How to detect and mitigate fraud

By Dan Zitting

Fraud risk is prevalent in all areas of the public sector. It’s found in agencies at the federal, state and local government levels, with some variation. According to a recent U.S. Government Accountability Office Fiscal Statement, fraud, waste and abuse in government agencies is estimated to cost taxpayers more than $136 billion each year—and that’s just from improper payments. An ACL survey on fraud found that less than 30 percent of anti-fraud recommendations are fully acted upon by government agencies. This compares to 40 percent of such recommendations being pursued in the business sector.

Federal agencies certainly might have tighter controls through internal auditing and oversight from the Office of Inspector Generals in each agency, so the opportunity to commit fraud is much greater in local governments. Internal fraud is a big problem for local governments, and the impact goes far beyond the financial costs, causing reputational damage and potentially public health and safety risks.

Why fraud is a bigger issue within smaller governments and local agencies is often attributed to more limited resources available. In some cases, this could mean one individual. Some local agencies without the resources to audit their own books rely on the state auditor general, whose staff does not have the bandwidth to check all details of every financial report generated by the agency. In fact, they may only be able to review key parts of reports and not drill down.

Regardless of the cause, local government agencies must make an attempt to do better and improve processes. There are a few key steps that go a long way to improvement:

1. Data Analytics
   Data analytics is the process of examining data sets in order to draw conclusions about the information they contain, increasingly with the aid of specialized systems and software.. It is a powerful tool government agencies should use to help identify possible fraudulent activity. Sophisticated analytics can identify the red flags throughout all the agency’s electronic records.

2. Automation
   Automation is the creation and application of technology to monitor and control the production and delivery of products and services. There are benefits to implementing automated searches for transactions that occur outside regular business hours, such as weekends and holidays. Automation also grants the ability to ask the system questions, such as, “is one employee class outspending all its peers?” 

3. Tighten the Rules.
   Often, something as easy as making and enforcing tougher rules can increase effectiveness of software tools. For example, have rules in place for what purchase cards can be used for. If the agency bans a class of employees from making certain purchases using the government purchase card, the software can search in transaction histories and pull up every instance of those purchases. If someone outside that class of employee went and made a transaction, it will be flagged.

Fraud in local and state government agencies can be combated effectively—as long as the proper resources and procedures are put in place. By implementing fraud management tools, organizations can protect taxpayers’ dollars and bolster the public’s trust in the governments that serve them.

Dan Zitting is the chief product officer for risk and control monitoring software company ACL. He is a certified public accountant, certified information system auditor and certified information technology professional.