Relationship Between Internal Controls and Fraud

According to the 2014 Report to the Nation on Occupational Fraud and Abuse prepared by the Association of Certified Fraud Examiners, the typical U.S. organization loses 5% of its annual revenues to fraud. The data in this report was prepared by analyzing 1,483 cases of fraud from a cross section of industries, including government. In this particular case study, fraud in government was not as pervasive as in other industries.

Although government fared better than most industries, any type of fraud within government is taken seriously. The impact of fraud, waste, and abuse of taxpayer dollars is devastating to the indispensable trust and respect that the public has for government leaders. To preserve the trust and respect that the public has for the governing process, government agency leaders should take the necessary steps to minimize the risk of fraud, waste, and abuse occurring within their agency.

The establishment of a strong internal control environment where written policies and procedures are enforced, internal controls are appropriately implemented, and employees are educated about fraud and its consequences is one of the best deterrents and methods of curtailing fraud. For internal controls to be effective, they must be constantly evaluated for effectiveness and changed as business processes are changed or altered.

The responsibility for the implementation of internal controls rests with management of each agency. The impact that strong internal controls has in deterring fraud and limiting exposure if fraud does occur is irrefutable; however, a strong system of internal controls is no absolute guarantee that all cases of fraud will be prevented. Why? Because the best system of internal control can’t prevent collusion between two or more people who are in positions to circumvent the internal control mechanisms, or prevent managers or individuals in key leadership capacities from unduly influencing those responsible for the internal control activities. Therefore, it is important for state government employees to recognize fraud when it is occurring and report the fraudulent activities to the appropriate authority. If you are unsure of whom to contact, call the Arkansas State Employees’ Fraud, Waste, and Abuse Report Center at 1-800-952-8248.

Occupational fraud and abuses can be defined as the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of government resources or assets. Occupational fraud and abuses include misappropriation of assets in the form of cash theft, fraudulent disbursements, theft or personal use of inventory, or other non-cash assets. Fraud can also take the form of bribery and corruption when kickbacks, gifts, or gratuities are offered to government employees from contractors or vendors to influence decisions of government agents or employees.

There are certain common red flags or danger signals that might indicate the existence of fraud. Some of these red flags are:

  • Changes in lifestyles (Conspicuous consumption and living beyond their means);
  • Personality changes, irregular behavior and changeable buying habits;
  • Reluctance to take vacations;
  • Missing or altered documents, etc.

It is important to remember that these indicators by themselves are not proof of fraud and any suspicion of fraud must be immediately reported to the appropriate authority for investigation. A thorough investigation must be performed to determine if fraud, as suggested by the indicators, has occurred. The state of Arkansas has enacted legislation to allow employees to communicate in good faith the existence of fraud, waste, and abuse. This legislation is cited as the "Arkansas Whistle-Blower Act".