Fraud, governance, and public finance: why internal control has become essential for municipalities

In the last few years, several cases of fraud in the municipal sector have highlighted real vulnerabilities within many local organizations. The schemes observed are varied, including payments to fictitious employees, inappropriate use of municipal credit cards, embezzlement, circumvention of procurement rules, and other abuses related to the administration of public resources. 

As part of an external audit engagement, the objective is to identify internal control weaknesses, assist teams in improving practices, and formulate recommendations that are applicable and proportionate to the municipal context, in order to reduce the risks of fraud, errors, and non-compliance.

In sensitive situations, particularly where there are indications of fraud, municipalities can benefit from the support of Forvis Mazars’ specialized forensic accounting teams to document the facts, assess the scope of the issues, and assist decision-makers in their efforts. 

Why internal controls are essential

A well-designed internal control system that is consistently applied serves as a first line of defense. In particular, it helps to:

• prevent and detect fraud,
• reduce errors and financial inaccuracies,
• minimize administrative inefficiencies,
• support decisions based on reliable and up-to-date information.

Effective internal controls are not just another “administrative burden”; they are a set of practices that safeguard operations and enhance the reliability of the information on which the city council bases its decisions.

In fraud cases, the same pattern often repeats itself. A single person may authorize, pay, and reconcile transactions, or key checks may be overlooked due to a lack of time or resources. However, a few relatively simple measures can significantly reduce risks:

• the segregation of critical duties (authorization, execution, recording, reconciliation),
• documented approvals and clear authorization thresholds,
• periodic reconciliations and reviews of financial transactions (payroll, credit cards, accounts payable),
• structured accountability, including follow-ups on discrepancies and corrective actions.

In this context, the external auditor plays a role that complements that of management and the board. The auditor assesses the design and implementation of certain key controls, brings significant weaknesses identified to the attention of those responsible for governance, and proposes improvements tailored to the capabilities and constraints of each municipality.

Governance: an integral part of internal control

Beyond procedures, internal control also depends on governance. The tone is set by the city council, which must demand reliable information and promote rigorous practices. Active and informed governance is a key factor in preventing abuses and maintaining public trust. 

Newly elected officials: a governance role that can’t be improvised

With each election cycle, many municipalities welcome newly elected officials. The desire to serve the community is certainly there, but the responsibilities of governance, financial oversight, and accountability are not always fully mastered upon taking office. Without adequate guidance, this learning period can increase the risk of errors, insufficiently informed decisions, or unintentional tolerance of non-compliant practices.

Taking office inevitably involves a learning curve. However, the role of elected officials is first and foremost a governance role: setting the direction, making structural decisions, and exercising diligent oversight of the administration, without assuming day-to-day responsibilities in place of management.

In this context, training for newly elected officials is a key preventive measure. Training focused on governance, financial reporting, fraud risks, and internal control provides municipal councils with a common framework from the start of their term. Specialized expertise within Forvis Mazars can support these initiatives.

Guidelines for elected officials

To carry out this oversight in a straightforward and effective manner, the city council can, in particular:

• make decisions based on comprehensive and understandable information,
• adopt policy-setting decisions (bylaws, the budget and budget monitoring, major infrastructure projects, strategic directions),
• ensure the sound management of public funds by verifying that the administration follows rigorous and compliant practices,
• ensure that citizens’ priorities and the public interest guide decisions.

In practice, discussions between external auditors and city councils aim to make these issues understandable and actionable—that is, to explain what is required, identify risks, and then propose realistic corrective measures.

Accounting standards: a real challenge for smaller municipalities

All municipalities, large and small, are required to apply Canadian Public Sector Accounting Standards. This uniformity promotes the comparability and transparency of financial information. However, it poses a particular challenge for smaller municipalities, which often have limited human and financial resources to adequately document their obligations and implement the required processes.

Case Study: GC 3280 Asset Retirement Obligations

This standard aims to ensure that public sector entities recognize a liability when they have a legal obligation, whether current or future, to decommission a fixed asset safely and in compliance with applicable requirements. Examples include the removal of underground infrastructure at the end of its useful life, the management of hazardous materials (such as asbestos), and others.

Three observations from the field

• Identifying the assets in question and documenting the obligations remains complex, especially when historical information is incomplete.
• Implementation requires time, specialized expertise, and, in some cases, costly assessments.
• City councils often need guidance to understand the financial implications of the standard and to realistically plan medium- and long-term mitigation measures.

What an audit can offer

Specifically, an audit can help municipalities:

• outline applicable regulatory requirements and adoption deadlines,
• assist municipalities in interpreting and applying standards, taking into account their capacity for implementation,
• highlight the risks associated with incomplete implementation (inaccuracies, non-compliance, accountability issues),
• formulate concrete and tailored solutions, such as multi-year planning or an analysis of available funding mechanisms, to mitigate the impact on citizens’ ability to pay.

An auditor–municipality partnership that creates value

A well-conducted audit does more than just provide conclusions on the financial statements. It can become a powerful driver of continuous improvement when the municipality and the auditor share a common goal, rely on reliable information, have well-established processes, and maintain credible accountability.

What makes for a strong partnership

• Open and proactive communication throughout the process.
• A solid understanding of the municipal context (resources, systems, regulatory framework, and accountability requirements).
• Clear expectations regarding the documents to be provided and each party’s responsibilities.
• Concrete, proportionate, and achievable recommendations, with follow-up as needed.
  A shared goal of strengthening the reliability of financial information and public confidence.

In conclusion

Financial pressures, regulatory requirements, and high public expectations leave little room for improvisation in the municipal sector. Robust internal controls—even simple ones—combined with vigilant governance help reduce risks, detect discrepancies earlier, and protect public funds.

In this context, external audits are most effective when they are part of a comprehensive approach that integrates fraud prevention, the strengthening of internal controls, governance support, and the implementation of sustainable mechanisms.

About the author of this article

As an external auditor for Quebec municipalities for over ten years, I assist organizations in improving their internal controls and governance practices, as well as in applying public sector accounting standards. I also contribute to the sharing of best practices through my involvement in the municipal working group of the Ordre des CPA du Québec and through training activities.

Our Approach

Forvis Mazars brings together professionals with recognized expertise in public sector accounting and auditing. Our approach aims to provide an independent external perspective, identify priority risks, and formulate concrete recommendations that support transparency, accountability, and informed decision-making. We also assist organizations in interpreting and applying relevant accounting standards to ensure compliance and the quality of financial information. Thanks to our team specializing in forensic accounting, we are able to support municipalities in analyzing sensitive or complex situations, particularly regarding fraud or financial disputes, thereby strengthening risk prevention and management.