Fraud in the Governmental and Private Sectors
Holmes, Sarah A., Strawser, Jeffrey W., Welch, Sandra T., Journal of Public Budgeting, Accounting & Financial Management
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).
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.
Freeman and Shoulders (1996) note that governmental organizations are similar to profit-seeking entities in many ways. They both are integral parts of the same economic system and must acquire and convert similar scarce resources to accomplish their purposes. Certain fundamental differences between public and private entities do exist, however. Public sector managers focus on acquiring and using available financial resources to provide the maximum quantity of goods and services possible to their constituencies. In contrast, private sector managers seek to expend resources to generate the maximum income possible for the benefit of their stockholders. These fundamental differences in organizational focus can lead to the development of different control systems. Strict operational and administrative controls are created throughout the public sector to ensure compliance with espoused regulations. In contrast, the profit measure provides an automatic external regulating device for assessing the performance of entities in the private sector of the economy. These basic differences, both in organizational objectives and in organizational controls, may create unique combinations of circumstances, time, and place that can lead to the misappropriation of assets in the public and private sectors. …