Expense fraud in the public sector : how to avoid it

Large corporate frauds have shaken both the private and public sectors in recent decades. The negative consequences of these frauds are significant, but difficult to quantify and measure. Their consequences are often financially and reputationally damaging to organizations and therefore not widely reported. 

 

What is expense fraud ? 

When an employee tries to get reimbursed for expenses or purchases that never really happened by backing them up with fake receipts, it’s categorized as fictitious expense fraud. These cases are blatant and should not be confused with human error.

When it comes to fraud in the public sector, issues such as corruption and abuse of power in public procurement often come to mind. These acts usually involve the misuse of entrusted power for personal gain, often including such actions like passing cash "under the table," so there is very little or no evidence of the crime in the financial records at all. In most cases, such crimes are uncovered through tips or complaints from third parties, often through a fraud hotline, or discovered through internal audits, external audits and financial inspections.

 

What are the most common types of fraud in the public sector ?

Fraud in the public sector, including state-owned enterprises, comes from both internal and external sources. Internal fraud can be committed by any employee at any level in the organization. They can range from minor abuses of travel expenses to large-scale fraud involving costly contracts and breaches of control that can have serious and significant consequences.

 

Examples of internal frauds:

  • Fraudulent expenditure claims (e.g. using false receipts to claim travel and accommodation allowances);
  • Payroll fraud (e.g. adding fake employees to the payroll or claiming overtime for hours not worked).

More recently a portion of economic crime connected with public sector entities involves accounting fraud, including accounting or reporting manipulations, that are connected to external sources. This has increasing relevance as public sector entities and governmental agencies introduce numerical performance indicators as an important measure of success and move towards accrual based accounting and financial reporting. External expense fraud in the public sector can be illegal activities that include money laundering.

Examples of external frauds: 

  • The transforming of profits of crime and corruption into legitimate assets 
  • Tax evasion (the deliberate reporting of false information in tax reporting)

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What are the responsibilities in respect of fraud within organizations ?

SOE (State-owned enterprises) executives, boards and public sector managers with oversight tasks are responsible for overseeing management's identification of fraud risks and implementing anti-fraud measures. 

Senior Officials and Management have a critical role to play in implementing effective anti-fraud measures in public sector organizations. Their responsibilities can include:

  • Having a clear code of ethics that has been communicated effectively to all employees as well as implementing regular training in ethics and the organizational code of conduct.
  • Being responsible to oversee management’s identification of fraud risks and implementation of anti-fraud measures, as well as supervising the work of the internal audit function.
  • Implementing an anti-fraud digital solution, that can simplify the workflow of employees and detect all fraudulent  expenses. 

How is it possible to minimize the risk ?

As already mentioned, that management is ultimately responsible for preventing fraud within organizations and has primary responsibility for preventing and detecting fraud by applying and maintaining appropriate accounting systems and internal controls. 

In this case companies can use digital solution to minimize risk. By using data analytics ,it can greatly assist fraud detection and prevention within organizations. There are many widely recognized benefits of the application of technology and data analytics tools in internal audits, resulting in internal audits that are more efficient and effective. For example Jenji Studio can give internal audit teams access to new and improved ways to see all expenses and fraudulent transactions.

Presently there is a skills and resources gap in public sector internal audit departments when it comes to use of technology and data analytics tools. Addressing this gap, by investing in data analytics tools like Jenji and uplifting the skills of staff or engaging external experts, is an important focus area for public sector internal audit departments so the benefits offered by these technologies can be fully utilized.

Do you have more questions about implementing an expense management solution with the possibility to detect fraud ? Do not hesitate to contact our team at sales@jenji.io 

We would be very glad to assist you!

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