Frequent Frauds Found in Governments and Not-for-Profits

Chapter 1 CASE 1: INTERIM FINANCIAL REPORTING

LEARNING OBJECTIVES

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

•     Determine relevant fraud risks relating to management override in a fictitious government.

•     Identify circumstances in a fictitious government, which might also be present in an actual government, that could increase fraud risks in a governmental organization.

BEFORE WE START

This case involves compliance with bond covenants and reporting required information to rating agencies, trustees, and other oversight entities. Because noncompliance with bond covenants could have a material effect on a government’s financial statements, it may be considered a significant risk area. Additionally, the potential for management to override existing controls to manipulate financial and operational information to be in compliance with bond covenants might lead the auditor to identify this as a fraud risk area.

Management override is an area of concern for auditors because management may be able to easily access data and systems. In addition, employees may be reluctant to discuss management abuses during the auditor’s fraud inquiry procedures. Management override most often occurs in the following areas:

•     Journal entries

•     Estimates

•     Business rationale for transactions

—     Bribes and kickbacks

—     Billing schemes

Professional standards require the auditor to assess the risk of material misstatement due to fraud using the components ...