Association of Local Government Auditors

Everyone knows that it is the job of an investigator to follow leads through whistleblower complaints, and to use proactive techniques to detect fraud and waste. Auditors also have responsibility to be aware of fraud during their fieldwork activities. But in reality, it is everybody's responsibility in the organization to do whatever they can to mitigate fraud and waste. Field level employees, managers, analysts and others who have direct daily contact with contractors, coworkers and other parties are in the best position to observe and identify potential wrongdoing.

Training

One way to stimulate this responsibility is to offer Fraud Awareness training or a basic educational program to all members within the organization as an introduction of typical behavioral red flags and anomalies. Fraud Awareness is not designed to teach everybody how to become a sleuth overnight, but is more geared towards promoting a general awareness that fraud and waste exists and that there are ways to mitigate losses. In these times of economic uncertainty it is not only the organization that experiences the hardships associated with such losses. Employees themselves are being affected on a more frequent basis due to budget constraints. The more people begin to realize how fraud and waste comes off the organizations bottom line, and can adversely impact one's own compensation, the incentive to take action is greatly enhanced. 

ACFE Reports

According to the Association of Certified Fraud Examiners 2010 Report to the Nations the typical organization loses 5% of its annual revenue to fraud. To put this in perspective, the City of Los Angeles has an approximate annual budget of $7 billion, using ACFE statistics that translates into $350 million in potential losses to fraud. Coincidentally, the City had a budget shortfall in the same approximate amount this past fiscal year, which has resulted in significant cuts in City services, as well as cuts in employee benefits and mandated work-furloughs.  Not all fraud and waste can be eliminated, but it certainly can be reduced. Even a 1% reduction in fraud and waste for the City of Los Angeles would represent a $70 million windfall.

The Los Angeles City Controller's Fraud and Waste Unit began the task of providing a Fraud Awareness training program to mid-level mangers in 2009. To date, approximately 25 different City Departments have received the training. The training presentation emphasizes the importance of having strong internal controls, updated policies and procedures, organizational cultural issues such as appropriate "tone at the top", as well as several helpful ACFE illustrations. These illustrations include a chart of behavioral red flags indicating potential high risk characteristics associated with fraud occurrences by employees. Others include charts of demographic characteristics, including age, employment tenure, and level of education, which have the highest percentage of fraud occurrences. According to ACFE, those who have considerable tenure, are college educated and fall within the 36 to 45 year old age bracket represent the highest risk. While this information is statistical in nature it does not mean that every employee who falls within the highest risk categories should be considered a fraud perpetrator.

Whistleblower Feedback

Perhaps one of the biggest learning tools in a Fraud Awareness presentation is providing feedback to employees of actual closed investigations and reviews which originated from whistleblower complaints. The Controller's Fraud Unit completed a recent whistleblower review of a City Department that wasted over a half million dollars in leasing equipment for an additional 4 years beyond a  5 year lease term,  which offered an option to buy all equipment for $1.00 at the end of the 5 year lease term. The same City Department wasted an additional $140,000 by leasing technology equipment with monthly air service charges for equipment that had been placed in storage for approximately two years.

Another whistleblower complaint resulted in a comprehensive review of the City of Los Angeles office supplies contract. This review identified an estimated $2.6 million in office supply purchases that were not covered under the contract, nor did the City receive the applicable negotiated contract discounts.  In fact, a random sample found that the City was charged about 12% higher than retail for the office supplies. 

Other whistleblower complaints have resulted in the filing of criminal charges by the District Attorney's Office for allegations relating to theft.  Many issues would never have been discovered without the eyes and ears of whistleblowers, and their ultimate decision to make the call to a hotline.

Whistleblower Protection

Far too often the organization for which the whistleblower complaint is directed is more concerned about learning the identity of the whistleblower, and quickly characterizes the whistleblower as a disgruntled employee rather than trying to determine if there is actual merit to the complaint. It is also common for a whistleblower to have attempted to seek resolution of their concerns through the normal chain of command before reaching out to a fraud hotline, usually because their claims are dismissed or not taken seriously. For those who do make the effort to bring attention through a whistleblower complaint, retaliation and retribution is a reality that every whistleblower must consider.

The good news is that whistleblower protection legislation was signed into law by the State of California (AB 2001), which ensures that city and county auditors and controllers can protect the identity of employees or citizens who use hotlines or websites for the purpose of reporting fraud and waste.

Unfortunately, at the federal level, legislation offering protection to would-be whistleblowers has been met with some apprehension by lawmakers. A federal Whistleblower Protection Enhancement Act would have provided additional protection to those who report fraud and waste in federal programs; however, after initially receiving strong support, the Act was stalled and ultimately defeated.

Everyone should share the responsibility by taking a proactive approach to fraud and waste detection, which is the best way to lessen the effect on the organization and to protect valuable resources.