Spring 2009 issue of Horizons

Raise Your Expectations CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS CONSULTANTS

Governments are exposed to the risk of each of these types of fraud. However, according to the ACFE study, two specific types of fraud account for more than 50 percent of the instances of fraud within the government environment: billing schemes and corruption. Billing schemes occur when a government pays invoices an employee fraudulently submits to obtain payments he or she is not entitled to receive. Versions of billing schemes include the creation of a shell company or ghost vendor, purchasing a product with government funds and returning it for a personal refund, and charging personal purchases to the government. Common warning signs for these schemes include increasing “soft” expenses, vendors with PO Box addresses, vendors listed as initials, and excessive voided or missing checks. Given the extensive amount of goods and services purchased by governments from external vendors, governments would be prudent to keep these warning signs in mind. According to the ACFE study, billing schemes generally end up being the most expensive type of asset misappropriation frauds. Corruption occurs when government employees or officials accept bribes, illegal or inappropriate gratuities, kickbacks or excessive gifts or when government employees or officials experience conflicts of interest. In the state and local environment, corruption schemes are made possible by the fact that most governments award service contracts through a competitive bidding process. The official supervising the process could be tempted to accept a bribe or kickback from a bidder in exchange for awarding that vendor a contract. Ultimately, corruption schemes cause governments to overpay for services (since the lowest bidder would likely have been selected had corruption not taken place), thus benefiting the perpetrator at the expense of taxpayers. When Fraud Occurs During the past year, stock prices have plummeted, the housing market has collapsed, and the economy has faltered. The ripple effects from these events have caused significant financial difficulties for many people. Accordingly, the temptation for employees to commit fraud schemes as a quick way of getting cash has increased significantly.

This financial pressure to commit fraud is one of the three components of the “fraud triangle,” along with rationalization and the perceived opportunity to commit fraud. These three components are present in every fraud. While pressure and rationalization are largely out of a government’s hands, governments do have the ability to reduce perceived and actual opportunity.

Perceived Opportunity

Pressure

Rationalization

How Fraud Is Detected And Deterred The ACFE study found that fraud is detected six ways: through tips, accidents, internal audits, internal controls, external audits and when governments are notified by police. Obviously, reliance on the police or accidents to uncover fraud is not advisable. Additionally, financial statement audits are not designed to detect fraud, and of all fraud schemes that are ultimately uncovered, only 2 percent are uncovered as a result of a financial statement audit. Thus, the most effective ways for governments to detect and deter fraud are developing strong internal controls, performing internal audits and promoting employee tips.

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