Effective grants management includes an awareness of the facts and conditions that often indicate fraud is taking place.
We protect ourselves from outside threats with security systems and insurance. Unfortunately it’s all too common to ignore the threats from inside our own buildings.
Grant fraud awareness starts with knowing the two types of deceptions to watch out for:
Direct fraud is when an individual misuses or misrepresents use of funds for personal gain. This includes direct theft of funds and misappropriation of grant resources for personal use.
Direct fraud is often perpetrated not by “career criminals” but by trusted staff who have no criminal history – including no history of theft.
Indirect Fraud is when the organization misuses funds or misrepresents use of funds for the purpose of sustaining an individual project or the organization at large.
Similar to direct fraud, indirect fraud can be committed by organizations of high standing that have no history of unethical use of funds.
14 Warning Signs: Conditions are “Ripe” for Grant Fraud
Fraud occurs when there is a “perfect storm” of motive, rationalization, and opportunity.
Let’s look at 4 common motives for direct fraud and 10 more complex motivators for indirect fraud.
Personal Gain-4 Motivators for Fraud
According to Price Waterhouse Coopers LLC’s 5th Global economic crime survey “76% of fraudulent activity is perpetrated by employees.”
There are a few common motivators for direct fraud perpetrated by individuals which include:
#1) Disgruntled or unhappy employees
For example, employees who feel they have not received adequate compensation or recognition may rationalize their behavior. A 1983 study of over 10,000 employees by Hollinger and Clark cited employee dissatisfaction as the most common motivator for fraud.
#2) Personal issues
Issues that impact the individual financially such as gambling, alcohol, or drugs as well as personal financial debt are strong motivators.
#3) Unrealistic Lifestyle
The desire to live beyond ones means, such as taking expensive trips and driving expensive cars can also lead to rationalization of fraud.
#4) Job Stress
The individual’s perception of high pressure to perform or competition within the organization or research field can affect their choices.
Organizational Fraud: 10 Motives for “Stretching the Truth”
Motivators for indirect fraud within an organization are a bit more complex and more numerous. Good grants management includes being observant of situations and circumstances that could lend themselves to fraud if the opportunity exists.
It should be noted that just because these situations and circumstances occur does not necessarily mean grant fraud is happening, but they can be potential “drivers” for organizational fraud to occur.
#5) Financial Difficulties
Is the organization is experiencing financial difficulties?
#6) Grant Management Stress
Is there an atmosphere of high pressure due to looming deadlines, competition, results, expansion, “use or lose” funds, grant renewal, or extension concerns?
#7) Outside Review
Is there nervousness about an upcoming site visit, or audit?
#8) Dysfunctional or Combative Program Management
Are there internal disagreements or contentious relationships within organization regarding management and finances?
#9) History of Problems
Have there been previous failures, such as disallowed costs, or audit findings within the organization?
#10) Changing Environment
Has the organization recently been impacted by changing conditions, such as a new regulatory, economic, or institutional environment?
#11) Management Instability
Has the organization has recently experienced negative situations due to changes in management or errors by management?
#12) Musical Funding
Is there a desire to divert funding to other projects, cost share, or partner relationships?
#13) Absolute Power
Is the project or organization dominated by one individual?
#14) Sudden Moves
Have there been abrupt changes in organizational procedures or practices (i.e. a different process for submitting reports or new ways to measure milestones.)
Don’t Ignore the Warning Signs
The crime of fraud requires motive, rationalization and opportunity. Organizations have the most control over opportunity.
Putting strong internal controls and procedures in place significantly reduces the opportunity for fraud to occur. Best practices include internal control systems which both prevent fraud and are consistently monitored to detect fraud.
But grant managers should not ignore the warning signs of motive and rationalization when it comes to the potential for fraud. An awareness of all these factors is required to minimize the chance of fraud occurring.
Lucy Morgan CPA, MBA
CEO, Compliance Warrior