Government Fraud: What Does it Look Like and How Can it Be Prevented?

In her book The Little Book of Government Fraud, author Leita Hart-Fanta, CPA, CGFM, CGAP takes a look at fraud within government entities: who perpetrates it, how they do so, and how it can be prevented. Below is a summary of Hart-Fanta’s introductory chapter.

Common Characteristics of Fraudsters

Fraudsters can come in all shapes and sizes. That being said, a 2018 fraud survey released by the Association of Certified Fraud Examiners (ACFE) yielded a picture of the typical fraudster. On average, the typical fraudster is a college-educated male, aged 31-45, who is beyond his first year of employment at the job where he commits fraud. The median fraud loss is $156,000, but that number tends to rise with the age of the perpetrator, and when fraud is committed by an owner/executive, the median loss jumps to $850,000. In the personal observations of Hart-Fanta, fraudsters often turn out to be the employee that is most trusted—because with power comes temptation.

Terms to Know

Hart-Fanta takes some time to define key terms when discussing government fraud, including:

  • Fraud – A situation where money is stolen or financial statements are intentionally misstated in order to result in personal gain
  • Abuse – A less-severe form of fraud, such as faking sick or using government resources for personal projects
  • Asset Misappropriation – Theft or misuse of organizational resources
  • Corruption – A misuse of influence in a business transaction for personal benefit (e.g., bribery or conflict of interest)
  • Financial Statement Fraud – Intentional misstatements or omissions on financial reports
  • Fraud Prevention – Procedures designed to head-off fraud before it occurs
  • Fraud Detection – Reviewing transactions after-the-fact to check if fraud has occurred

Characteristics of Government Fraud 

According to the ACFE fraud survey, fraud within government entities is the second most frequent type (with banking and financial services fraud occupying the top spot). Of the fraud that occurs in governmental organizations, theft is the most common type, with corruption right behind. Generally, local governments don’t deal with much financial statement fraud because there’s not much, if any, benefit to be gained by doing so. Sometimes there is an incentive to manipulate financial statements at a larger government level, but this type of fraud is still firmly in third place.

Survey results revealed that the median loss from governmental fraud is in the $100,000-$120,000 range, though fraud on the upper-level management level can be much higher, depending on the size of the government. On average, government fraud schemes last for 18 months before being detected. 

The Key Elements Leading to Fraud 

Fraudsters justify their actions in a number of different ways. Generally, fraud experts identify three key elements that, combined, make up the justification for fraud: rationalization, incentive, and opportunity. Even the most honest and trusted employees, under the right circumstances, will commit fraud given the existence of each of the three elements in their personal situation.

Given the fact that nearly any employee might be driven to commit fraud, what actions should those charged with preventing and detecting fraud within a government entity take? Hart-Fanta suggests that focusing on eliminating the third element—opportunity—is most effective. Generally, rationalization and incentive are fed by personal circumstances in an employee’s life. Therefore, taking away the opportunity to commit fraud is the best strategy.

For more details, check out Hart-Fanta’s book, The Little Book of Government Fraud.