Insights: Article

Why does fraud continue in governmental organizations?

By Doug Cash

December 11, 2017

Almost daily, there’s an article on the web about yet another governmental organization victimized by embezzlement. Embezzlement can happen anywhere—a small town in rural Wyoming where the former city treasurer is arrested for mishandling deposits; a director of a housing authority in Texas sentenced up to 10 years for taking money from federal grants; two city employees in South Carolina charged with paying themselves 16 extra paychecks over a four-year span; or an administrative aid to a city judge who was arrested for using the city’s credit card for $300,000 in personal charges. Each day, the number of these cases grows.

No matter the type of organization, it’s not easy convincing leaders that trust is not an internal control and preventing fraud is a lot less expensive. Imagine explaining to the city council, board of supervisors, county commissioners or any other type of governing body why the misappropriation of tax payer funds took place in the first place. And then try to explain why a second embezzlement took place in the same division, by the same position within a year.

It is very seldom an organization decides to conduct any type of preventative work. One town contacted us to do preventative work, and we applaud them for their forward-thinking. Leaders in Castle Rock, Colo., which is experiencing explosive growth, contacted us about having their entire organization’s internal controls checked for possible weaknesses, even though no concerns had previously come to light.

For them it wasn't, “that's the way we do things, so why should we change”? They were willing to change anything necessary to better protect the assets of the town and tax payer funds entrusted to them. Many organizations start out with a good set of controls but over time, those controls are expanded little by little. Many times, it's simply explained away as “that's just how so-and-so does it.” No one is willing to confront this individual about how they are moving their activity away from the norm, so this new way of doing things is now the norm. This type of thought process is repeated over and over until it is unclear what the true policy or job duty is any more. When this takes place, the ability for someone to manipulate their position and take advantage of this manipulation occurs. This can lead to a large-scale, long-lasting fraud scheme. Could it be possible this type of thought process attributed to what transpired in Dixon, Ill., and cost the city $53 million over 20 years?

There is a concept called “normalization of deviance,” which explains this attitude much better than Albert Einstein's concept of “insanity: doing the same thing over and over and expecting a different outcome.” According to an article published in the Public Safety Risk Management newsletter for the League of Minnesota Cities, normalization of deviance is defined as “the gradual process through which unacceptable practice or standards become acceptable. As the deviant behavior is repeated without catastrophic results, it becomes the social norm for the organization.”

It's critical every governmental organization works diligently to protect their organization from this normalization of deviance attitude so they don’t become the next Dillion, Ill., and need to explain how millions of dollars disappeared from the city coffers.

Learn more about how Eide Bailly can help your organization protect itself from fraud here.

Latest Insights

November 19, 2018
Article
Have you been paying attention to the sales tax changes and increased compliance obligations as a result of the recent SCOTUS Wayfair decision?
November 16, 2018
Video
If your business sells or operates in more than one state, it’s important to understand the concept of nexus. Depending on how you’re earning revenue, having nexus could impose a variety of taxes, which vary state to state. Learn more in our…
November 15, 2018
Article
Until recently, many businesses weren’t overly concerned about sales tax. They knew they needed to collect and remit in the state in which they resided, but beyond that, their compliance burden was limited.
November 12, 2018
Article
This insight explores what dealerships can expect from the proposed section 199A regulations under tax reform.
November 8, 2018
Article
Are you a business taxpayer with annual gross receipts of $25 Million or less? If so, you may be eligible to take advantage of new Small Taxpayer Safe Harbors that could generate significant tax savings and simplify your tax returns in future years!
November 8, 2018
Article
Considered the most significant tax code overhaul in over three decades, the Tax Cuts and Jobs Act passed in 2017 includes provisions affecting both individuals and businesses.
November 7, 2018
Recorded Webinar
State and local sales tax compliance is always evolving, making it important to stay up-to-date on changes affecting your tax liability and responsibilities. This session will cover what you need to know regarding the recently enacted state and…
November 7, 2018
Article
“Why is my portfolio underperforming the market?” This question may be on your mind.
November 5, 2018
Article
Identify your implementation methodology. There are four practical expedients available. We'll explore each option.