Fraud Risk in Governmental and Not-for-Profit Organizations

Chapter 4 WHERE FRAUD OCCURS IN GOVERNMENTAL AND NOT-FOR-PROFIT ORGANIZATIONS

LEARNING OBJECTIVES

After completing this chapter, you should be able to do the following:

• Identify the steps of the typical fraud process.
• Analyze the areas where fraud may occur in governmental and not-for-profit entities.
• Identify where fraud risks may exist in governmental and not-for-profit entities.
• Determine where fraud risks may be present related to revenue recognition and management override.

Where Fraud Occurs

With respect to how and where fraud occurs, governmental and not-for-profit entities share a number of areas in common with private sector entities. Fraud in the private sector as well as in governmental and not-for-profit entities occurs in

• overstatement of earnings or increases in net assets,
• fictitious revenues,
• improper revenue recognition,
• understatement of expenses or expenditures,
• overstatement of assets,
• understatement of allowances for receivables,
• overstatement of inventories due to inclusion of obsolete goods, and
• overstatement of property values and creation of fictitious assets.

The process of fraud is typically the same for all types of entities and occurs in the following three-step process:

• The fraud is committed.
• Perpetrators receive the benefits of the fraud.
• The fraud is concealed.

Fraud is typically detected after it is concealed; and the concealment, or lack of concealment, of fraudulent transactions most often is reflected by

• discrepancies in ...