Fraud in the Governmental and Private Sectors

Article excerpt

ABSTRACT. The objective of this paper is to identify and provide a description, assessment, and analysis of frauds occurring in governmental entities at the federal, state, and local levels and to compare these findings to data from the private sector. Analyses are conducted along the following dimensions: the victim of the fraud, its perpetrator(s), the fraud scheme, and the detection and investigation of the fraudulent activity. In addition, the conditions under which the frauds occurred in both the public and private sectors are described, discussed, and analyzed. Data were obtained from a mail survey distributed to the membership of the Association of Certified Fraud Examiners. A total of 2,471 responses containing details of actual fraud cases were received. Of these, 611 cases described frauds that had occurred in governmental units and 1,860 depicted frauds that had occurred in the private sector. The findings of this study clearly indicate that no entity is immune to victimization by criminal activities of a financial nature.

INTRODUCTION

In recent years, fraud has become an increasingly troublesome problem for numerous entities in a wide variety of environments in both the public and the private sectors. For example, the Justice Department estimates that fraud and abuse account for approximately ten percent ($100 billion) of the nation's annual health care expenditures (General Accounting Office, 1997), and federal auditors suggest that improper payments totaling $23 billion have been made to medical providers under the Medicare program alone (Anders, 1997).

Loss estimates such as these (and the subsequent public comments generated as a result) have caused many managers and administrators to reexamine their activities. The detection of fraud is difficult, to say the least. Nevertheless, given the sometimes conflicting pressures placed on governmental officials in all sectors because of such factors as budget shortfalls, in particular, and the repeated calls for increased accountability, an examination of this important issue is of particular interest to the government sector at this time.

The objective of this study is to identify and provide a description, assessment, and analysis of frauds committed against governmental entities at the federal, state, and local levels and to compare these irregularities to those committed against companies in the private sector. Common factors associated with the misappropriation of assets (fraud) are addressed through the following five basic questions:

Where are frauds most likely to occur?

Who is most likely to perpetrate a fraud?

How are these frauds perpetrated?

What leads to the discovery of these frauds?

How are these frauds confirmed?

Knowledge of frauds that have occurred and have been subsequently detected in a variety of contexts, offers valuable insights that may be used to design and implement not only appropriate audit procedures, but perhaps more important, more effective control measures for the organization. Specifically, by profiling both the victims and the perpetrators of frauds, identifying the basic characteristics of the fraud schemes, and detailing the methods used to detect and confirm the fraudulent activity, managers, administrators, and auditors can be alerted to the likelihood that organizations may be vulnerable to fraud and take appropriate action(s).

BACKGROUND

According to the Institute of Internal Auditors (1985), an employee, outside individual, or a party representing another entity perpetrates a fraud against an organization for direct or indirect personal benefit. In general, the perpetrator conceals or misrepresents events or data, or makes false claims. Although no single study provides a comprehensive theory of fraud, many do offer at least some insight into the complexities of this important issue.

The Victim

Freeman and Shoulders (1996) note that governmental organizations are similar to profit-seeking entities in many ways. …