But you’d be wise to assure that the employees issuing the bills are adequately trained and are following appropriate policies and procedures.

What counts as a “bill”?

A “bill” is any communication, written or not, that requests money on behalf of the government. Examples of “bills” include:

• A letter from City Attorney demanding payment for a settlement.
• A court-ordered settlement.
• A schedule from Finance to a related government requesting reimbursement for their share of costs.
• A sidewalk replacement or tree removal assessment.
• A grant reimbursement request.
• Recreational program collections.
• Receivable collection letters, including those related to penalties, interest, and amounts previously written off.
• An issuance of fines and penalties.

Recommended internal government controls over billing, that you should implement, are:

• Verify pricing on bills against a contract or price list.
• Include a second person review of each bill before it is sent for reasonableness, accuracy, and compliance with billing policies and procedures.
• Ensure that each invoice directs payment to the appropriate address, not the person doing the billing.
• Reduce access to billing software to minimize risk of fraudulent billings.
• Segregate the billing, collection, and accounting duties to keep anyone from falsely issuing a bill and then collecting the related funds.
• Prompt investigation of payor complaints by an individual who has no billing responsibilities.
• Require approvals for all refunds, credit memos, and revisions of previously issued bills.
• Compare amounts collected to prior years. Significant variances should be documented and reviewed by senior management.
• Sequentially number bills and assure all are recorded in the accounting records.

Having a disciplined billing and collection procedure in place is the cornerstone, of good billing internal control.

If your accounting system has a good billing module, use it. Be sure that every “bill” gets entered into the module at the time it is generated. Written policies and procedures should make it clear that any employee who sends a bill without using the module will be disciplined accordingly, up to termination of employment. If your accounting system does not have a good billing module, you will need to design procedures that assure that Finance knows every bill that is being issued anywhere in the government.


It may be near impossible to prevent all fraud completely, but as long as Finance is aware of every request for payment and follow up to assure timely collection and recording in the accounting records, then most billing fraud can be avoided.

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If you have more questions about billing fraud prevention, feel free to reach out to Kevin directly:

Kevin Harper, CPA
kharper@kevinharpercpa.com
(510) 593-503

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