Why Fraud Risks Look Different in 2026
Local governments are operating in a perfect storm of conditions that fraudsters love:
- Staff turnover and retirements: A shrinking pipeline of experienced government finance professionals means fewer institutional knowledge keepers and potentially weaker oversight.
- Expanding digital systems: Online bill pay, grant portals, procurement platforms, and cloud-based accounting systems bring efficiency, but also expand the risk surface.
- Pressures on internal controls: Lean back-offices often mean limited segregation of duties, rushed reconciliations, or “temporary workarounds” that quietly become permanent.
- Rising expectations for transparency: Citizens, boards, and auditors expect more visibility than ever. Gaps in reporting or documentation can quickly erode trust.
Fraud prevention isn’t just about catching the “big” schemes. It’s about safeguarding credibility, public trust, and resources that directly impact community services.
The Most Common Fraud Schemes Facing Local Governments
You don’t need Hollywood-level cybercrime to cause real damage. Most fraud starts small and grows slowly. The schemes we see most often include:
- Payroll and ghost employee manipulation: Especially in departments with high turnover or decentralized staffing.
- Procurement and vendor fraud: Fake vendors, inflated invoices, and conflicts of interest are still incredibly common.
- Misappropriation of cash receipts: Small payments add up—particularly where one person handles collection, recording, and reconciliation.
- Technology-enabled phishing and payment diversion: One fraudulent email can reroute an entire vendor payment.
- Grant-related reporting fraud: Pressure to meet requirements or lack of documentation can lead to intentional or unintentional misrepresentation.
The pattern is clear: When controls weaken, fraud risks rise.
So How Do You Strengthen Your Fraud Defenses? Start Here.
These action items are realistic, budget-friendly, and doable, even for small offices.
1. Revisit Segregation of Duties (Yes, Again)
Even with limited staffing, you can build smart guardrails:
- Require secondary review of payments and adjustments
- Separate who approves, who records, and who reconciles
- Rotate responsibilities annually to reduce blind spots
Segregation doesn’t have to be perfect, just intentional.
2. Tighten Vendor Management
Vendor fraud is one of the fastest growing risks. Try implementing:
- Annual vendor file cleanups
- Independent verification of vendor banking changes
- A centralized list of approved vendors
- Cross-checks for duplicate payments
These steps catch more issues than you’d expect.
3. Modernize Policies That Haven’t Been Updated
If your fraud policy predates remote work, cloud systems, or your newest finance software, it’s outdated. Policies should cover:
- Cybersecurity expectations
- Reporting mechanisms
- Conflicts of interest
- Use of purchasing cards
- Remote or hybrid work protocols
A strong policy is one of your most underrated tools.
4. Train Employees to Spot Red Flags
Fraud prevention isn’t only the finance department’s job. Short, accessible training can cover:
- Recognizing suspicious vendor activity
- Identifying unusual payroll changes
- Phishing and email fraud
- How to report concerns safely
Most fraud cases are caught by employees, not software.
5. Lean on Data Analytics (Without Needing a Data Scientist)
You don’t need advanced software to spot patterns. Even basic analytics can reveal:
- Duplicate payments
- Round-dollar invoices
- Payments just under approval thresholds
- Unusual transaction timing
- Inactive vendors suddenly becoming very active
A little data visibility goes a long way.
6. Conduct Regular Fraud Risk Assessments
Think of this as your preventive checkup. A fraud risk assessment helps you identify vulnerabilities you didn’t even know were there and prioritize fixes before issues arise.
At the End of the Day, Fraud Prevention Is About Culture
Controls matter, but tone at the top matters more. When leadership models transparency, accountability, and openness, employees follow. When leadership avoids difficult conversations or overlooks risky behaviors, employees notice that too.
Fraud thrives in silence. Prevention thrives in awareness.
The Bottom Line
Fraud prevention isn’t about assuming the worst of your employees; it’s about protecting your organization’s mission, reputation, and resources. If your organization hasn’t revisited its fraud prevention strategy recently, now is the perfect time to take a fresh look.
If you need further guidance or have any questions on this topic, we are here to help. Please do not hesitate to reach out to discuss your specific situation.
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.
