"As originally published in Government Advantage, a Crowe Chizek and Company LLC publication, Winter 2007. All rights reserved."
Government employees must grapple with many of the same pressures that drive anyone to commit fraud, but there are additional influences at work in government operations. Here, authors Emy Neuman-Javornik and Brenda Buetow discuss how managers may be able to identify those who are likely to succumb to the temptation to commit fraud.
A number of years ago, a state Medicaid caseworker began embezzling money from patients she was helping to qualify for benefits. A tireless advocate for her elderly patients, she wouldn't have dreamed of stealing directly from them or their families.
Instead, she fraudulently reported to Medicaid that patients had visited their doctors every month, and pocketed the amount Medicaid paid the nursing home for the claimed "other medical expenses." When she was discovered, she insisted she had done nothing wrong.
Her reasoning was that the families didn't lose their Medicaid coverage as a result of her actions, and thus there was no victim and no crime. In her mind, stealing from the state — a large, faceless entity — was not really stealing.
The caseworker's story illustrates that potential fraudsters aren't obvious. Many times the person committing fraud is the least suspicious person in the office. Employees and managers in one university health service were stunned to learn that a universally well-liked woman who had been with the service for more than 20 years had also been stealing money every week for most of those years.
Defining The Fraud Triangle
How can managers in government spot a fraudster in the making? Employees who commit fraud wear many guises, but there are definitive warning signs that a fraudster may be in the making. Becoming familiar with the "fraud triangle" will help managers recognize those signs.1
The fraud triangle identifies the elements of fraud as motive, opportunity, and rationalization. People will commit fraud more readily when all three elements are present, but situational pressures and the ability to rationalize their actions as legitimate may be all that's required. Many people who commit fraud do not consider it theft, particularly when the theft is from a government body.
Motive for government workers is often regrettably easy to determine. Too many are in relatively low-paying jobs with little or no chance of advancement. Governments are increasingly called upon to do more with less, and employees often must shoulder larger workloads without commensurately larger paychecks.
Employees who have reached the tops of their career ladders simply because there are no jobs into which they can be promoted may be frustrated. And the more dissatisfied an employee becomes, the more likely he or she is to commit fraud.
In addition, government workers face the same fraud motivations that apply in the private and not-for-profit sectors. They include:
- Addictions such as gambling, drugs, or alcohol;
- Extramarital activity;
- Unexpected expenses for situations such as illness or significant property or vehicle repairs; and
- Financial pressures associated with aging parents or college-age children — or both.
These influences aren't necessarily evident at work, which is why it's important for managers at all levels of government to take an interest in and develop a rapport with employees.
Knowing that an employee is the single parent of two college students, for example, means a manager is aware that the employee may be under financial and emotional pressure. If the employee suddenly begins to exhibit a more lavish lifestyle, such as taking frequent trips abroad or driving a new luxury car, the manager should be more alert for signs of fraud.
The second leg of the fraud triangle is opportunity. Budgetary constraints have drilled holes in many government agencies' internal control systems. There aren't enough employees to maintain strict segregation of duties, but internal controls don't become more stringent as the number of people decreases. For example, the person who is responsible for making purchasing decisions should not also be the person who receives the goods that have been ordered. Similarly an employee responsible for project awards should not also be in charge of contractor invoice approvals.
Changing Leadership Adds Risk
Ever-changing leadership can create pathways to fraud in government operations, as well. Succession planning is nearly impossible when the director or mayor changes every four years. Long-term employees who survive the changes can become powerhouses of information, and can figure out how to hide fraudulent activity from successive administrations.
Additionally, unlike their private-sector counterparts, government agencies don't always look at financial statements year over year. Once a budget year is finished, it's forgotten. The focus is on the current budget and how to maintain or increase it the next year. Thus, fraud may go undetected.
The final leg of the fraud triangle, rationalization, may be particularly comfortable for government workers. Employees rarely get merit raises or promotions, regardless of how well they perform in their jobs. Instead, pay increases are based on cost-of-living adjustments that may or may not meet the cost of living.
Employees may feel fraud is justified because they perform management-level work but don't get paid managerial wages. They may believe they deserve perks such as driving a government car for personal errands or using petty cash to hire a relative for an odd job.
The sheer size of government, coupled with a lack of visible ownership, also makes it easier for employees to rationalize they aren't stealing from or hurting anyone in particular.
Ways To Reduce Risk
There are ways to help reduce the risk of fraud by government employees, however, and some are cost-free. City workers, for instance, may be delighted if the city manager or department head comes in to personally distribute paychecks and express appreciation for their hard work one day — an event that can boost morale as well as fight fraud.
At the end of the day, managers can review any uncollected paychecks. Do they belong to employees who are sick or on vacation, or are they evidence that ghost employees have infiltrated the payroll?
Government managers can also review their departments' vendor lists and payment practices. Someone trustworthy should approve all vendors and ensure that unapproved vendors aren't paid. Additionally, managers can compare vendor names and addresses with those of employees. Duplications may be signs of fictitious vendors, although there are exceptions.
Another expense-free fraud prevention method is monitoring whether internal controls such as vendor payment policies are, in fact, being enforced. Internal controls are essential, particularly in small offices, and it's important that someone checks to be sure they're in place and being followed.
And if everyone is aware that auditors come through in January, managers may want to do a petty cash count in March. Unannounced, random checks can bring discrepancies to light.
These and similar strategies may seem unnecessarily time-consuming for managers already juggling myriad responsibilities. Compared to the time and resources a full-scale fraud investigation can consume, however, they're worth every second.
Footnotes
1. First identified by Donald R. Cressey, a preeminent sociologist and criminologist, the "fraud triangle" remains one of the benchmark theories in fraud criminology.
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