Tracy L. Coenen

When we think of fraud in governmental agencies, we often think of the sleazy-sounding bribery and corruption. Maybe you think of the bribe paid to secure a contract, or a kickback to an official for pushing a large project toward a friend’s company. Things like illegal gratuities and extortion are also perceived as occurring in governmental agencies more often than in the private sector.

While those things do happen in governmental agencies, it may surprise you to know that they’re not necessarily the most common or the most costly types of fraud occurring in the public sector.

Government fraud happens the same way fraud occurs in the private sector. You might hear the phrase “waste and abuse,” and that’s probably a pretty accurate way to view the bulk of fraud committed against governmental entities. Government agencies rely on funds from the public to carry out their work, and when that money is used for illegal purposes, taxpayers feel that their money has been wasted and their trust abused.

At times it seems as though governments have a limitless supply of funds. If the money runs out, a new tax is likely to replenish the supply. That’s what makes it so easy for companies and individuals to justify bilking the government out of money. The open checkbook mentality makes it seem as if there is not a tangible victim in such a scheme.

The Facts on Governmental Fraud

More than $652 billion is estimated to be lost to employee fraud in the United States every year, according to the 2006 Report to the Nation on Occupational Fraud and Abuse, published by the Association of Certified Fraud Examiners (ACFE). This figure includes all fraud committed by employees, in all industries and sectors.

However, the amount of internal fraud experienced by governmental entities actually appears smaller than the occupational frauds happening in all industries as a whole. Government agencies suffer median losses that are only half as much as those that occur in the private sector. Publicly traded and private companies experience fraud losses that are $200,000 to $210,000 on average, while government losses are only about $100,000 on average.

Billing fraud and theft of non-cash assets are the most common internal frauds experienced by governmental agencies. Billing fraud occurs when those providing goods and services to an entity overcharge or create otherwise false billings, and payment is secured on the false invoices with the help of an employee of the governmental agency. The theft of non-cash assets includes an employee stealing equipment, supplies, or other items used by the agency in fulfillment of its duties.

Cases of corruption and financial statement fraud occur less often in government, when compared to all organizations. The ACFE study found corruption in only 26 percent of government cases, while all industries experienced corruption in almost 31 percent of fraud cases. Financial statement fraud happens less often in government as well, with only 4 percent of fraud cases including a financial statement fraud element, as compared to almost 11 percent across all industries.

That $652 billion a year in fraud losses is outrageous, and when we look at the government sector alone, the fraud losses are equally as staggering. In 2004, the Government Accountability Office identified over $45 billion of improper payments by 17 federal agencies. However, this figure excluded at least 12 specific federal programs with significant budgets and significant fraud risks. So it’s quite possible the fraud against the federal government much higher.

More Susceptible to Fraud?

The statistics show that governmental fraud is less prevalent and less costly than fraud across all industries as a whole. Is this really the case? Or do government agencies have just as much (or more) fraud than the private sector, but don’t discover it as often?

That’s a hard question to answer. To say that government agencies have more fraud and just don’t know it would be a sweeping generalization without hard data to prove it. On the other hand, my discussions with other fraud examiners lead me to believe that at the very least, the government is more susceptible to fraud than private industry.

It would seem that this shouldn’t be the case. In a way, the government has unlimited access to funds. If they need more money, they create or raise a tax. This perceived unlimited funding should lead to resources to combat fraud.

On the other hand, the real world demonstrates something different. There may be a lot of resources available to the government, but it doesn’t appear that they’re spending a lot of money on fraud prevention and the improvement of systems. Go check out the average municipality and see how up-to-date their accounting computer systems are. Lots of them have old systems, and outdated systems aren’t as good at heading off fraud.

Talk to government employees who work in an accounting capacity, and see how often they tell you that money isn’t spent on fraud until after it is discovered. Until the budgetary hand is forced to do something because of a crime, money often isn’t voluntarily spent on the fraud issue.

Solutions For the Future

One might expect that the government would be very diligent in fighting against fraud. After all, they are using my money, aren’t they? And don’t they owe it to all taxpayers to safeguard those assets and make sure they’re being appropriately spent? Again, it appears that’s not the focus of the governmental agencies that use our money.

The victims of governmental fraud are many. Not only are taxpayers robbed of honest services and responsible use of their money. Victims also include those who might have benefited from legitimate government programs and policies funded with taxpayer money.

There is hope, however. The ACFE study found that government agencies tend to rely less on the accidental detection of fraud, when compared to all industries as a whole. Their detection of fraud by tips and external audits was more common than for all industries. So while I may be of the opinion that the government is not doing enough to prevent fraud, the evidence suggests that in the area of proactive detection of fraud, the government is actually doing better than private industry.

It is my hope that governmental agencies will build on these successes and take a more proactive stance against fraud. The way to prevent fraud in government is really no different than in private industries, however. Solid fraud prevention is achieved through an efficient combination of internal controls over assets, education of employees about fraud schemes, and enforcement of agency policies and procedures.

Tracy L. Coenen, CPA, MBA, CFE, is the president of Sequence Inc., a forensic accounting firm with offices in Milwaukee and Chicago. Coenen can be reached at tracy@sequence-inc.com or 414-727-2361.