Loyola University Chicago

Quinlan School of Business

Research reveals local governments have significant fraud exposure

Research reveals local governments have significant fraud exposure

"Fraud in local governments, specifically asset misappropriation, is a problem," says Professor Ellen Landgraf.

By Whitney Critten |  Student reporter

How is a government official in Dixon, Illinois, able to embezzle $54 million over a 20-year period? According to Quinlan professor Ellen Landgraf, massive thefts like this could have been prevented.

Landgraf’s research on anti-fraud measures in local governments highlights their considerable fraud exposure, and suggests they can combat this problem by implementing established internal controls meant to detect and prevent fraud. Later this year, this research will be published by the Journal of Forensic and Investigative Accounting.

Landgraf’s other research interests include accounting education, corporate governance and social responsibility, corporate disclosure and reputation, and ethics. Her research has been published in notable peer reviewed journals such as the Journal of Forensics Studies in Accounting and Business and the Journal of Business Case Studies.

Here, Landgraf discusses what attracted her to anti-fraud, why there was a need for her research, and how her survey can help non-governmental organizations prevent and detect fraud.

What attracted you to anti-fraud?

When I was an undergraduate student at Loyola, I had a co-op job with the Internal Revenue Service in the Criminal Investigations Division. Here, I assisted the IRS coordinator of Strike Force in investigations involving organized crime and political figures. Strike Force consisted of coordinators of various federal agencies—such as the Secret Service, FBI, and ATF—that worked closely with the U.S. Attorney’s Office.

My time at the IRS was a catalyst for my lifelong passion for studying fraud. That, coupled with the ethical values inherent to a Jesuit education, led me to this interest in anti-fraud research.

Why was there a need for your research?

Fraud in local governments, specifically asset misappropriation, is a problem. Money is leaking from local governments and taxpayers deserve to know how this is happening, and what local governments are doing to prevent it.

In 2013, COSO—a collaboration of five professionals societies representing accounting and finance professionals—released an updated framework on internal controls, which is widely used in corporate America. Following the release, my research partner and I decided to examine how local governments prevent fraud.

Thanks to a generous grant from the Institute of Fraud Prevention, we surveyed close to 100 city finance directors on their preferred anti-fraud practices. Prior to our survey, there had never been a comprehensive study on fraud risk awareness and mitigation in local governments.

What were the key findings?

Most city finance directors were not familiar with or interested in COSO 2013. Only 18 governments had implemented it, and seven more intended to implement.

There was very little interest in the use of anonymous fraud hotlines. In my opinion, anonymous fraud hotlines are one the most effective practices for fraud prevention and detection. My research partner, and I also were very surprised that none of the governments had compensation for whistleblowers.

The survey revealed that finance directors consider the most effective anti-fraud measures to be internal audits, management review, surprise audits, and external audits. Based on these findings, local governments have a long way to go to prevent fraud.

Why is this of interest to businesses?

Executives need to understand the importance of having in place internal controls that are employee friendly, such as an anonymous hotline. Such measures detect errors early, and help to protect a company and its bottom line. 

Why is this important to Quinlan students?

Students who go on to work for local governments will already be knowledgeable about anti-fraud prevention and how to mitigate risk through internal controls. Others should read the study to stay informed on how their tax dollars are being spent.