Forensic Briefs

Fraud in Governmental and
Not-for-Profit Organizations

June 2011

For much of the past several years, the news has been dominated by major fraud cases; in fact, today Madoff is likely more synonymous with fraud than Ponzi. While financial frauds such as the Madoff fraud have rightly grabbed the spotlight, what is often lost is the impact of fraud schemes on not-for-profit (“NFP”) and governmental organizations. According to the 2010 Report to the Nation on Occupational Fraud & Abuse, published by the Association of Certified Fraud Examiners, approximately 26 percent of the fraud cases included in the survey involved either a governmental or a NFP organization.

Fraud cases within these sectors can involve significant dollars, and behavior that can erode public trust. For example, two Luzerne County (Pennsylvania) judges have been accused of receiving kickbacks of more than $2.5 million in exchange for sentencing juvenile offenders to privately operated juvenile detention facilities; the Pennsylvania Attorney General has obtained convictions related to the payment of $3.8 million in bonuses to legislative staff members in return for work performed on campaigns; and a State Senator was convicted on 137 counts related to, among other issues, the use of Senate employees for personal and political purposes, the use of public funds to hire contractors that provided personal services, and the payment of more than $1 million from a not-for-profit organization for personal and political benefit.

These facts highlight the risk of fraud that governments and NFPs face. The risk, combined with the current economic environment, exposes organizations, and their employees, to additional situational pressures, and results in a challenging environment in which to deter and detect fraudulent activity. In many cases, these situational pressures relate to individuals who are attempting to maintain or achieve a certain lifestyle or status. Specifically, we routinely observe in the investigations that we perform:

  • The fraud is typically committed by an individual in a position of trust, who can exercise some level, if not complete, control over financial resources and reporting.
  • The fraud is enabled by a weak or ineffective system of internal controls that allows the trusted employee to act undetected.
  • The perpetrator is acting to meet his or her needs, and not that of the organization.

Clearly, control weaknesses, situational pressures and the issue of fraud are not exclusive to governments and NFPs. However, given the unique nature of these types of organizations, and the public mission that they often serve, the impact of a fraud can go beyond the dollar losses sustained.

If you have questions or concerns about possible fraud, or are interested in speaking with us about this brief, please contact David Duffus at 412-697-6404 or [email protected].

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