Professor Fraud

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Should our local and state governments be subjected to forensic audits?

Professor Fraud

Associate Professor at the Saint Xavier University Graham School of Management; Director, Center for the Study of Fraud and Corruption. CPA, Attorney, Certified Fraud Examiner.


In his Chicago Tribune column today, John Kass reports that Democratic Chicago Alderman - and possible mayoral candidate - Scott Waguespack is calling for a "forensic audit" of the financial records of the City of Chicago.


Alderman Waguespack joins a growing chorus of folks throughout the state calling for forensic audits of our state and local governments.  The most notable example is Republican grass roots activist Adam Andrzejewski, who made the demand of a forensic audit of the State of Illinois' books the centerpiece of his gubernatorial campaign. 


But before we go any further, a bit of clarification in terminology is needed. 


I realize that with television programs like the CSI franchise, combined with the demands of editors and speechwriters for brevity, the term "forensic audit" is a nice, popular, short hand expression for the type of professional engagements being demanded.  However, what is being called a "forensic audit" is not really a forensic audit, at least not to many of us who teach this stuff.   


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Photo by Flickr user GenBug

"Forensic audits" or "forensic accounting" is usually reserved for those engagements conducted in support, or in anticipation, of some manner of litigation.  While litigation may eventually result from the engagements envisioned, a true forensic audit is generally not commenced until there is sufficient predication to make the anticipation of litigation reasonable.  As such, those calling for "forensic audits" are probably asking for "internal audits with pro-active fraud examination components."  More precise, but a mouthful, to be sure.


I know what you're saying, "Enough of the professor-speak, Professor Fraud!"  Ok, ok.  But so long as you now know that when I use "forensic audit" in the remainder of this piece I really mean "internal audit with pro-active fraud examination components," I will use the popular term "forensic audit".  (Although I know I will cringe every time I type it.)


So we return to the question in the title:  Should our local and state governments be subjected to forensic audits? 


And now my answer: Yes.  Most definitely, yes.


In fact, most every government agency, company and non-profit organization could benefit from such an engagement.


Now you may ask, "But how can a city and a state already in debt pay for this forensic audit?"  Good question.  However, the answer is simple: they pay for themselves. 


Remember, there is a lot of inefficiency, waste and fraud out there.  A biennial study conducted by a professional group with which I am affiliated, the Association of Certified Fraud Examiners, indicates that the typical organization loses 5% of its annual revenue to fraud alone.  Why should we think that our state and local governments are immune?


Continuing with this "pays for itself" idea, let me give some examples.  I am quite familiar with the U.S. Air Force Office of Special Investigations since the fraud examination graduate program at Saint Xavier University educates a number of OSI special agents every year.  One of the missions of AFOSI is to investigate fraud, and they spend millions every year doing this.  And every year, AFOSI reports that the funds recovered from their fraud investigations are many more times than the agency's fraud mission budget.


Closer to home, it was recently reported that after spending just $750,000 in investigations, the State of Wisconsin uncovered over $45 million in fraud in just one program.  Contrarily, a grand jury in Orange County, California found that after cutting $900,000 in the investigations budget of one agency, $9.6 million in fraudulent payments went undetected.


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Photo by Flickr user somegeekintn.


But while detecting active frauds and discovering the stolen loot are definitely the most glamorous parts of a forensic audit, it is only one component.  There are four keys to a forensic audit:  uncovering waste and inefficiency, fraud detection, fraud prevention and fraud deterrence.  Fraud detection has already been mentioned, so lets look at the other keys.


Even when there are no bad motives involved, millions can be lost due to waste and inefficiency. This waste and inefficiency can best be seen by the "fresh set of eyes" of a trained and experienced forensic auditor.  We auditing professors like to tell the apocryphal tale of the auditor touring a tire manufacturing plant when he came upon the "tire wrapping room."  In this room all of the tires coming off the line were wrapped in paper before stacking and shipping.  He had seen other tire plants and had never seen such an operation, and no one there knew why they did this step.  After some digging, the auditor discovered that the process was begun years ago to prevent white wall tires from being scuffed.  However, the firm had not made white walls in decades.  Within a few months the tire wrapping was discontinued, the workers reassigned, and the company improved its efficiency and saved money.  One can only imagine the savings that might be uncovered in our local and state governments by the "fresh set of eyes" of a forensic auditor.


Fraud prevention is another key to a forensic audit.  Even if a forensic audit does not detect an active fraud, the auditors will usually locate holes in internal controls that would allow a potential fraud to take place.  By acting on the suggestions made by forensic auditors at the conclusion of an audit, measures can be made to fix the internal controls so to either prevent a fraud from occurring, or at least detect a fraud quickly when the losses are minimal.


Many violent crimes take place in the heat of passion.  But fraud is different.  Fraudsters tend to be "economic creatures," who weigh the costs and benefits of their actions.  And this is where fraud deterrence comes in.  One of the biggest "costs" considered by a potential fraudster is the probability of getting caught.  The mere presence of forensic audits create an enhanced fear of detection, which, in turn, can positively impact a potential fraudster's behavior such that the fraud is never committed.



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1 Comment

jack said:

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I remember that Adam Andrzejewski's (thank you for providing the name, as I wouldn't have been able to spell it) call for a forensic audit was mentioned, essentially, only in an Eric Zorn piece, in which the thrust was that he talked to all sorts of people associated with state government associations, who never heard of it. After he also made the point that it was both Democrats and Republicans, I pointed out that both were associated with state governments, and maybe he should talk to the FBI people who did stuff like uncover the Enron fraud. Then he said he was giving Adam some press, even though the tenor of the piece was that he wasn't buying what Adam said.

Hence, I again make my point that the legal illiterates on the Tribune editorial staff could use some education provided by you.

It appears that every unit of government in Illinois needs a forensic audit. For example, the Sun-Times found another Metra friends and family plan today. If someone promised a forensic audit of Cook County, there would be real money.

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