Government Fraud Discovered—a headline that no government official, auditor, or taxpayer ever wants to see. Fraud in government exists in many forms and can be perpetrated by a multitude of persons individually or in collusion with others. External entities, engaged with governments through public projects or contracts, may also bring risk of fraudulent activity. Losses vary widely in amounts and can affect governments both on the international stage as well as within your zip code.
Take Rita Crundwell, the Comptroller and Treasurer of Dixon, Illinois, for example. During an extended vacation, her scheme, which would later be considered one of the largest municipal fraud events in United States history, began to unravel. The discovery of a secret bank account and false state invoices shed a grave light on her financial transgressions. Rita was stealing over $2.5 million annually to fund one of the best-known Quarter Horse breeding operations in the country and a lifestyle well beyond her $80,000 annual salary. This fraudulent scheme lasted over 22 years and amounted to $53.7 million in embezzled funds. Rita is now carrying out a 19.5-year prison sentence.
While justice was eventually served, the proper internal controls could have mitigated or prevented this two-decade-long scandal altogether. This series will explore the following ten business processes, which could help, prevent your government from becoming the next fraud case like the one that occurred in Dixon, Illinois. Each topic listed below will be examined through the lens of actual fraud incidents and provide steps that can be taken to prepare for and avert the risk of fraud.
- Accounts Payable
- Accounts Receivable
- Contract Management
- Grants and Program Management
- Information Technology & Security
- Inventory Management
- Payroll & Human Resources
- Vendor Debarment
How Having a Robust Set of Internal Controls Helps Mitigate Fraud:
Today, fraud is the leading threat faced by all governments. Advancements in technology and the globalization of the economy have made internal and external fraud easier to commit and harder to trace. This phenomenon has been underscored by the Association of Certified Fraud Examiners (ACFE) Report to the Nations 2020 Global Study on Occupational Fraud and Abuse. In this report, the ACFE found government and public administration to be one of the most common industries impacted by fraud, only second to banking and financial services. The facts surrounding fraud can be overwhelming and you may feel like you do not know where to begin in the war against government fraud.
The key to fraud detection and prevention is management’s responsibility to maintain and monitor a robust system of internal controls. Internal controls help governments plan, prevent, and mitigate all types of fraud that can occur. They can also help governments fulfil their overall mission, business objectives, and strategies. There are five components of internal control known as the Committee of Sponsoring Organizations (COSO)—Integrated Framework. In addition to providing confidence in the reliability of financial information, this framework is required for all public and private organizations that issue audited financial statements.
The Five Components of Internal Control:
- Control Environment - The foundation of the internal control system that establishes the overall discipline and structure to help the government operate smoothly with minimum conflict and issues. Best practices include a separate independent oversight body to oversee internal control, an effective organizational structure that includes segregation of duties and departments, the recruitment and retention of ethical and competent employees, and policies that hold everyone in the government accountable for their performance.
- Risk assessment - Helps management plan, forecast, mitigate, and respond to all possible threats and fraud opportunities to prevent financial and credible damage to a government.
- Control activities - Policies and actions set forth by management to prevent, detect and mitigate risks based on risk assessment plans and procedures.
- Information & communication - A vital key component of government to include transparency within the organization so all employees are aware and updated on the government’s objectives and are following the most updated policies and procedures in compliance with state and federal rules and regulations.
- Monitoring - Assessing all control activities and risk assessment procedures to ensure all are operating as planned and remediating deficiencies as they occur. Monitoring is an ongoing element that should be performed on an as-needed basis.
Internal controls are the foundation every government needs to ensure fraud can be detected and prevented, internally and externally. Each of the five components of internal control play a role in providing assurance that information reported by the government is both reliable and ethically competent. Each week, we will post an article that explores various aspects of fraud and utilizes the COSO’s internal control framework to examine the risks, red flags, and best practices. Stay tuned for upcoming articles in our series where we will explore areas of government operations that are susceptible to fraudulent activity.
Association of Government Accountants (AGA) https://www.agacgfm.org/Tools-Resources/intergov.aspx
Association of Certified Fraud Examiners (ACFE) https://acfepublic.s3-us-west-2.amazonaws.com/2020-Report-to-the-Nations.pdf