CPE for Government Auditors

Little frauds are a big deal in government.

Please enjoy Chapter 1 of An Auditor’s Responsibilities for Fraud in the Government Environment, available at Yellowbook-CPE.com.


  • Differentiate between auditing for fraud in the government environment and auditing for fraud in the commercial environment

Fraud – it’s a costly thing! Whether it is committed in the government environment or the commercial environment, those who practice it leave victims in their wake and rob taxpayers and businesses of their money.

You’ve heard the stories about the small town sheriff who used prisoners to landscape his backyard. Or the court clerk who takes bribes to dismiss traffic tickets. Or the school lunch lady who takes home a portion of the kids’ lunch money every day.  Cities are going bankrupt because their leaders rewarded themselves with huge salaries, perks, and pension benefits.  These stories of fraud crop up every day in the press and make us think badly of our government leaders.

But we also see similar stories in business.  Let’s not fool ourselves into believing that corporations are any better than the government at running things. I have had the privilege of working at a dozen or so Fortune 500 companies and they all have their quirks, and all have suffered from employee fraud.

Maybe it is just the people with whom I hang out, but most dinner conversations eventually include a few criticisms of our government.  And the tacit agreement among most of my friends and family is that corporations operate more effectively and efficiently than government.  But I think they are wrong.  I think both corporations and governments are flawed.  I have never encountered a perfect organization.  Have you?

My husband recently treated me to an Apple laptop – which I love by the way. And I was curious about how Apple had created such great products so I watched a MSNBC business documentary about Apple. It turns out that Apple folks argue, and fail, and torment each other while creating products.  Time is wasted, people get their feelings hurt, and the company loses massive amounts of money. But, they create a great product in the end, don’t they?

Governments, with all of their faults, create great products and services for us, too.  They pick up our trash, fix our roads, educate our children, and respond to emergencies.  Even the tiniest cities are responsible for a wide range of services, from police and fire protection to courts, water and sewer, garbage disposal, inter‑government relations, health programs, parks and recreation, bus systems, and airports. No wonder things get out of hand every so often.  The more stuff there is to manage, the more opportunities for fraud to be committed.

Fraud Defined

Unfortunately, leaders and managers of government programs and of businesses engage in bad behaviors such as fraud, illegal acts, violations of contracts, abuse, and unethical behavior. This text focuses on fraud that occurs in government: more specifically, what you should do when you detect fraud in government.

In this text, I hope to give you the ability to discern between fraud and other bad behaviors in government.  I also hope that you will be able to recognize fraud when you see it and know what your professional responsibilities are regarding fraud.

So, first you need to know what fraud is.

According to the dictionary[1], fraud is: “deceit, trickery; specifically: intentional perversion of truth in order to induce another to part with something of value from someone else or to surrender a legal right.

This is how the Government Accountability Office (GAO) defines fraud in the Yellow Book:

8.73     …Fraud involves obtaining something of value through willful misrepresentation. …

Basically, fraud is a willful act in order to gain something for personal use. In super simple terms, fraud is lying, cheating, and stealing. When it happens in business it is bad. When you have fraud in government it is often much, much worse.

Victims of Fraud in Government

When a bookkeeper steals money from a businessman, it is ugly and wrong.  But how much nastier is it when a bookkeeper takes monies destined to feed impoverished children? The elderly? War veterans?  Take your pick of disadvantaged or deserving groups, and the government probably helps them in some way.  When fraud occurs in the government, there are many helpless victims, and it is a crying shame.  It is one thing for business owners or corporations to lose their resources but another when fraud consumes the resources that are destined to become school lunches, infant formula, military armor, or low-income housing.

When I was in public accounting, auditing a car parts manufacturer in Eagle Pass, Texas, my ultimate customer was the owner of the business or the banker who used the audit report.  But when I audit a HUD project, a low-income apartment complex, whom is my ultimate customer?

Yes, HUD, the feds, the state, the city, the management of the housing project all are involved and concerned about the project.  But my ultimate customer is a 3 year-old toddler living in the complex with her single mother who works two jobs to keep the family together.

I have had the opportunity to work for a variety of governmental audit organizations including federal, state, and local government audit organizations. The stories I hear about and witness regarding governmental waste, fraud, and abuse are numerous and sad.

A Higher Purpose

When government works well, it is a wonderful thing.  And our job, as government auditors, is to make the government work better.

The 2018 version of the Yellow Book contains an introductory statement letter from Gene Dedaro, the Comptroller General of the GAO.  He said, in part:

Given the current challenges facing governments and their programs, the oversight provided by auditing is more critical than ever. Government auditing provides the objective analysis and information needed to make the decisions necessary to help create a better future.

The Yellow Book itself states:

1.07     Engagements performed in accordance with GAGAS provide information used for oversight, accountability, transparency, and improvements of government programs and operations.

One city auditor has a personal mission that transcends the day-to-day work of auditing.  He believes his ultimate goal is to make sure that the city’s resources are directed to those who don’t have a voice, to those who are disenfranchised and in need of help.  Bravo! I am glad to know he is on the job.

3.08     A distinguishing mark of an auditor is acceptance of responsibility to serve the public interest. This responsibility is critical when auditing in the government environment. GAGAS embodies the concept of accountability for public resources, which is fundamental to serving the public interest.


Little Misbehaviors can be a Big Deal in Government

If you have not worked in government before, I need to warn you that little things can easily become a big deal.

One of my buddies got a job as a city manager of an east Texas town.  Early in his tenure, a scandal rocked his office.  His executive assistant used the city’s stamp machine to mail her Christmas cards.  The local press went wild over the whopping $60 in postage and painted his office as wasteful and out of control.  He had to let her go to save his job and the jobs of others in his department.

This boils down to for whom we work when we work for the government: the citizens.  Citizens own the government.  They work hard, pay their taxes, and choose lawmakers to create programs to do very specific things – such as build a library, feed low-income children, or clean up the beach.  It really upsets and angers them when their money is misspent or flat out stolen.

Materiality in Government

And that brings us to the topic of materiality.  Materiality is a term used in auditing to indicate the importance of a matter in relationship to other matters.  Risk-based auditing requires auditors to delineate between important or risky matters and insignificant matters. The auditor cannot and should not look under every rock for problems, examine every transaction, or consider every risk because they will never finish the audit project!

You may hear an auditor saying something like, “That is not material.”  And what he is really saying is, “I am not going to look at that because I don’t care as much about that as I do something else.”  For instance, an auditor may not examine a petty cash account of $200 but will examine equipment worth $70,000.

One wise auditor in a class I held in California pointed out that many of his corporate clients are high-flying, incredibly busy executives who could care less about a small fraud.  Small frauds could be managed by front line managers and do not warrant inclusion in the audit report.

In a corporation, access to the stamp machine, the copy machine, goodies, cake, and spa retreats are all perks of the job.  Remember when AIG spent $500K on a spa retreat for executives one week after the feds bailed them out?  The public was outraged, and AIG simply said, “Oh, we always do that. What’s the big deal?”

But in government, expectations for what is acceptable behavior are different. One federal inspector general for whom I work forbids his employees from holding birthday celebrations or eating in the office on government time. He does not want to be perceived as wasting taxpayer dollars.  When I work for a government, I have a hard time finding a cup of coffee, much less a pastry or a massage!

Once I attended the annual picnic at a state audit organization where they gave out awards for the most stupid finding of the year.  A guy named Jesse won the award for writing up a finding for a questioned cost of 52 cents.  Yep.  The federal grantor had told the state auditor they wanted to know about everything they had found. Jesse was just doing his job, literally!

While the AICPA (American Institute of Certified Public Accountants) standards are primarily written for audits of financial statements of commercial entities, the GAO (Government Accountability Office) standards are written for audits of governments.  The GAO counsels us – but doesn’t require us – to set a lower materiality level on government engagements than on engagements following AICPA standards. Here is their reasoning:

6.03     …Additional considerations may apply to GAGAS financial audits of government entities or entities that receive government awards. For example, in audits performed in accordance with GAGAS, auditors may find it appropriate to use lower materiality levels as compared with the materiality levels used in non-GAGAS audits because of the public accountability of government entities and entities receiving government funding, various legal and regulatory requirements, and the visibility and sensitivity of government programs.

Over and over, the GAO’s Government Auditing Standards distinguish between the purpose of their standards and the AICPA’s purpose for their standards.  And here the GAO says that government programs are more visible and sensitive.  In other words, little things matter in government! And what do we know about government? They care about it all!  Little, big, all of it!  So, a broader range of bad behaviors is reportable in this realm.

Do you think the federal grantor who doesn’t want employees eating cake on government time would care about the stamp machine incident?
Probably.   So while you might not report a small fraud for a business owner, you probably should in government.

The 2018 version of the Yellow Book identifies several methods by which you can report fraud depending on its significance or materiality.

If the fraud is material, then the auditor must write a finding and include it in the audit report. This language is excerpted from the financial audit standard, but the performance audit standards say something similar:

6.41 Auditors should include in their report on internal control or compliance the relevant information about noncompliance and fraud when auditors, based on sufficient, appropriate evidence, identify or suspect … 2 fraud that is material, either quantitatively or qualitatively, to the financial statements or other financial data significant to the audit objectives. 

And if the fraud is not material, but still warrants the attention of management, the auditor should communicate with management in writing:

6.44 Auditors should communicate in writing to audited entity officials when …b. the auditor has obtained evidence of identified or suspected instances of fraud that have an effect on the financial statements or other financial data significant to the audit objectives that are less than material but warrant the attention of those charged with governance. 

Accountability is an Ideal for Which We Strive

The GAO likes the concept of accountability so much that they changed their name from the General Accounting Office to the Government Accountability Office.  They even refer to auditors in their literature as “accountability professionals.”

Because we citizens are the owners of our government, we have a right to see where our money goes. Good governments seek transparency in their actions and their financial information. And if we know what the government does because they are transparent, we can hold those working for the government accountable for their actions.  That is the theory, anyway.

1.02 The concept of accountability for use of public resources and government authority is key to our nation’s governing processes.1.03 As reflected in applicable laws, regulations, agreements, and standards, management and officials of government programs are responsible for providing reliable, useful, and timely information for transparency and accountability of these programs and their operations.Legislators, oversight bodies, those charged with governance,and the public need to know whether (1) management and officials manage government resources and use their authority properly and in compliance with laws and regulations; (2) government programs are achieving their objectives and desired outcomes; and (3) government services are provided effectively, efficiently, economically, ethically, and equitably.

But accountability can be hard attribute to any one person in government.  Because of the complexity of government and the vast array of services the government offers to its citizens, losses due to fraud, waste, and abuse in government are often absorbed into the complex bureaucracy, and no one is held accountable.

When my children were small, we visited my aunt in Jefferson County, Alabama. My aunt lives  just outside of Birmingham, and she warned my children not to get in or touch the pretty lake on which she live because it was contaminated. In 1993, Jefferson County, Alabama was prosecuted for contaminating local creeks with raw sewage.

To fix the contamination problem, the county issued bonds to finance water treatment facilities.  The project has been plagued with corruption and the county commissioner was jailed in 2010 for accepting bribes.

And to add insult to injury, an unscrupulous Florida investment banker talked the county into defeasing the bonds using a complicated swap.  Then the county suffered from low tax collections in 2008, and had to lay off 1400 workers.  For a time, it appeared that the county would go bankrupt and default on the bonds.

No one, including the state of Alabama, wants the county to go bankrupt! Birmingham is the state’s most vibrant city. A failure there would make Alabama look less appealing to investors and industry. So the initial $3 billion dollars in bond debt was renegotiated and reduced to less than $1.4 billion.

Is anyone in government in jail for these poor decisions regarding the bonds? Did anyone responsible lose his or her jobs? And who ate the other $1.6 billion?  These mysteries may never be solved because so many were involved in the decisions.[2]But the citizens of Jefferson County deserve better.


Fraud occurs in both corporations and governments. Government auditors have a higher purpose, and that is to protect the recipients of government programs and citizens from fraud, waste, and abuse of their resources.

When auditing for fraud in the government, you need to be aware that:

  • Victims of fraud in government are ultimately the individuals that government intends to help.
  • You should reduce your materiality level when auditing governments.
  • Citizens want and deserve government leaders to be held accountable (and for every penny) for fraudulent activities.

[1]“Fraud.” Online Merriam-Webster Dictionary. April 10, 2012.
[2]Matthew Bigg. “Alabama’s Jefferson county sees hope for debt deal.” Reuters[London]. April 9, 2010.
Visit the Yellowbook-CPE.com Student Center
Click to learn more about Yellowbook requirements.


Lost your password?