As a forensic accounting service provider, we are involved in many investigations prompted when management discovers financial transactions that do not seem related to the business. Sometimes these cases are simple to investigate and document, such as when city clerks from small city governments issue checks to themselves and conceal the activity through the accounting.
Large government entities, which most would consider to have proper segregation of duties, are still susceptible to fraud. However, these cases tend to be more complex due to the schemes used to hide the fraudulent activity from the multiple controls typically found in larger entities with more employees.
Below is a typical billing scheme scenario involving large government entities:
- A committee of individuals not involved in the day-to-day operations of a particular program develops concerns over large expenditures under a “miscellaneous” account.
- The committee talks to key personnel and they, in turn, drill into the accounting.
- This leads to the discovery of questionable transactions involving an individual within the program who can approve expenditures and certain vendors with which the program does business, but for what appears to be for no legitimate business purpose.
- Outside forensic accountants are often engaged by large or small entities given their specific skillset; an accounting background, investigative mindset, an understanding of how to document fraud schemes for civil, criminal and/or insurance purposes, and for their experience in testifying in court, if needed.
- Through common forensic accounting procedures such as examining policies and procedures, employee interviews, accounts payable detail and exports, bank records, digital forensics and online investigative techniques, forensic accountants not only identify the fraudulent individual(s), but the method that was used and the extent of the fraud.
- Investigations take anywhere from three to six weeks or more, depending upon complexity, to complete. Most often, the driving factor behind the time to complete an investigation is the availability of records. If certain records have been destroyed, such as bank records or accounting records, then the investigation may take longer due to third-party requests for records and having to reconstruct the entity’s accounting.
- In the scenario above, forensic accountants are able to identify an individual as being the only program employee to authorize these specific vendors’ invoices for payment, prepare the payment requests and request the checks to be routed to the individual’s desk for hand-delivery.
This is a typical fraudulent billing scheme involving conflicts of interest between the individual authorizing payment and the specific vendors due to their unknown relationship. Large government entities fall victim to billing schemes—even with good controls—when employees get around the controls because of a lack of appropriate monitoring mechanisms. In this example, no one scrutinized manual payment requests or monitored expenditure thresholds for policy violations.