Preventing Fraud and Mismanagement in Government - Systems and Structures

Cover????????????????????????

Title Page??????????????????????????????????

Copyright????????????????????????????????

Contents??????????????????????????????

Foreword??????????????????????????????

Acknowledgments????????????????????????????????????????????

About the Authors????????????????????????????????????????????????

Preface????????????????????????????

Introduction??????????????????????????????????????

People are Your Greatest Risk and Your Greatest Asset

Focus of the Book

Rules: Do They Stop Fraud and Mismanagement?

Mird: The Four Criteria to Prove Fraud

Judgment

Structures and Systems

Developing Systems in Structure by Asking the Right Questions

Agfot (Assisted Gorilla Fraud Observation Techniques)

Notes

Chapter 1: Government and How It Works

Types and Forms of Local Government: An Example from New Jersey????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????

Politics, Public Operations, and Loss????????????????????????????????????????????????????????????????????????????????????????

Global Forms of Government??????????????????????????????????????????????????????????????????

Revenue Functions within Governmental and Public Entities????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????

The Federal Government??????????????????????????????????????????????????????????

Fiscal Discipline????????????????????????????????????????????????

Structure of Federal Debt????????????????????????????????????????????????????????????????

State Governments????????????????????????????????????????????????

Local Governments????????????????????????????????????????????????

Public Agencies????????????????????????????????????????????

Public Authorities??????????????????????????????????????????????????

Government via Concessions, Franchises, and Contract Work????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????

Public-Private Partnerships????????????????????????????????????????????????????????????????????

Conclusion??????????????????????????????????

Notes

Chapter 2: Public Finance and How Government Creates Cash Flow

Government Finance 101??????????????????????????????????????????????????????????

Case Study: Transportation Finance??????????????????????????????????????????????????????????????????????????????????

The Basic Rules of Forensic Accounting??????????????????????????????????????????????????????????????????????????????????????????

Cost of Collection??????????????????????????????????????????????????

Tax Collection Example-Fuel Taxes????????????????????????????????????????????????????????????????????????????????

Enforcement and Compliance: Tax Evasion????????????????????????????????????????????????????????????????????????????????????????????

Burden of Taxation??????????????????????????????????????????????????

Maturity Mismatching??????????????????????????????????????????????????????

Fiscal Federalism????????????????????????????????????????????????

PFDA??????????????????????

User Fee versus Tax????????????????????????????????????????????????????

Pigouvian Taxes and Subsidies????????????????????????????????????????????????????????????????????????

Government Revenue Sources??????????????????????????????????????????????????????????????????

Taxes????????????????????????

Excise Taxes??????????????????????????????????????

Property Taxes??????????????????????????????????????????

Personal Income Taxes????????????????????????????????????????????????????????

Sales Taxes????????????????????????????????????

Fine Revenues????????????????????????????????????????

Fees??????????????????????

Transfer Payments????????????????????????????????????????????????

Bonding and Borrowing????????????????????????????????????????????????????????

Bond Structure??????????????????????????????????????????

Revenue Bonds????????????????????????????????????????

General Obligation Bonds??????????????????????????????????????????????????????????????

Core Issue: Government Spending????????????????????????????????????????????????????????????????????????????

Conclusion??????????????????????????????????

Notes

Chapter 3: Accounting for Government

Service Efforts and Accomplishments (SEA) Reporting????????????????????????????????????????????????????????????????????????????????????????????????????????????????????

Expectation Gaps??????????????????????????????????????????????

Management-Driven Motivations????????????????????????????????????????????????????????????????????????

Double-Entry Accounting????????????????????????????????????????????????????????????

Modified Accrual Basis??????????????????????????????????????????????????????????

Government Final Reporting??????????????????????????????????????????????????????????????????

Operational and Fiscal Accountability????????????????????????????????????????????????????????????????????????????????????????

Management Discussions and Analysis????????????????????????????????????????????????????????????????????????????????????

Government Employees' and Officials' Responsibility to Find Inconsistencies and Irregularities??????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????

Parallel Interest Conflicts????????????????????????????????????????????????????????????????????

Asset and Liability Recognition in Government????????????????????????????????????????????????????????????????????????????????????????????????????????

Statement of Net Position????????????????????????????????????????????????????????????????

Gordon Gecko Accounting????????????????????????????????????????????????????????????

Interfund Transfers????????????????????????????????????????????????????

Inflow and Outflow of Cash??????????????????????????????????????????????????????????????????

Related Statements??????????????????????????????????????????????????

Budgeting and One-Shot Accounting in Government????????????????????????????????????????????????????????????????????????????????????????????????????????????

Budget Manipulations??????????????????????????????????????????????????????

Public and Private Sector????????????????????????????????????????????????????????????????

Monopolistic Control??????????????????????????????????????????????????????

Government Intervention (Override)??????????????????????????????????????????????????????????????????????????????????

The Odd and Unsettling Mix of Public and Private Capital??????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????

AVERT Tool??????????????????????????????????

Governmental Funds??????????????????????????????????????????????????

Government Funds??????????????????????????????????????????????

Proprietary Fund??????????????????????????????????????????????

Fiduciary Fund??????????????????????????????????????????

Case Study: Multiple Jobs and Double Dipping??????????????????????????????????????????????????????????????????????????????????????????????????????

Future Pension Issues????????????????????????????????????????????????????????

Fixed Assets and Long-Term Debts: Self-Balancing Accounts????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????

Assumption Based??????????????????????????????????????????????

Principle Based????????????????????????????????????????????

Judgment Based??????????????????????????????????????????

President Obama's 2015 Proposed Spending??????????????????????????????????????????????????????????????????????????????????????????????

Ratio and Tables from a Government Perspective??????????????????????????????????????????????????????????????????????????????????????????????????????????

Financial Ratios??????????????????????????????????????????????

Government-wide Financial Statements Summary??????????????????????????????????????????????????????????????????????????????????????????????????????

Reconciliation of Government-wide and Government Funds Financial Statements (GFFS)??????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????

Financial Statement Communications??????????????????????????????????????????????????????????????????????????????????

Know Management????????????????????????????????????????????

OMB Circular A-123??????????????????????????????????????????????????

Conclusion??????????????????????????????????

Notes

Chapter 4: Who Works in Government and What Is Their Motivation?

Understanding People??????????????????????????????????????????????????????

Government Workers??????????????????????????????????????????????????

Elected Officials????????????????????????????????????????????????

Delegate Model Versus the Trustee Model of Representation????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????

Political Appointees??????????????????????????????????????????????????????

Bureaucrats????????????????????????????????????

Nurturing Homegrown Gorillas??????????????????????????????????????????????????????????????????????

The Care and Feeding of a Gorilla????????????????????????????????????????????????????????????????????????????????

Gorilla Hunting, Capture, Control, and Banishment????????????????????????????????????????????????????????????????????????????????????????????????????????????????

The Carrot and the Stick??????????????????????????????????????????????????????????????

A Case Study in Too Much Carrot Eating??????????????????????????????????????????????????????????????????????????????????????????

Union Workers????????????????????????????????????????

Unions as Gorillas??????????????????????????????????????????????????

Virtuous Public Servants??????????????????????????????????????????????????????????????

PFDA??????????????????????

Political Operatives??????????????????????????????????????????????????????

Human Resources: The First Line of Defense??????????????????????????????????????????????????????????????????????????????????????????????????

Hiring Process??????????????????????????????????????????

Personnel Data??????????????????????????????????????????

Policies and Job Descriptions????????????????????????????????????????????????????????????????????????

Job Descriptions??????????????????????????????????????????????

Lead by Example????????????????????????????????????????????

Employee Relations??????????????????????????????????????????????????

Compensation and Benefits????????????????????????????????????????????????????????????????

Training and Development??????????????????????????????????????????????????????????????

Performance Management??????????????????????????????????????????????????????????

Payroll????????????????????????????

Typical Types of Frauds????????????????????????????????????????????????????????????

Segregation of Duties among HR, Payroll (Hiring and Paying), and Accounting????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????

Time Entry??????????????????????????????????

Management/Supervisory Review and Approval??????????????????????????????????????????????????????????????????????????????????????????????????

Security and Access Controls??????????????????????????????????????????????????????????????????????

Human Resources????????????????????????????????????????????

Conclusion??????????????????????????????????

Notes

Chapter 5: Fraud in Public Agencies: Horse Trading or Stealing?

Understanding Government Fraud and Mismanagement??????????????????????????????????????????????????????????????????????????????????????????????????????????????

Just How Pervasive Are Fraud and Corruption???????????????????????????????????????????????????????????????????????????????????????????????????????

Why Do Agencies Do What They Do???????????????????????????????????????????????????????????????????????????????

Who Motivates Policy?????????????????????????????????????????????????????????

Government and Public Agency Frauds and Mismanagement-Why???????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????

Types of Government and Public Agency Fraud????????????????????????????????????????????????????????????????????????????????????????????????????

Criminality and Intent versus Ineptitude??????????????????????????????????????????????????????????????????????????????????????????????

Auditor versus Accountant Understanding????????????????????????????????????????????????????????????????????????????????????????????

Quantifiable Evidence????????????????????????????????????????????????????????

"More Likely Than Not" Standard????????????????????????????????????????????????????????????????????????????

"Reasonable Person" Standard??????????????????????????????????????????????????????????????????????

Identify, Record, and Communicate????????????????????????????????????????????????????????????????????????????????

Categories of Waste????????????????????????????????????????????????????

Centralization??????????????????????????????????????????

Centralization vs Decentralization of Government/Public Agency Internal Accounting Control??????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????

Money and Power????????????????????????????????????????????

How Wealth Distribution Leads to Fraud??????????????????????????????????????????????????????????????????????????????????????????

How Donations Can Lead to Fraud????????????????????????????????????????????????????????????????????????????

Political Principles to Prevent Fraud????????????????????????????????????????????????????????????????????????????????????????

Health Care Diversion????????????????????????????????????????????????????????

Typical Health Care Frauds??????????????????????????????????????????????????????????????????

Improper Payments????????????????????????????????????????????????

Meals and Entertainment: Directly Connected to a Public Entity's Operations????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????

Applicable Limitations??????????????????????????????????????????????????????????

Record-Keeping Requirements????????????????????????????????????????????????????????????????????

Churches and Political Campaign Activity??????????????????????????????????????????????????????????????????????????????????????????????

Common Travel and Expense Reimbursement Fraud Schemes????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????

Systems and Structures That Can Potentially Prevent Expense Reimbursement Schemes and Abuse????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????

Bribery, Kickbacks, and Gratuities Frauds????????????????????????????????????????????????????????????????????????????????????????????????

Making or Using False Statements Frauds????????????????????????????????????????????????????????????????????????????????????????????

Companies Conducting Business under Several Names????????????????????????????????????????????????????????????????????????????????????????????????????????????????

Collusive Bidding????????????????????????????????????????????????

Conspiracy to Defraud????????????????????????????????????????????????????????

Disclosure of Proprietary Source Selection Sensitive Information??????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????

Insufficient Delivery of Contracted Items????????????????????????????????????????????????????????????????????????????????????????????????

Failure to Meet Specifications??????????????????????????????????????????????????????????????????????????

Common Schemes??????????????????????????????????????????

Rigging Specification????????????????????????????????????????????????????????

Small Purchases Pattern????????????????????????????????????????????????????????????

Breaking Large Requirements into Smaller Ones????????????????????????????????????????????????????????????????????????????????????????????????????????

Duplicate Payment????????????????????????????????????????????????

Overstatement of Weights and Numbers Ordered??????????????????????????????????????????????????????????????????????????????????????????????????????

Patterns in Expense Frauds??????????????????????????????????????????????????????????????????

Conclusion??????????????????????????????????

Notes

Chapter 6: Corrupt Policies and Actions

Corruption: Agency Thinking and Inbreeding??????????????????????????????????????????????????????????????????????????????????????????????????

Systematic Risk????????????????????????????????????????????

Why Does Wrongdoing Continue to Happen?????????????????????????????????????????????????????????????????????????????????????????????

Types of Corruption Found in Government????????????????????????????????????????????????????????????????????????????????????????????

Examining Demographic Factors for Corruption Potential??????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????

Size of a Municipality??????????????????????????????????????????????????????????

Condition of the Local Economy??????????????????????????????????????????????????????????????????????????

Education????????????????????????????????

Political Culture of the Municipality????????????????????????????????????????????????????????????????????????????????????????

Corrupt Acts??????????????????????????????????????

Corrupt Act 1: Money Makes the Government/Public Agency World Go Round??????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????

Corrupt Act 2: Entitlement versus Earned (Rights)????????????????????????????????????????????????????????????????????????????????????????????????????????????????

Social Security????????????????????????????????????????????

How the U.S. Government Spends??????????????????????????????????????????????????????????????????????????

How People Spend??????????????????????????????????????????????

Political Risks????????????????????????????????????????????

Public Corruption????????????????????????????????????????????????

Deregulation??????????????????????????????????????

Banking Deregulation??????????????????????????????????????????????????????

Energy Deregulation????????????????????????????????????????????????????

Airline Deregulation??????????????????????????????????????????????????????

Conclusion??????????????????????????????????

Notes

Chapter 7: Policing of Public Corruption and Fraud

Background on Internal Control??????????????????????????????????????????????????????????????????????????

Distinguishing among Deterrence, Prevention, and Detection??????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????

Back to Analyzing the Risk Beyond Numbers????????????????????????????????????????????????????????????????????????????????????????????????

Financial Reporting Risk??????????????????????????????????????????????????????????????

Operational Risk??????????????????????????????????????????????

Compliance Risk????????????????????????????????????????????

Worms????????????????????????

Warnings Operations Revolve Management System (WORMS)????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????

Policing and Understanding the Enforcement Gaps????????????????????????????????????????????????????????????????????????????????????????????????????????????

How to Preserve the Evidence of Fraud and Corruption in the Public Entities????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????

How to Present the Evidence in a Public Entity Fraud or Corruption Case????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????

Conclusion??????????????????????????????????

Notes

Chapter 8: Final Thoughts

Six Symbolic Shapes of Government: Organizational Symphony??????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????

Fraud Can Happen at Any Time or Place????????????????????????????????????????????????????????????????????????????????????????

First Story: Embezzling from Churches????????????????????????????????????????????????????????????????????????????????????????

Second Story: Dixon, Illinois????????????????????????????????????????????????????????????????????????

Third Story: Nick's Roast Beef??????????????????????????????????????????????????????????????????????????

The Warning System??????????????????????????????????????????????????

Five Categories of Fraud??????????????????????????????????????????????????????????????

Misstatement of Revenues??????????????????????????????????????????????????????????????

Misstatement of Expenditures??????????????????????????????????????????????????????????????????????

Misstatement of Assets??????????????????????????????????????????????????????????

Inadequate Disclosures??????????????????????????????????????????????????????????

Misappropriation of Assets??????????????????????????????????????????????????????????????????

Why Public Entities' Auditors/Accountants Fail to Detect Fraud??????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????

A Simple Fraud Risk Plan for the Public Entity??????????????????????????????????????????????????????????????????????????????????????????????????????????

Fraud and Mismanagement Types, Signs, and Suggested Actions????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????

Approval??????????????????????????????

Billing????????????????????????????

Cash??????????????????????

Complaints??????????????????????????????????

Conflicts-of-Interest Risk??????????????????????????????????????????????????????????????????

Contract Bid Award Process: Request for Proposal (RFP)??????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????

Procurement/Purchasing-Bribery and Kickbacks??????????????????????????????????????????????????????????????????????????????????????????????????????

Favoritism (Nepotism)????????????????????????????????????????????????????????

Information (Disclosure)??????????????????????????????????????????????????????????????

Middleman Fraud and Mismanagement????????????????????????????????????????????????????????????????????????????????

Reputation (Rumors)????????????????????????????????????????????????????

Segregation (Overlap, Levels of Trust, Approval)??????????????????????????????????????????????????????????????????????????????????????????????????????????????

Change Orders, Unusual Volume, Late Delivery, Subpar Goods and Services????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????

Risk Overview and Plan??????????????????????????????????????????????????????????

Compliance Checklist??????????????????????????????????????????????????????

Conclusion??????????????????????????????????

Final Word??????????????????????????????????

Notes

Appendix: Tables??????????????????????????????????????????????

Index????????????????????????

EULA