Government Second Only to Finance for Fraud

The 2012 edition of the Association of Certified Fraud Examiners (ACFE)’s Report to the Nations on Occupational Fraud and Abuse offers the not-too-surprising finding that government and public administration is the second-most fraud-prone industry, behind only banking and finance services.  That represents an advance; in the 2010 report, government was third, behind manufacturing.

The authors caution that the data, which is collected through a survey of CFEs, is affected by the relative likelihood that CFEs will be retained in a particular industry.  However, the most likely method of fraud detection came via tips, with the majority from employees, indicating that internal oversight and audits in the public sector may not account for the difference.

Of all of the fraud cases examined, 10.3% were in the government and public administration industry, up from 9.8%.  Meanwhile, manufacturing dropped from 10.7% to 10.1%.  (It’s important to note, for these comparisons, that the 2012 report is the first to expand the survey beyond the United States.)

The next two industries in the top 5 are also heavily intertwined with government activities: health care (6.7% of cases, up from 5.9%) and education (6.4%, up from 5.0%).  Since 2010, health care passed retail (6.1%, down from 6.6%), and education vaulted over both retail and insurance (5.7%, up from 5.1%).

The median loss due to government fraud was $100,000.  That was less than healthcare ($200,000), but more than education ($36,000).  Mining leads the list, at $500,000, while banking and financial services came in fifth, with $232,000.

Perhaps contrary to expectations, while owners and executives were individually responsible for greater loss, employees were the most likely to commit fraud.  Managers were only slightly less likely than employees to be the culprits, while owners/executives were about half as likely to be.

In the United States, 43% of fraud cases were perpetrated by employees, another 34.3% were perpetrated by managers, but only 18.5% by owners/executives.  However, those higher up the ladder individually accounted for much greater median losses, from $373,000 for owners/executives, to $150,000 for managers, to $50,000 for employees.  Meanwhile, U.S. fraudsters are much more likely to work alone than is true in other regions.

Across industries, the two most significant red flags for fraud (accounting for 62.7% of all cases) are “living beyond means” and “financial difficulties.”

Taking all of the data together, it would appear that the citizens of Rhode Island (and the residents of its cities and towns) should be keeping a very close eye on their tax dollars.

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