Is Fraud a Problem in Governmental Entities?
Graves, Sharron M., Lilley, Treba, Lozano, Marsh Miguel, Iii., Academy of Accounting and Financial Studies Journal
The Association of Certified Fraud Examiners estimates the loss from occupational fraud and abuse at approximately $600 billion per year, or about $4,500 per employee. The FBI has labeled fraud the fastest growing crime, and accordingly allocates a large portion of its resources to fighting fraud. There are many types of fraud, but all can be classified as those committed against the corporation or those committed on behalf of the organization.
This article reports the results of a survey developed by the authors and sent to members of the Government Finance Officers Association of Texas via electronic mail. Responses were received from 54 governmental entities. The results of the survey are compared to the KPMG 1998 U. S. Fraud Survey to determine if the fraud statistics from governmental entities echoed those from a national survey which primarily included large corporations.
With the Sarbanes-Oxley Act of 2002 and the implementation of SAS 99, management and auditors of publicly held companies will become more adept at recognizing fraud risk factors. Hopefully, some of this awareness and strengthening of internal control systems will transfer to the governmental sector.
During most of the 19th century, fraud was somewhat ignored by both public and private companies. As a result, fraud thrived and cost companies an untold amount of money. At one time, the U. S. Chamber of Commerce estimated that the cost of employee and management fraud exceeded $100 billion annually (Davia, 2000). Other groups estimated a much higher figure.
In 1996 the Association of Certified Fraud Examiners (ACFE) published its first Report to the Nation on Occupational Fraud and Abuse. At that time, the results indicated fraud cost U. S. organizations more than $400 billion per year or roughly $9 per day per employee or 6 percent of the company's total annual revenue (The Association of Certified Fraud Examiners, 1996). Recently, the 2002 Report to the Nation on Occupational Fraud and Abuse was released. The latest report was more extensive than the first and was based on 663 occupational fraud cases which were reported to the ACFE by Certified Fraud Examiners and accounted for more than $7 billion in losses. Only six years after the first fraud study, the ACFE now estimates the loss from occupational fraud and abuse at approximately $600 billion per year, or about $4,500 per employee (The Association of Certified Fraud Examiners, 2002). The percentage of fraud losses remained relatively constant at 3 percent of revenues. However, during the six-year period the Gross Domestic Product increased from approximately $7 trillion to about $10 trillion which accounted for the $200 billion increase in losses. For purposes of this research, occupational fraud and abuse is defined as: "The use of one's occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization's resources or assets" (Wells, 1997). Fraud embraces a wide variety of actions committed by company employees from the chief executive officer to the lowest level employee and ranges from sophisticated investment schemes to petty theft. Abuse covers a multitude of activities often accepted by both employees and employers as a cost of doing business. Abusive activities include such things as padding expense accounts, taking long, unapproved lunch breaks and employees falsely claiming sick leave. Obviously, flagrant abuses are normally reprimanded or prosecuted, but lessor offenses are often overlooked.
The FBI has labeled fraud the fastest growing crime and, accordingly, allocates a large portion of its resources to fraud investigation. On a continual basis, the bureau is investigating several hundred fraud and embezzlement cases involving amounts in excess of $100,000 per case (Albrecht, 2003).
At the Principles of Fraud Examination Conference held in June 2003, Toby Bishop, ACFE President and CEO, was asked the question, "What is the state of fraud in this country? …