Fraud In Governmental Programs - A Waste of Our Tax Dollars

            "The US Office of Management and Budget estimated that the government lost more than $125 billion in improper payments in fiscal year 2010," and it's the taxpayer who ends up paying this bill. Part of the improper payments is obviously due to fraud. The government should be held to at least the same standards as a publicly traded company because as taxpayers, we are America’s shareholders.

            The GAO, the Government Accountability Office,   is set up to investigate all matters relating to the receipt, disbursement, and application of public funds,. The GAO's auditors conduct not only financial audits, but also engage in performance audits.  The GAO has been referred to as "The Congressional Watchdog" and "The Taxpayers' Best Friend,”  for its audits and reports that have uncovered waste and inefficiency in government.  Despite its reputation and the billions of dollars in potential savings, the House and Senate are proposing a 7.6 percent cut from the GAO's 2011 budget.

            "The GAO publishes more than 1,000 reports and audits annually and provides an invaluable asset to the taxpayer."  The GAO has uncovered fraud in many of the government agencies.  They have found improper or fraudulent farm-subsidy payments as much as half a billion dollars a year.  In 2007, the GAO uncovered that the USDA paid $1.1 billion in subsidies over six years to 170,000 deceased individuals.   Program audits have also found that about one-quarter of those receiving free and reduced-cost lunches are not eligible. Reviews have also found that almost one-third of Earned Income Tax Credit payments of $12 billion annually are improper or fraudulent.   They have also found that more than $1 billion, of the payments made to people in the $30 billion Food Stamp Program were in excess of what they should receive.   

            Fraud in the two main federal health programs is extremely huge.  Medicare and Medicaid have as much as $60 billion a year in fraud, waste and overpayments.  The GAO estimates that there are about $17 billion of improper Medicare payments each year, including fraudulent and erroneous overpayments to health care providers.

            The Department of Housing and Urban Development (HUD) provides subsidies to state and local governments, real estate businesses, financial institutions, and nonprofit groups. The largest share of HUD’s budget goes toward rental subsidies for low-income tenants. According to the GAO, there are about $1 billion in erroneous and fraudulent overpayments to these subsidies each year.

            The federal budget has become victim to large-scale fraud and abuse.  Why cut the one agency looking to protect taxpayers from government waste, corruption and fraud?  This is one agency that monitors the spending of our government and saves tax dollars. The return on investment has been quite strong over the years as the GAO has detected fraud, abuse and waste in our governmental programs. There is a need for our tax dollars to be spent on an agency that reviews the "Governments Books."   Just as accounting firms review publicly traded corporations, government agencies and programs need to be reviewed, audited and held accountable; they are spending our money.

Calling All Auditors

             What is the problem?  When is the auditing profession going to get the message that if they are not performing their job adequately  with professionalism, knowledge and integrity there will be no use for their services.  We saw what happened to Arthur Andersen with the Enron scandal when they were destroyed. 

             An audit of financials is supposed to be the verification of the financial statements of a company with a view to express an audit opinion. The audit opinion is intended to provide reasonable assurance that the financial statements are presented fairly, in all material respects, and/or give a true and fair view in accordance with the financial reporting framework. The audit is designed to increase the possibility that a material misstatement is detected by audit procedures. The purpose of an audit is to increase the confidence of intended users of the financial statements.

            If there is one scandal after another the degree of confidence the auditing profession instills in its users will deteriorate.  The auditing profession obviously knows this, but it keeps happening. Why? Is money behind it?  Doesn’t the auditor realize that the immediate profits may be immaterial when their services are no longer required?

            Aside from the Enron scandal, just to mention some of the numerous scandals, Xerox would come to mind. In 2003, the SEC filed a complaint against Xerox's auditors, KPMG, alleging four partners in the "Big Five" accounting firm, permitted Xerox to "cook the books" to fill a $3 billion "gap" in revenue and $1.4 billion "gap" in pre-tax earnings.  The issue was when the revenue was recognized, not the validity of the revenue.   The SEC charged that the change in how Xerox applied accounting principles not only violated GAAP, but was intentionally designed to fool Wall Street into believing the new management team was working wonders.

            Another scandal worth mentioning, actually involved an accounting firm's own fraudulent activity. In 2005, KPMG admitted to setting up fake tax shelters for its wealthiest clients, which helped them evade paying $2.5 billion in tax dollars throughout the1990's.  KPMG agreed to pay $456 Million to avoid an indictment from the US Department of Justice.

            And now there is another scandal lurking!   In a stock market announcement, the company Olympus said it has been "engaging in deferring the posting of losses on investment securities."  The details disclosed could lead to one of the worst accounting scandals Japan has ever seen.  Olympus Corp's use of accounting tricks to hide big losses has obviously raised questions about its auditors, KPMG and Ernst & Young, both of which have audited Olympus in recent years.   KPMG stepped down in 2009 after a disagreement over how $687m (£427m) in advisory fees on an acquisition was being accounted for. The replacement of KPMG, after the dispute over how to account for the acquisitions was Ernst & Young. The reason for KPMG's resignation was never revealed to the market. Olympus told investors at the time that KPMG's audit contract had expired and it was hiring Ernst & Young. Why weren’t the reasons for the step down by KPMG made public?

            As a student of the accounting/auditing profession, it is very disturbing to constantly read about one scandal after another.  Whether it is intentional or careless really doesn't matter.  The accounting and auditing field is still a respected profession, as such we need to follow every procedure, policy, and standard necessary to continue to command that respect. 

Independence is an Asset to the Auditor

The auditing profession loses its value when independence is compromised. Independence is a standard that relates to the auditors organization and the individual auditor.  Independence includes both independence in fact and appearance.  Even when an auditor is acting with integrity, if there is reasonable cause for a third party to believe that the results of the audit may be compromised, then independence in appearance does not exist.  Auditors maintain independence so that their opinions have validity.

If a CEO told you that his company was rock solid and that it was going to continue to make a tremendous amount of money, would you believe him?  If a major investor in a corporation said that the corporation was definitely worth investing in, would you invest?  If you were a consulting business that offered advice to your client, would you be able to be impartial in your audit of that client? We know that if someone has a vested interest in the success or failure of a company, he may not be able to give an unbiased opinion. If in fact he does give an unbiased opinion, it may still not carry any weight because in appearance he is not independent.

The fee the auditor receives can actually be the vested interest an auditor has in his client. The fee can affect his independence as well as the threat of losing the client.  For example, a decade later we will still hear about the Enron scandal.  We know the scandal affected the employees and investors of Enron, but it also had a horrible impact on the auditing profession and obviously their auditors Arthur Andersen, which was put out of business.

Arthur Andersen was charged with shredding thousands of documents and deleting e-mails and company files that tied the firm to its audit of Enron. In investigating Arthur Andersen, the concept of independence entailed a big part of the picture.  Was Arthur Andersen independent?  Many feel they were not, so even if they acted independently, their appearance was compromised.

Arthur Andersen received some $27 million in consulting fees from Enron, compared to $25 million in audit fees. We know that the fees an accounting firm receives can affect his independence, but when the fees from consulting services outweigh the fees from auditing there is a bigger problem.  Consulting fees offer a temptation for an auditing firm to not be objective.  Arthur Andersen’s consulting fees from Enron outweighed its audit fees; independence was compromised. The Enron scandal may seem like history, but the concept of independence is a standard that the auditing profession must actively follow if their profession is to survive.  There were five big accounting firms before the Enron scandal. 

As a consequence of the scandal, new regulations and legislation were enacted to expand the accuracy of financial reporting for public companies. One piece of legislation, the Sarbanes-Oxley Act, expanded repercussions for destroying, altering, or fabricating records in federal investigations or for attempting to defraud shareholders. The act also increased the accountability of auditing firms to remain unbiased and independent of their clients.

Independence is a standard of the auditing profession that needs to be reviewed and evaluated constantly.  Independence is an asset to the auditor that earns the confidence of the public.  Without independence in fact or appearance the auditor’s findings are useless.