"HMO to Settle Billing Claims for $12 Million."1 "Air Force Worker Accused of Bilking the US."2 These recent Washington Post headlines suggest that even the federal government is not immune to victimization by criminal activities of a financial nature. Indeed, fraud uncovered within the federal sector has proven to be extremely costly. Though relatively small in terms of the percentage of the budget impacted (median dollar losses as a percentage of median budgets ranged from a low of 0.03 percent to a high of only 0.4 percent), the specific illegal acts reported in this article affected numerous agencies and resulted in losses in excess of $157 million. Even beyond the sheer magnitude of the dollar losses incurred, fraud has also proven to be extremely costly in other ways. Illegal activities divert budgeted resources from their intended uses. In addition, fraud undermines an agency's attempts at reform by deflecting the focus of its leaders. These well-publicized events also erode the public's confidence in the integrity of our federal system.
All would agree that fraud must be uncovered and eliminated whenever and wherever it is practical to do so. Fraud can never be justified or condoned. The complete eradication of fraud, however, is simply not feasible. In the book, "Other People's Money" D. R. Cressey specified that a fraudulent act is committed when three conditions co-exist. "Trusted persons become trust violators when they conceive of themselves as having a financial problem which is non-sharable, are aware that this problem can be secretly resolved by violation of the position of financial trust and are able to apply to their own conduct in that situation verbalizations which enable them to adjust their conceptions of themselves as trusted persons with their conception of themselves as users of the entrusted funds or property."3
Organizations typically lack both the skills and the tools necessary to identify those individuals who may harbor nonsharable financial problems and who may subsequently rationalize a trust-violation as either noncriminal, justified or a part of a general irresponsibility for which the individual feels no personal accountability. Realistically, organizations can alter only one of Cressey's three conditions that culminate in the criminal violation of a financial trust-the likelihood that individuals will perceive that a violation of their financial trust would provide a means of resolving their nonsharable problem. The presence of controls, both internal and external to the organization, certainly can reduce (but not eliminate) the opportunities to perpetrate fraud available within an individual's ordinary work routine. Nevertheless, a balance must be maintained. An organization must guard against the costs of over-controlling an environment without sacrificing the benefits of justifiable levels of asset protection.
Greater knowledge of the details of specific incidents of fraud that have been perpetrated and subsequently uncovered at the federal level offers insight into the need for the constant vigilance of agency personnel. Specifically, by identifying characteristics of the organizations victimized by fraud, as well as traits of the perpetrators, agency managers and auditors, both internal and external, can be alerted to the likelihood that their areas of responsibility may be particularly vulnerable to fraud. Further, by identifying the patterns of fraud schemes associated with various types of perpetrators, control systems can be designed and implemented that effectively balance costs and benefits. Concerned individuals can be sensitized to the possible presence of fraud or, at a minimum, to its potential danger.
This is the first of two articles on fraud in the federal government. Part I provides a profile of the perpetrators and examines the victims of fraud to identify those characteristics that made them vulnerable to defalcations. Part II, which will run in the Summer issue of the Journal, describes, analyzes and summarizes data pertaining to the instances of fraud perpetrated against the federal government. …