Small Cities, Big Scandals: Why Smaller Cities are at Greater Risk of Fraud

Fraud and financial mismanagement aren’t just problems for big cities — they’re hitting small communities hard. When fraud happens in small towns, the financial impact can be devastating, and the reputational damage even harder to recover from. According to the Association of Certified Fraud Examiners (ACFE), government organizations lost a median of $150,000 per fraud case in 2024, a staggering increase from $48,000 in 2002. Meanwhile, the Government Accountability Office (GAO) estimates that fraud in government programs can account for 3% to 7% of total obligations, adding up to billions in taxpayer losses.

Recent cases in Texas highlight just how damaging these failures can be. In November 2024, Local 3 News in Corpus Christi reported that the former Taft County finance director faced eight felony charges for tampering with government records after allegations of fund mismanagement. Just a month later, Wilson County News covered the Floresville city manager’s termination for allegedly misusing city funds. These cases raise a pressing question: Why do small cities struggle with financial oversight?

Why small cities are more vulnerable

The issue isn’t just that fraud happens; it’s why these smaller communities are especially at risk.

• Limited budgets: Many small cities operate with tight budgets and can’t afford dedicated financial oversight. It’s not uncommon for one or two people to manage everything from budgeting to vendor payments, leaving little room for checks and balances.
• Lack of expertise: Unlike larger cities with internal auditors and compliance teams, small towns often rely on a single finance director, who may not be trained in fraud detection.
• Trust-based oversight: In close-knit communities, there's often a greater level of trust between city officials and employees. While this can foster strong working relationships, it can also lead to lax oversight and fewer accountability measures.

Without safeguards in place, fraud becomes easier to commit, and harder to catch.

Key internal controls to reduce fraud risk

1. Strong policies and procedures
   Policies and procedures set clear financial expectations and create a structured approach to handling city funds. Every city, no matter its size, should have:
   • Code of ethics: Establishes guidelines for ethical conduct and conflicts of interest.
   • Expense reimbursement rules: Sets limits on what can be reimbursed and requires documentation.
   • Procurement policies: Outlines vendor selection and bidding procedures to prevent favoritism or kickbacks.
2. Segregation of duties
   A key factor in preventing fraud is ensuring no single employee has full control over a financial process. When one person is responsible for approving, processing and reconciling payments, fraud becomes much easier to commit.

Take the case of Taft County’s finance director — without proper oversight, it was possible to manipulate records without detection.

A safer system distributes financial tasks among multiple people:

• A clerk records payments.
• A separate employee deposits funds.
• Another team member reconciles bank statements.

This structure ensures accountability and minimizes risk.

Read the full article published by American City & County.