The harsh reality is that fraud is an ever-present threat that can drain funds needed to provide services, programs, and maintain the functions and responsibilities of government entities. It can be difficult to imagine the sense of betrayal which is aroused when a trusted employee, contractor, or vendor, is found to have committed fraud. Despite the presence of certain anti-fraud controls, dozens of government agencies find themselves in such a position each year. The amount of loss arising from fraud can be devastating.
According to the ACFE 2020 Report to the Nations – Government Edition, the median loss from fraud was $100,000 per incident. This number highlights the importance of regularly reviewing and enhancing fraud prevention programs and the associated savings potential available. To help clients, prospects, and others, Selden Fox has provided a summary of the key insights and findings from this report here.
Most Common Fraud Schemes
To design controls that provide maximum protection, it is imperative to understand the most common fraud schemes used. For this reason, the survey wanted to understand which schemes were most frequently used. It was found that 51% of respondents indicated corruption, 18% non-cash fraud, 17% billing fraud, 14% expense reimbursements, 14% payroll, 9% skimming, 7% financial statement fraud, 5% check and payment tampering, and 4% cash larceny. Given the high rate of corruption, it is essential to develop controls that can check such behavior.
It is also important to understand the most effective detection methods. According to the survey, 43% indicated fraud was uncovered from a tip, 15% internal audit, 9% external audit, 8% management review, 5% notified by law enforcement, 3% surveillance and monitoring, 3% account reconciliation, 2% by accident, and only 1% by confession. It was also found that the top three tips sources were 54% from employees, 13% anonymous parties, and 10% vendors.
Common Anti-Fraud Controls
The survey was seeking to understand the most common anti-fraud controls used. It was found that 85% undergo an external audit of financial statements, 83% a code of conduct, 82% internal audit department, 76% management certification of financials, 65% employee support programs, 62% hotline, 54% fraud training, and 53% anti-fraud policies.
What is interesting to note here, organizations identify an external audit of financial statements as their most common anti-fraud control mechanism yet only 8% of the time was an external audit the catalyst for uncovering existing fraud. Financial statement audits are designed and intended to obtain reasonable, rather than absolute assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud. The auditor should not be considered a component of your fraud detection and internal control systems.
Fraud Red Flags
There are often common patterns of behavior or situational conditions which indicate a high likelihood fraud may occur. According to the survey, in 43% of cases, the fraudster was living beyond their means, 25% experienced financial difficulties, 22% had a close association with a vendor/customer, 17% had significant control issues, and 15% exhibited a “wheeler-dealer” attitude. It was also found that only 4% of perpetrators had a prior fraud conviction.
There was interest in understanding where perpetrators worked within the government agency. It was found that 16% worked in operations, 11% accounting, 10% executive or upper management, 8% administrative support, and 7% in purchasing.
There were also questions asked about how fraud perpetrators were punished. It was found that 49% were immediately terminated, 16% probation or suspension, 12% were no longer with the organization, 11% were permitted or required to resign, 10% reached a settlement agreement, and 8% received no punishment. In terms of recovery, 57% recovered nothing, 15% recovered all losses, and 28% received a partial recovery.
The survey findings provide important “real-time” insights which local government entities can use to evaluate and enhance existing fraud prevention programs. If you have questions about the information outlined above or need assistance with a fraud or forensic accounting issue, Selden Fox can help. For additional information call us at 630.954.1400 or click here to contact us. We look forward to connecting with you soon.