Fraud Proves Costly to Institute in Funding, Reputation
As a public research university, Georgia Tech is a steward for a variety of financial resources, including state tax dollars, federal-sponsored research grants, and tuition paid by students and their families. While it is a known fact that fraudulent acts are damaging to the Institute, most don’t realize the true cost of financial fraud.
“According to the Association of Certified Fraud Examiners, organizations typically lose 5 percent of revenues annually to fraud,” said Melissa Hall, associate director of Forensic Audits. “But the total costs are often three-and-a-half times the original amount diverted from the Institute, and that doesn’t even address the damage to our reputation and the human toll caused by these unethical acts.”
If stolen funds originated from state or federal agencies, the Institute must pay back the awarding agencies. Additionally, there are resource costs including the extra employee time needed to investigate and evaluate evidence, payments to consultants to assist in the investigations, and administrative costs associated with criminal and legal actions. These legal actions can take months or years to complete.
“The money we receive from state and federal agencies is not Tech’s money, so anything misappropriated in these areas must be paid back in full,” said Jim Fortner, associate vice president for Financial Services. “In addition to the payback requirement, there is corresponding heightened monitoring of Tech’s activities, which ultimately increases demands on staff and results in additional audits from state and federal agencies related to sponsored programs or P-card abuse. Increased monitoring takes time and energy from Tech’s administrative and financial employees to demonstrate that Tech can appropriately administer state and federal funding.”
There’s also the collateral damage associated with fraud — potential losses of state funding and sponsored research dollars that can come from legislative actions, including suspended grants and contracts.
In cases where the asset diverted is intellectual property, the value of unrealized royalties and rights from intellectual property can result in the loss of millions of dollars. If the resources diverted are used to pursue undisclosed outside interests, such as a private company or private consulting contracts, the loss includes the total income from direct contracts that have been diverted.
While the actual occurrence and types of financial fraud are not unique to higher education, higher education differs from the corporate environment in that it embodies a culture of trust along with academic freedom and integrity. Also, a decentralized operating environment is common in higher education. When these attributes combine with a complex financial model, an inherently risky environment evolves.
The most common type of fraud nationally and at Georgia Tech is asset misappropriation fraud, which involves employees taking assets for private interest. The asset could be money, materials and supplies, or other items of value. Asset misappropriation usually begins with a procurement policy violation, but also typically includes providing falsified documents and intentionally misleading supervisors and administrators as to the business purpose for the purchase.
In terms of prevention, education and training are still considered the most effective ways to deter and minimize the impact of fraudulent behavior. This means learning from past events and proactively teaching employees what to look for.
Internal Auditing is focusing on fighting fraud by encouraging the use of the EthicsPoint hotline, working closely with management to identify risk areas, and developing new uses of data analytics to identify potential fraudulent activities.
“Even with all the appropriate controls in place to mitigate risk, if employees don’t take compliance seriously and question suspicious activities, the controls won’t work effectively,” said Phil Hurd, chief audit executive and director of Internal Auditing. “As a part of the University System of Georgia, we are required by Board of Regents policy to report any and all instances of suspected malfeasance. If you know something, please do something. We want employees to be the first line of defense.”
Understanding and advocating for ethical behavior is everyone’s responsibility. All members of the Tech community are encouraged to educate themselves and speak up to protect Tech’s resources and reputation.
Anonymous reports of suspected unethical behavior, including financial fraud, can be submitted at www.ethicspoint.com.