Government Fraud: Understanding Occupational Misconduct and Key Countermeasures

While occupational fraud refers to using one’s occupation for personal enrichment through the deliberate misuse or misappropriation of the employing organization’s resources, occupational fraud in the government takes numerous forms and occurs for a variety of reasons. This type of fraud could be asset misappropriation or corruption, among others. Though possible, financial statement fraud is usually uncommon in governments since it requires the collaboration of top-level management staff. There is, however, a relaxed attitude toward occupational fraud against governments throughout the world. Government fraud is not as broad as it is in the private sector, yet it has the potential to cripple the system and create significant losses. While there may be accidental fraudsters, as defined by the Fraud Triangle, many of them quickly transform into serial fraudsters and require less rationalization in the public sector. 

Understanding Deviant Behavior 

This section focuses on why government personnel commit fraud, and the reason they do is not exclusive to government employees. People commit fraud for a variety of reasons, whether they work for the government or not is immaterial. 

There are many theories of fraud and analyzing criminal behavior, but Dr. Donald Cressey's Fraud Triangle garnered a standing ovation. His idea proposed that people commit fraud when they are under undue financial pressure that cannot be discussed with anyone, have the opportunity to do so and may rationalize their conduct in a way that makes fraud morally right to themselves. There are multiple ways in which the Fraud Triangle applies to government employees seeking to justify fraud, including poor working conditions, low compensation, no bonuses or raises and a poor organizational ethical culture. Here are some real-world case examples of government frauds with identifiable information redacted: 

Case Study #1 

Jack works in finance with XYZ, a government department in charge of salary payment. He recently received information of the death of Johnson, a BCD employee who worked for another government agency. Included were instructions to stop paying the dead employee’s salary and a request to process death benefits payable to the deceased’s family or estate. Jack halted salary payments to Johnson for a month, but then, with the help of Sharon, who works in BCD’s payroll unit, replaced Johnson’s account details with his own and resumed salary payments in Johnson’s name. He divided his earnings with Sharon. 

Cases like this are prevalent and are characterized as asset misappropriation and theft of government cash. These cases are also similar to extortion or corruption from private contractors or the general public when doing services for which they are hired. The culprits in the preceding case study were caught following an anonymous tip, and they are currently on trial.  

Fraud committed by government personnel in the course of their duties should not be considered incidental because it is deliberate and oftentimes in conjunction with another employee. Because government employees caught in the act are rarely young, the population of government fraudsters is substantially older. Fraud committed within government agencies typically includes having the capability to do so, which brings this additional element cited in Wolfe and Hermanson’s Fraud Diamond into context. Government employees who commit fraud frequently hold sensitive or authoritative jobs and have subordinates, so they are capable of carrying out fraud when the opportunity arises—whether under pressure or not, and even if they continue to rationalize it citing work dissatisfaction to outright avarice.  

Another prominent instance of government fraud is the use of privileged positions to steal, victimize or extort money from the public they were supposed to serve. Consider the following case study for background. 

Case Study #2 

Fred is employed by ADC, a law enforcement agency. He was assigned to accompany other officers on an arrest in which 24 people were taken into the office on suspicion of cybercrime-related actions. Fred had access to one of the suspects' mobile devices during his profiling. He discovered the suspect had a Bitcoin wallet and, with the assistance of the suspect who provided his private key, discovered that the suspect had approximately $12,000 in Bitcoin in his wallet. Fred moved this bitcoin to his personal wallet without the suspect's knowledge, who claimed in his written statement that he had no assets other than the money in his bank accounts. After being released on bail, the suspect reported the theft to the agency, prompting an internal investigation. Fred's employment, as well as those of other complicit employees, was terminated when the suspect received a complete refund.

This second case study is an example of a government employee abusing his authority while working in law enforcement. Unfortunately, it also applies to every other government organization. Fraud of this sort committed against a member of the public demonstrates moral deterioration in the government employee and opposes the purpose of public service. In most situations of this kind, the Fraud Triangle or Diamond is not deployed. These culprits are not under any inherent financial pressure; they are simply competing to preserve a specific lifestyle and live beyond the law. 

Case Study #3

Dane, an individual employed in the field of law enforcement, assumed the role of exhibit keeper following a handover from his predecessor. The handover note provided by the previous exhibit keeper included a comprehensive inventory encompassing automobiles, laptops, phones and other electronic devices, as well as monetary sums denominated in both U.S. dollars and British pounds. Over approximately eight months, Dane fulfilled his duties as exhibit keeper until he was reassigned to a different position. However, upon assuming the role, his successor discovered that all the cash previously stored within the exhibit room, meticulously recorded alongside their respective serial numbers, had vanished. Subsequent investigation revealed that Dane had confessed to the act of appropriating the cash, offering financial pressure as the justification. 

In all three case studies, it is evident that the complicit employees engaged in the misappropriation or theft of assets, whether belonging to the government or encountered during their employment with the government. Notably, corruption emerges as an underlying theme across all three of these instances. 

Corruption 

According to Transparency International, corruption can be defined as the abuse of entrusted power for private gain. Every government official in these case studies engaged in the abuse of their delegated authorities for personal gain. The occurrence of fraud would be significantly reduced if government personnel were without such powers.  

This is why understanding the reasons behind corruption among government employees cannot be adequately addressed using the Fraud Triangle or Diamond frameworks, as instances of fraud within the government are not typically committed by individuals who coincidentally encounter an opportunity or are subjected to external pressures. The individuals in question do not passively await the emergence of opportunities; rather, they encounter opportunities as an inherent part of their daily responsibilities. These individuals are not subject to constant external pressure, yet their primary concern lies in their self-interest and the potential benefits that can be derived from the power they have been entrusted with. 

The mitigation of corruption, which manifests as a variant of occupational fraud within governmental institutions, can be significantly addressed by the implementation of robust internal control mechanisms. Government employees are typically assigned work and obligations without the imposition of sanctions. The completion and processing of employee assessment forms, for example, occur without thorough scrutiny by supervisors, resulting in a lack of oversight and autonomy among employees. The presence of locks is conventional; nonetheless, they are typically left unfastened. Corruption flourishes due to insufficient internal control mechanisms, necessitating the implementation of an anti-fraud program by the government that incorporates these. 

Effective utilization of anti-fraud systems can be inferred when the residual risk of fraud is lower than the inherent risk. The mitigation of corruption and occupational fraud encompasses the implementation of anti-fraud rules that prioritize the identification and prevention of fraudulent opportunities, as well as the cultivation of a culture that effectively addresses the underlying motivations for engaging in fraudulent behavior. Government organizations have the potential to establish and execute anti-fraud rules, and the presence of an ethical culture ensures that employees do not seek to justify fraudulent conduct, but rather, actively strive to report such behavior. 

The Fraud Triangle and Diamond models are widely recognized frameworks for understanding deviant behavior, particularly in the commercial sector. However, it is important to note that these models may not be directly applicable in cases of occupational fraud within the context of government agencies. The occurrence of fraudulent activities within the government is mostly attributed to the misuse or exploitation of authority, which can be categorized as a form of corruption. The motivation for engaging in corrupt practices can be attributed to a combination of factors, including moral ineptitude, discontentment or sheer greed. The primary contention revolves around ethical considerations or a strategic endeavor to maximize gains from the system, which is free from pressure, rationalizations, capabilities or opportunities. This fuels the necessity of adopting distinct approaches to combatting fraud in the government as opposed to the private sector, underscored by the imperative to implement fraud rules that prioritize internal controls, checks and balances.