The Fraud Examiner & the Prevention of Improper Payments

Fraud Examiners involved with the public sector report an ever rising preoccupation within their client governmental agencies with the problem of what governmental accounting  defines as “improper payments”.   The U.S. Office of Management and Budget defines improper payments as occurring when  funds go to the wrong recipient, the recipient receives the wrong amount of funds (including both overpayments and underpayments), documentation is not available to support a payment, or the recipient uses the funds in an improper manner.  All improper payments are irregularities but not all irregular improper payments are connected with fraud.  An OMB report estimated for federal fiscal year 2010 that $125 billion of  Federal disbursements represented improper payments; there is no official estimate as to how much of these payments are directly or indirectly related to active fraud schemes.

Fraud examiners (FE’s) are experts, not only in the investigation of fraud, but in fraud prevention.  Let’s not kid ourselves.  There is no magic formula for addressing an issue so vast as improper payments at the state and Federal level but there are contributions FA’s can make to addressing the problem for individual client governmental agencies at all levels.  Initially, emphasize the advantage of a front end fraud prevention program over chasing dollars after they’ve been paid.  An ounce of disbursement fraud prevention is worth many pounds of pay and chase  cure.  This is because the percentage of actual payment recoveries experienced by your governmental client  will be pitifully  small if not non-existent.   With that said, what elements of fraud prevention should you be recommending to your governmental clients?

First, as with any fraud prevention effort, agency top management must back the program 100%.  A serious upper management, dedicated to preventing improper payments on the front end is literally half the battle but it can’t begin to do it all.  Second, the FE should identify and document the flow of payments across the agency… where in the organization do payments originate and to what outside parties do they flow: when that identification is complete, get upper management’s permission to get fraud prevention program buy-in from managers whose divisions are originating payments.  This can be hard work but well worth the effort.  Third, advise agency management to actively forge partnerships with outside entities receiving payments like vendors, local governments and non-profit entities.  Fourth is risk management; the FE will have to outline for management a risk assessment process that is  continuous, involves every organization and activity that impact’s the agency’s payment process, adopts leading best practices (national ACFE can help you here), includes  an evaluation of IT risks and is well understood by internal program and finance staff.

One significant failure with fraud prevention programs that are up and running is the lack of  benchmarking  to  keep management informed of program performance.  Management needs to know that the program is working in order to justify its funding continuance on a return-on-investment basis.  This means that measureable goals are set for the program, that there is a continual measurement of results, that the results are publically reported and that the FE and independent, outside auditors are assessing  all outcomes.  Any program shortcomings are identified and promptly corrected.

As all FE’s are aware, reducing all improper payments (but especially fraudulent ones) is essential for winning and retaining the public trust.  FE’s have a critical role to play in advising our clients on the best practices associated with setting up and running effective improper payment prevention programs.

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