Fraud Risk in Governmental and Not-for-Profit Organizations

Chapter 5 FRAUD SCHEMES FOUND IN GOVERNMENTAL AND NOT-FOR-PROFIT ORGANIZATIONS

LEARNING OBJECTIVES

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

• Identify common ways in which fraudulent financial reporting and misappropriation of assets is perpetrated in governmental and not-for-profit entities.
• Identify fraudulent financial reporting schemes found in governmental and not-for-profit entities.
• Identify misappropriation-of-assets fraud schemes found in governmental and not-for-profit entities.

Fraudulent Financial Reporting Schemes

There are an almost infinite number of ways in which to perpetrate fraud through the financial reporting mechanism. A number of incentives and pressures, opportunities, and rationalizations and attitudes exist with respect to fraudulent financial reporting in governmental and not-for-profit entities.

These circumstances are exacerbated in many governmental and not-for-profit entities due to missing or ineffective internal controls, not the least of which is management override. The most common schemes to perpetuate fraudulent financial reporting include

• Premature revenue recognition or delayed revenue recognition, and
• Premature expenditure and expense recognition or delayed expense recognition.

PREMATURE REVENUE RECOGNITION OR DELAYED REVENUE RECOGNITION

Premature revenue recognition is most common in a for-profit entity. However, the existence of certain incentives/pressures and rationalizations/attitudes coupled ...