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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:
A 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.
Without these, financial mismanagement can go unnoticed for years.
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.
3. Oversight and accountability. Even if small cities can’t afford full-time auditors, there are cost-effective ways to improve oversight:
Independent reviews: Hiring a part-time external auditor can help flag suspicious transactions early.
Fraud awareness training: Teaching employees and officials what to watch for helps prevent fraud before it happens.
Regular financial reports: Requiring city officials to review and question spending ensures transparency.
How small cities can strengthen financial safeguards
Even with limited resources, small governments can take practical steps today to protect taxpayer dollars:
Leverage external expertise: Consider regional finance partnerships or outsourced audits.
Invest in simple tech solutions: Affordable accounting software can flag unusual transactions.
Encourage whistleblowers: Employees and residents should feel safe reporting concerns.
Train staff and officials: Fraud prevention isn’t just for finance teams — elected leaders need to understand risks too.
The cost of inaction
Ignoring these risks comes at a high price. The ACFE’s 2024 report found that small organizations lose a median of $140,000 per fraud case, often without the reserves to recover. Beyond financial loss, fraud erodes public trust, leads to tax increases and reduces funding for essential services.
The good news? Small cities don’t need big budgets to improve financial controls. They can prevent becoming the next fraud headline by: auditing policies for gaps; splitting financial responsibilities; strengthening oversight, even on a budget; and encouraging transparency and reporting.
Fraud prevention isn’t just about compliance. It’s about protecting public funds and ensuring financial stability for the future.
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About the Authors
Patricia Castro, CAPM, is a senior consultant with UHY Advisors Mid-Atlantic Inc. She has more than 10 years of experience conducting forensic investigations, financial analysis, internal audits, regulatory and compliance audits, and enterprise risk management for profit companies and local governments. Castro is responsible for supporting adherence to the established risk framework and ongoing supervision of business controls, including risk and control self-assessments, identifying and evaluating control effectiveness, identifying control failures, facilitating risk and compliance remediation, internal and external audits and regulatory exams and minimizing risk exposure.
Shannon Castillo, MBA, CFE, is a consulting manager with UHY Advisors Mid-Atlantic Inc. She has more than eight years of experience in risk and compliance management, accounting and procurement, forensic examinations, internal audit, and data analysis. Castillo identifies and develops solutions for areas of improvement by formulating process documentation and leveraging systems and tools for management to rely on to ensure processes are streamlined, risks are mitigated, and data is accurate and complete. She is a certified fraud examiner (CFE) with the Association of Certified Fraud Examiners. She leverages her knowledge and experience in data analytics to identify trends and develop data visualizations that support management and stakeholders in decision-making.
