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CPE for Government Auditors

Fraudulent Nonfinancial Statements

He who winks with his eye is plotting perversity; he who purses his lips is bent on evil.
Proverbs 16
Whoever corrects a mocker invites insult; whoever rebukes the wicked man incurs abuse.  Do not rebuke a mocker or he will hate you, rebuke a wise man and he will love you.  Instruct a wise man and he will be wiser still; teach a righteous man and it will add to his learning.
Proverbs 9


  • Classify the three major subcategories of nonfinancial fraudulent statements

This chapter covers altering other (non-financial) reports and documents for benefit including employment credentials, internal documents and external documents.

Employment Credentials

Texas Representative Lena Guerro was an honored speaker in my women’s studies course. She was a young Hispanic from the Valley (deep south Texas) and a mentee of Ann Richards, our colorful governor.  Lena was famous for her quick wit and knew how to handle a difficult audience.  After talking to truckers in Coriscanna, someone asked her, “What’s your bra size?” Guerro retorted, “Not big enough.”

She was flying high until reporters found that she was 19 hours short of graduating from the University of Texas. What’s the problem?  She bragged that she was a UT alumnus.  In fact, she hadn’t graduated from any college.  Eeek!  There went her run for governor.  She eventually went back to school and became a lobbyist.  She died of breast cancer in 2008.

Name Dropper

Lena Guerro lied about her credentials to get what she wanted, but she isn’t the only one!  If you watch the Food Network you may have caught Chef Robert Irvine setting up makeshift kitchens and cooking incredible meals in almost impossible situations.  I have enjoyed his show several times.

Well, it turns out, he is quite an exaggerator.  He claimed that he baked the wedding cake for Prince Charles and Princess Diana’s wedding.  He also said that he owned a castle awarded to him by the Queen of England and claimed to be a KCVO Knight and a graduate of the University of Leeds.  None of it was true.

Why did he lie?  He was wooing the residents of St. Petersburg, Florida where he was opening a restaurant.  The local glitterati took him seriously and provided free services for him.  Or maybe he just had a few too many pints and started making stuff up.

Irvine lists repeated Five Star Diamond Awards from the American Academy of Hospitality Sciences on his resume. It sounds like a great honor but those who receive the awards have to pay for them!   Not surprisingly, he was the founder of the ‘Academy’ and was its first award recipient.

The Who’s Who Scam

The Five Star Diamond Award is much like the “Who’s Who” books that will include you in their hard-bound, official looking book if you cough up some money.  One of my clients – a  textbook publisher – published the ““Who’s Who” of college students.  It was one of their most profitable products.  Proud parents couldn’t resist paying hundreds of dollars to include their child in the book.  The publisher delayed publishing each edition until they had milked enough paying parents/students to make it profitable. A brilliant scam built on inflated egos.

A One Student Seminary

A pastor at a church (that I no longer attend!) created a seminary school using church funds that only had one student, his youngest son.  Once his son earned his theological credentials, the pastor shut the seminary down.

Buying Houses with Fake Employment Credentials

Here is a legal summary of a case involving falsifying employment records:

United States Court of Appeals
For the First Circuit
No. 06-1362
Appellee, v.
Defendant, Appellant.
[Hon. Morris E. Lasker, Senior U.S. District Judge]

July 31, 2007
Between January 2001 and November 2002, Raphael Tejada, a cooperating witness for the United States Drug Enforcement Agency (DEA), made a series of controlled cocaine purchases from Salvatore (“Rudy”) and Anthony (“Tony”) Carrillo (“the Carrillos”), as well as their confederate underlings. The Carrillos utilized cell phones and pagers purchased from Portalla’s cell phone store to facilitate the drug sales, many of which occurred at the Carrillos’ residences or from their vehicles. Moreover, Portalla provided other services to the Carrillos. For example, he had kept the books for a pool hall operated by the Carrillos, which was a center of their drug trafficking activities. On several occasions, Portalla also provided the Carrillos and their drug confederates with documents, such as W-2 forms, which falsely stated that they were employed by his company Wakefield Communications. The false documents enabled the drug conspirators to purchase expensive houses and luxury automobiles, from which they conducted their drug trafficking. The government adduced evidence that Portalla knowingly facilitated the Carrillo conspiracy on several occasions by providing them with false employment credentials in order to enable purchases of expensive residences and vehicles, which served the Carrillos’ drug trafficking enterprise. Portalla’s false information enabled the Carrillos to conceal the fact that the bulk of their income derived from illegal drug trafficking.

Now that was a tangled web of deceit!

Internal Documents

I served on the finance committee of a large church.  During one of our meetings, we examined the accuracy of the staff’s projection of pledge revenues.  Should we assume that 90% of pledged tithing would eventually be collected?  If we were willing to change our assumption to assume that 93% of tithe commitments would be collected, we would eliminate our budget deficit and look good to the major donors in the congregation. But if we were conservative, we would estimate that only 85% of pledges would be collected and budget cuts would be necessary and the staff wouldn’t get a raise that year.

We contemplated how to present the most realistic numbers to our members, but we also were trying to come up with justification for funding a raise for our underpaid staff.  We left the meeting a bit dissatisfied with the results because we decided to keep our assumption at 90% collections and not give the staff a raise.

Just one little tweak to a percentage, a number, or an assumption can make a big difference to decision makers.

Just look at the title of this blog post on InfoWorld:[2]

The real cost of lying about IT infrastructure costs Are you hiding the truth from management to justify the money you need to operate your infrastructure? That’s a dangerous game

And because internal documents are seldom audited, managers could be making up anything in order to further their agenda.

External Documents

Large governments report key performance data to external users including regulators and citizens, not just other government managers and leaders.

Is that pothole filled?

In 2009, the city of San Diego Streets Division reported to City Council and the citizenry that within 72 hours of receiving complaints, it repaired 100% of all potholes reported.  It turns out that the city used a little creative accounting, took liberty with terminology (what does the term “sex” actually mean, President Clinton?), and gave the issue just the right bit of spin to cover up how slow they really were.  In actuality, it often took the division as long as two weeks to respond.[3]

The Street Division’s calculation of response time was based on a number of factors that don’t reflect how you and I would define “repaired.” In some cases, the division reported a completed repair when the site was not even touched.

Even Crime Stoppers is Vulnerable to Crime!

We rely on police officers to help catch criminals. But, in Miami, one police officer had something else in mind.

He used information he gleaned from the Crime Stopper rewards program to make some extra cash. He shared his knowledge of the system with friends who, without offering any real tips or leads, collected about $14,000 in rewards.

The Energy Star is bogus!

And you or someone you know most certainly got a rebate or tax credit for buying an Energy Star product. You know Energy Star: the Environmental Protection Agency and the Department of Energy’s program that help us both save money AND protect the environment by using products that are energy efficient. Well, I hate to break it to you: the Energy Star is bogus!

Energy Star Program: Covert Testing Shows the Energy Star Program Certification Process Is Vulnerable to Fraud and Abuse[4]Summary

American consumers, businesses, and federal agencies rely on the Energy Star program to identify products that decrease greenhouse emissions and lower energy costs. In addition, the federal government and various states offer tax credits and other incentives to encourage the use of energy-efficient products including Energy Star products. Specifically, approximately $300 million from the American Recovery and Reinvestment Act will be used for state rebate programs on energy-efficient products. The Energy Star program, which began in 1992, is overseen jointly by the U.S. Department of Energy (DOE) and the U.S. Environmental Protection Agency (EPA). Given the millions of dollars allocated to encourage use of Energy Star products and concerns that the Energy Star program is vulnerable to fraud and abuse, GAO was asked to conduct proactive testing to (1) obtain Energy Star partnership status for bogus companies and (2) submit fictitious products for Energy Star certification. To perform this investigation, GAO used four bogus manufacturing firms and fictitious individuals to apply for Energy Star partnership and submitted 20 fictitious products with fake energy-savings claims for Energy Star certification. GAO also reviewed program documents and interviewed agency officials and officials from agency Inspector General (IG) offices.

GAO’s investigation shows that Energy Star is for the most part a self-certification program vulnerable to fraud and abuse. GAO obtained Energy Star certifications for 15 bogus products, including a gas-powered alarm clock. Two bogus products were rejected by the program and 3 did not receive a response. In addition, two of the bogus Energy Star firms developed by GAO received requests from real companies to purchase products because the bogus firms were listed as Energy Star partners. This clearly shows how heavily American consumers rely on the Energy Star brand. The program is promoted through tax credits and appliance rebates, and federal agencies are required to purchase certain Energy Star certified products. In addition, companies use the Energy Star certification to market their products and consumers buy products relying on the certification by the government of reduced energy consumption and costs. For example, in 2008 Energy Star reported saving consumers $19 billion dollars on utility costs. GAO found that for our bogus products, certification controls were ineffective primarily because Energy Star does not verify energy-savings data reported by manufacturers. Energy Star required only 4 of the 20 products GAO submitted for certification to be verified by an independent third party. For 2 of these cases GAO found that controls were effective because the program required an independent verification by a specific firm chosen by Energy Star. However, in another case because Energy Star failed to verify information provided, GAO was able to circumvent this control by certifying that a product met a specific safety standard for ozone emission. At briefings on GAO’s investigation, DOE and EPA officials agreed that the program is currently based on self-certifications by manufacturers. However, officials stated there are after-market tests and self-policing that ensure standards are maintained. GAO did not test or evaluate controls related to products that were already certified and available to the public. In addition, prior DOE IG, EPA IG, and GAO reports have found that current Energy Star controls do not ensure products meet efficiency guidelines.

Children Robbed of Benefits

Sadly, the Government Accountability Office finds that the Head Start program – a program to prepare low-income children for school – is plagued with fraud.  Here is an executive summary from a September 2010 report.[5]

Undercover Testing Finds Fraud and Abuse at Selected Head Start CentersWhat GAO Found

GAO received allegations of fraud and abuse involving two Head Start nonprofit grantees in the Midwest and Texas. Two of the many allegations were substantiated. For example, one grantee inappropriately counted time parents spent helping children with homework as contributions to meet program funding requirements. While not fraudulent, we found that at both grantees, the average number of students who attended class was significantly lower than the number of students the grantees reported as enrolled in class.

Realizing that the alleged fraud schemes could be perpetrated at other Head Start programs, GAO attempted to register fictitious children as part of 15 undercover test scenarios at centers in six states and the District of Columbia. In 8 instances staff at these centers fraudulently misrepresented information, including disregarding part of a family’s income to register over-income children into under-income slots. The undercover tests revealed that seven Head Start employees lied about applicants’ employment status or misrepresented their earnings. This leaves Head Start at risk that over-income children may be enrolled while legitimate under-income children are put on wait lists. At no point during our registrations was information submitted by GAO’s fictitious parents verified, leaving the program at risk that dishonest persons could falsify earnings statements and other documents in order to qualify. In seven instances centers did not manipulate information.

[1] United States Court of Appeals, First Circuit v. Edward Portalla. Litigation no. 06-1362. Web. March 19, 2014.
[2] Matt Prigge. “The real cost of lying about IT infrastructure costs.” InfoWorld. Blog. April 19, 2010.
[3] Kyle Keegan. Taking Longer to Fix Potholes.” Voice of San Diego. Online news. Web. December 1, 2009.
[4] United States. Govt. Accountability Office. “Energy Star Program: Covert Testing Shows the Energy Star Program Certification Process Is Vulnerable to Fraud and Abuse.” GAO-10-470. March 5, 2010.
[5] United States. Govt. Accountability Office. Undercover Testing Finds Fraud and Abuse at Selected Head Start Centers. September 2010.
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