GUARDING AGAINST FALSE CLAIMS

A former California National Guard bonus and incentive manager has admitted to submitting US $15.2 million in false and fraudulent bonus and loan repayment claims to the U.S. Department of Defense (USDOD), according to a recent article published in CalCoastNews. The U.S. Attorney’s Office in Los Angeles reported that the former manager submitted the claims — from which she did not personally benefit — to the U.S. Property and Fiscal Office (USPFO), which then certified the illegal claims and further led the USDOD to pay out federal funds. The USPFO failed to catch fictitious claims that in some cases also were illegal from the start, because the claims exceeded legal monetary limits on loan repayments, the article states.

A federal auditor was hired to review the funds spent by the California National Guard after the former manager’s replacement discovered more than US $100 million in misused federal funds. The auditor blew the whistle on the fraud by leaking the findings to the Internal Revenue Service and the FBI to prevent the fraud from being covered up. Those agencies, as well as the U.S. Department of Justice and the Army Criminal Investigation Division, took over the audit, which has not yet been completed.

Lessons Learned

Situations like these reinforce the high-risk nature of performance bonuses. Although an organization’s claims process may include adequate segregation of duties, fraudsters still may be able to exploit an absence of control and monitoring. “Middleman” — in this case, the USPFO — employees often do not understand their roles in the control framework and, as a result of a heavy workload, may neglect to monitor claims for compliance with the regulations. In this case, claims were submitted to the central office and certified and paid without being questioned — despite the fact that many of the claims were greater than the maximum allowance or were ineligible for reimbursement. Organizations with a similar claims process should consider implementing a control requiring claims to be reviewed to ensure they are less than the annual maximum. This review could help to prevent false claims from being processed. Organizations also may want to include the claims process in future audits.

The false and fraudulent claim incident within the California National Guard also demonstrates that motivation to commit fraud is not necessarily for personal monetary gain. Motivation to commit fraud also can be emotional, such as a need to be accepted, the desire for prestige and importance, and wanting to be liked. However, someone besides the fraudster will benefit financially.
 
The perception of how fraud will be dealt with affects not only the likelihood of fraud occurring but also how it will be handled when discovered. An organization’s claims department must do more than blindly approve claims — the claims should be subject to a thorough independent review. Furthermore, the tone at the top should reflect an ethical culture, encouraging employees to report suspected or actual fraud.
 

Above all else, it is important for organizations to have a consistent and rigorous approach regarding prevention, detection, and prosecution of fraudulent activity. It also is important to have a strong audit function that is independent from management and reports to an independent audit committee. While it’s impossible to prevent all frauds from occurring, organizations can create an environment that is hostile to fraud — one where everyone understands their role in preventing and detecting fraud.

 


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