Fraud in government entities: the perpetrators and the types of fraud.

• Author: Albrecht, W. Steve

Government employees are not immune to the pressures that lead to fraud and a drain on the community's cash and assets. Managers who are aware of the kinds of fraud most prevalent in government offices can create a proactive prevention and detection environment.

Jason Montgomery is director of purchasing for the City of Alexandria, Georgia. In that position, he is in charge of buying supplies of all types as well as securing certain contract services for the city. Jason has worked for the city for 16 years. His integrity and dedication have earned him a reputation of being an outstanding employee and his responsibilities have been increased as a result.

Jason is married and has four children. His salary, combined with that of his wire, total $46,000 per year. With their combined earnings, the Montgomery have been able to live a comfortable lie in a middle-class neighborhood in Alexandria, but their savings are almost nonexistent, The Montgomerys are proud people and it has always been their goal to send their four children to college. Two years ago their oldest son started school at State College and next year their second son also will be in college.

One year ago, Jason faced a serious crisis. He did not have the money to pay for his son's college expenses and he realized the would not be able to send his other children to school. In his postion, Jason has become quite familiar with various suppliers, and the buyer for one, a paper products firm, the past had offered Jason favors if he would give them a bigger percentage of the city's business. Jason approached the buyer with a proposition. He would give the supplier more volume if the supplier would "pay" him and honorarium of $1,000 per month. What ensued became the biggest nightmare of Jason Montgomery's life.

The supplier started shipping a cheaper grade of certain supplies as well as increasing prices. When Jason confronted the supplier about the changes, the supplier basically said, "We have no plans to go back to the original prices and quality of products and you can't do anything about it. What are you going to do, tell your supervisors that you have been taking kickbacks?"

The fraud continued for two years until a colleague of Jason's noticed some problems and started to investigate. The fraud was discovered, and the cost to the city was an overpayment for paper products of approximately $300,000.

The above case is real, but both the name of the perpetrator and the city have been changed.

The Extent of Fraud

Unfortunately, these types of frauds are becoming quite common in all kinds of organizations today. A recent study estimated that 31 percent of all Americans are dishonest (up from 12 percent in 1961) and another 40 percent are situationally honest, meaning they will be honest if it pays to be honest and dishonest if it pays to be dishonest.(1) Employee fraud is estimated to cost American businesses and organizations $200 billion per year, far outshadowing the $11 billion cost of violent crime. In banks, 95 percent of the losses are from employees-going out the back door-while only 5 percent are caused by bank robbery and customer fraud. In retail establishments, employees cause 70 percent of the losses while shoplifters and customers account for only 30 percent of the losses. At an alarmingly increasing rate, frauds are becoming more commonplace in government, business and all types of organizations.

Why is fraud becoming such a significant problem and what are the reasons people commit fraud? Jason Montgomery had been an honest employee for nearly 16 years: Why would someone with his background suddenly become dishonest?

Research has shown that individuals commit fraud when a combination of three factors exist: * perceived pressure, * perceived opportunity to commit and

conceal, and * a way to rationalize the behavior as

acceptable.

These three factors combine to create the "fraud triangle." The fraud triangle is very much like the "fire triangle." In order to have a fire, three conditions must exist: there must be oxygen, heat and fuel. If any one of these is removed, there will be no fire. Likewise with fraud: if either the pressure, opportunity or rationalization is removed, fraud does not occur.

For Jason, the pressure was financial in that he needed money to keep his children in school. He was too proud to admit to them and others that he could no longer pay for their school expenses. Unfortunately, very few people in today's society are free from pressure. Some of the most common pressures are high debts, financial losses, health expenditures, alcohol, drugs, gambling, greed or high lifestyle. Some pressures, however, are not financial. Rather, they include such factors as frustration with work, as desire to get even with one's employer, the challenge to beat the system, and peer of family pressure.

The confessions from some reformed gamblers illustrate how significant and compelling various pressure can be.

"Once I was hooked," says a reformed

gambling addict, "any wager would do.

I would give odds on how many cars

would pass over a bridge in the space of

10 minutes."

"When I caught that first whiff of the

race track, I was king in my own

fantasy world. There is no other...