Trusting the Cops on the Beat: Tracking Government Accountability Efforts

June 2010

IN THIS ISSUE

— Watching the Watchdogs: Gauging Effectiveness of Federal Anti-Fraud Actions
— Private Sector Fraudsters and the Stimulus Bill
— Article 3 Headline

GREETINGS!

Welcome to the June 2010 edition of our newsletter! In this issue, we’ll look at how effective the various government agencies tasked with monitoring fraud have been, especially as stimulus monies have been distributed within the last year.

WATCHING THE WATCHDOGS: GAUGING EFFECTIVENESS OF FEDERAL ANTI-FRAUD ACTIONS

When the federal government decided to dole out $787 billion in stimulus monies following the implementation of the American Recovery and Reinvestment Act in February 2009, it also called for various anti-fraud safeguards to be put in place, including the centralization of reports by the U.S. Government Accountability Office and various Executive Branch agencies’ inspectors general, to both track where the money was going and to provide a mechanism to report fraud and abuse. So, more than one year later, how are they doing?

The answer to that question varies somewhat by agency — and often the federal agency reports vary themselves by state. At the U.S. Education Department, which received a considerable share of stimulus funding, the reports issued since the stimulus bill’s passage were analyses of internal controls at the education departments within various large states, such as New York, Texas, California and Illinois. In New York, for example, federal auditors found that the Kiryas Joel school district in Monroe, New York, lacked “adequate controls in safeguarding payroll checks” and auditors also found that the school district “did not have sufficient controls to minimize the risk of funds being improperly disbursed,” including accounting software which did not prevent duplicate checks from being issued. Kiryas Joel received more than $5 million of funds set aside under the stimulus legislation, and it is unclear to what extent they have implemented the changes suggested in the Education Department Inspector General’s February 2010 report.

PRIVATE SECTOR FRAUDSTERS AND THE STIMULUS BILL

Other federal agencies receiving stimulus monies, whether related to education or aviation, certainly have their fair share of fraud, abuse, or lax controls. Another concern for regulators is the reputation and worthiness of private sector vendors vying to assist newly enriched government agencies. To date, the most informative sources on this topic are anecdotal and are not considered exhaustive studies. In January 2010, for instance, the Orange County (California) Register reported that one contractor received a grant of more than $6 million to refurbish airport runways and other roadways despite facing “three federal probes, including a criminal investigation into whether it fraudulently overcharged the city of San Diego in the wake of the devastating 2007 wildfires.” A California watchdog group also said its state, which has received or will receive a total of $85 billion of stimulus act funds, said the U.S. Federal Bureau of Investigation expected seven to ten percent of all monies spent to be lost of waste, fraud or abuse, and noted that the California inspector General was working with the state’s Community services and development Department to identify fraudulent transactions using stimulus funds and disallowing them altogether. Among the culprits caught to date was the San Francisco Economic Opportunity Council, which accrued more than $540,000 of expenses that would later be disallowed, including $2,300 for bottled water and $8,300 for a directors retreat “at a luxury casino.” ProPublica, a non-profit journalism group in Washington, has published a collection of case studies demonstrating many instances where stimulus act monies were revoked due to fraud or abuse, although some of the highlighted case studies don’t say whether the funds were returned after fraud was discovered.

What more can be done to provide strict oversight of stimulus monies, many of which will be disbursed this year? While there is a web-based tool on the government’s recovery.gov web site for reporting of fraud, waste and abuse, as well as a hotline, oversight for each relevant agency stops with that agency’s Inspector General. These agencies are also tasked with providing fraud reporting training to the very agencies they oversee — in this time of flattened federal receipts, increased institutional fraud prevention is one area where the federal government could see return on its investment, although private consultants should be retained where IG staffs are stretched too thin or lacking expertise to provide appropriate training regarding internal controls.

IN THE NEXT ISSUE

In the July issue, we’ll examine the difficulty in investigating bribery and other foreign corrupt practices, particularly how to parse the legal and moral nuances between varying cultures.