The hiring of a full-time investigator has led to more arrests in welfare fraud cases and has generated more than US$1 million in savings for the Schuyler County, N.Y., government, the
Star Gazette reports. County officials say the new investigator has worked with the Department of Social Services' welfare fraud unit to investigate more than 300 cases and make 23 arrests for welfare fraud, grand larceny, and other charges. The county averaged only four to eight arrests in previous years, and it had a reputation as a welfare haven.
Schuyler County officials should be commended for taking appropriate action, including the hiring of a fraud investigator, to address government benefits fraud, a problem faced by local, state, and national governments worldwide. One statement made by the Schuyler County district attorney is particularly intriguing: "When we catch people, they get punished. It creates a deterrent for other people considering welfare fraud."
In that context, the two questions worth asking are "How do we know if we have the right deterrence mechanisms in place and that they are working?" and "Is the audit profession taking full advantage of fraud deterrence methods and thinking in the practice of auditing?" If fraud deterrence is effective, there should be little or no fraud being committed, with significant financial savings. My perspective, however, is that organizations and their internal auditors still need to invest further in improved fraud deterrence as well as enhanced detective skills and resources.
The "fraud triangle" (motive-rationalization-opportunity) has underpinned much of the thinking about what fraud is and how to address it for about 50 years. Efforts to "break the fraud triangle" by removing one or more of its three elements to reduce the likelihood of fraudulent activities have focused on eliminating opportunity. In turn, the opportunity element is generally considered to be the factor that is most directly affected by the system of internal controls, which is where organizations and auditors have invested much of their time and efforts in deterring fraud. Motive and rationalization are considered less measurable and therefore less controllable.
Emphasizing strong internal controls is not enough. Organizations with adequate controls shouldn't experience significant fraud, but unfortunately they do time and time again. Of course, no control can provide absolute assurance against fraud. Fraudsters who are sufficiently motivated to override or circumvent controls usually can find a way.
Although controls are a vital part of fraud deterrence, they need to be considered in a larger context. Economic crime ultimately is perpetrated through either force or deception. Recent U.S. crime statistics indicate that force is declining as a cause, while deception is increasing. Robbery, theft, and other crimes of force are the bailiwick of the young and undereducated. On the other end of the demographic spectrum, both older and more educated individuals have come to understand a valuable proposition: The best way to rob a bank is to work in or own one.
Further complicating this trend is the fact that one of the most important factors in deterring fraud is the degree of certainty that those who are caught will be punished, as compared to other factors such as how quickly or severely they will be dealt with. Criminal justice systems in the U.S. and other nations frequently punish corporate fraudsters much more lightly than street criminals even though the financial and operational damage to organizations is much greater.
Here are three strategies that could help organizations:
Organizations — particularly public-sector entities — and internal auditors should use the unique skills of anti-fraud specialists proactively. Many organizations employ such specialists, but they often are used reactively instead of proactively. Rather than using these specialists to solely investigate allegations of fraud once they have been reported, anti-fraud specialists also should be involved in fraud risk assessments to help identify key risk areas and help investigate them before fraud occurs. Moreover, awareness that the organization has anti-fraud specialists in place could increase the perception that illegal activity will be detected.
Ensure financial transparency where it counts. Since the Enron scandal, a distinct pattern has emerged: A growing number of corporate executives, insiders, and board members have lined their pockets at the expense of shareholders, customers, and taxpayers. Their methods vary and are often cloaked behind complex transactions that are not readily apparent to the organization's auditors. However, profits from illegal schemes nearly always find their way into the personal finances and spending habits of those involved, including large illegal profits being declared on personal tax returns. Corporate insiders have a fiduciary duty to act in their shareholders' best interests. Part of this duty should include their financial transparency. Auditors should be given full access to any financial information that bears on this issue, including personal tax returns and detailed banking records. Having such access makes financial transparency a significant and powerful deterrent, and it makes it more difficult for insiders to conceal ill-gotten gains.
Auditors and their organizations need to better understand and adopt deterrence methods, including through research. There has been useful research into the psychological profiling related to human resources management decision-making and income tax compliance. Organizations have applied that research to better screen potential employees and target types of industries, groups, and individuals that are more likely to attempt income tax fraud. However, such research could never completely identify all of the factors involved in deterrence, and more research is needed into the many categories of occupational fraud. For example, when presented with seemingly identical opportunities and motives, why does one person or organization turn to fraud and another does not? More knowledge about fraud deterrence is likely to lead to different audit practices, compared to fraud detection, and it could encourage organizations to adopt better fraud-prevention strategies.