âEvery gun that is made, every warship launched, every rocket fired signifies in the final sense, a theft from those who hunger and are not fed, those who are cold and are not clothed. This world in arms is not spending money alone. It is spending the sweat of its laborers, the genius of its scientists, and the hopes of its children. This is not a way of life at all in any true sense. Under the clouds of war, it is humanity hanging on a cross of iron.â
âDwight D. Eisenhower
Topics:
- National Government
- State Government
- Local Government
- Agencies
- Public Authorities
- PublicâPrivate Partnerships
Key Questions:
- Can government forms regulate morality?
- What are political agents looking to do?
- What are the forms of government?
- Where are the best observation points in these entities to identify the risks they face?
THIS CHAPTER WILL INTRODUCE the reader to various operational and organizational aspects of government. It spells out how and why government functions the way it does, from a fiscal perspective, setting the foundation for the ultimate exploration of the potential for government fraud and mismanagement. The examination of the cash flow that migrates into and out of the various governmental units is key. Prime examples of activities that can create opportunities for mismanagement and fraud are: the strong centralization of activity in the federal government, the significant financial transfers between the federal and state governments, and the direct fiscal effect of state government on the municipal (local) level. These types of intergovernmental transactions should be subjected to strict professional scrutiny.
We will examine the key forms of government encountered in American society, the role each level of government plays in our lives, and its effects on our wallets. We will examine the primary sources of government revenue, spending, and capital infrastructure, and how government borrowing funds its longâterm existence. The reason it is important to analyze the forms of government is that it establishes the environment in which the public entity must operate and leads to developing a better understanding of abnormal or deviant behavior. A key element in understanding why fraud happens is to understand the perspectives within which people operate in order to develop the appropriate systems and structures to prevent fraud and mismanagement.
One thing we are going to ask you to consider throughout this and all the chapters, is how the moral standards and structural practices of a public entity form and the behavior of the people who are involved in the process. We then ask you to think about how would you observe and verbalize your findings. When you are in the field, you need to actually develop creative ways to generate an opportunity to examine these people from two perspectives, exploring both their visual cues (how are their bodies reacting?) and verbalization (supportable/believable), preferably unexcitingly. Watching the trusted parties' visual cues and verbalization with respect to their actions will potentially generate warning signs requiring further reexamination.
This examination does not necessarily have to result in finding fraud. Nervous people may be nervous because they are not comfortable speaking in public. This thinking helps in designing systems and structures as you identify weaknesses that may need something as simple as training or support to make the nervous party comfortable. A solid approach is to watch people in action and monitor them as they speak. Remember to always document your findings.
Understanding the basics of the governmental structures and operations and the various types of governmental levels and entities is one of the key elements in developing an understanding of how potential misstatement and fraud can exist in the overall governmental structures. We look to explore the mechanisms that create and maintain the power of political entities and how these entities interact with the general public and each other. A particular emphasis is placed on public agencies and tiers of authority. A thorough understanding of the hierarchy in any organization is imperative in following the flow of money and who enables access to cash resources. By examining the behavior surrounding the flow of money we begin to develop the necessary insight needed to institute the proper levels of internal control. It all starts by ensuring the correct ethical behaviors are in place. Remember the âTone at the Top.â
Governmental entities serve many functions in society. Knowing who the potential enablers and detractors are and their personality behavior is important in building systems and structures around them that lead to accountability and mitigate fraud and mismanagement.
TYPES AND FORMS OF LOCAL GOVERNMENT: AN EXAMPLE FROM NEW JERSEY
Government comes in many forms. Even at the local level, there are significant variations in the structures and operations in which people function. Each of the structures has its own inherent quirks, power structures, and process requirements. Therefore, an understanding of the broad variations gives insight into who has their hands on the levers of power, poised to push for good and/or corrupt purposes.
In New Jersey, there is a staggering number of municipalities per capitaâ565 for a population of 8.9 million. Right next door, to the east, is New York City, one massive municipality of 8.2 million residents in the state of New York that is run by a singular governing body.
The types of local government, according to the New Jersey League of Municipalities, are borough, township, city, town, and village.
Each of the 565 varying types of municipalities in New Jersey is run according to one of 12 forms of government: Borough, Township, City, Town, Village, Commission, CouncilâManager Act of 1923, OMCL MayorâCouncil Plan, OMCL CouncilâManager Plan, OMCL Small Municipality Plan, OMCL MayorâCouncilâAdministrator Plan, and Special Charters.
The first five forms are associated with a particular type of municipality. Each of these five types has a unique form of government historically associated with it. The next seven forms are âoptionalâ forms of government available for adoption, with the exception of the OMCL Small Municipality Plan (which is available only to municipalities with a population of under 12,000), by all 565 municipalities.1
Government attempts to organize itself into various segments much like ants form eusocial colonies. It's within the concept of grouping communities where the conflict often arises, as smaller communities have different needs than larger. In explaining the decision making, or voting power, of different forms of municipal government, terms like âstrong mayorâweak councilâ and âstrong councilâweak mayorâ are often bandied about. At the end of the day, it's a form of division that is often created by one interest, not in agreement, with another. Unlike the ant colony that builds its lifestyle around the family unit and operates in a highly organized structure with defined roles, the governmental unit often finds itself with conflicting selfâinterests and roles that are not always clearly defined and with the overriding power in the hands of a few.
Think of it this way: Strong and weak are opposites, and, while they attract one another, they often create control conflicts. There's the stronger politically connected individual versus the weaker. There are the rich versus the poor. The rich feel they pay their fair share of taxes, and the poor think the rich do not pay enough. In order to develop sound systems and structure, there is a need to understand all interests involved.
New Jersey has 565 municipalities that are, in turn, run under the umbrella of 21 county governments. To further break down the myriad of New Jersey public agencies, the New Jersey Office of the State Comptroller identifies 55 state authorities, 205 local commissions2 and authorities,3 and 604 school districts,4 not to mention the organizations that cluster under the state government itself. All of these entities were created to serve a population of 8.9 million people. Based on this data there is one public entity for every 6,160 people in the state.
The typical fraudster loves all this hierarchy and bureaucracy, as it has a high distraction potential. The fraudster knows how to sift through duplications and unearth what's buried in the past. Only through a meticulous cost analysis will New Jersey stop being crowned the king of property taxes, according to WalletHub.com. The more taxes or revenue the public entity receives, the more value exchange opportunity. The fraudster needs to be able to convert value to cash and remain undetected. When the public entity has greater cash flow (value), the risk for fraud and mismanagement opportunities becomes available to the trusted people who have access to that value. As long as the cash flow and revenues keep coming in, they are likely to remain undetected and fly under the radar.
Let's for a moment think about a hedge fund that is leveraged. As long as the money comes in and can provide a satisfactory return and remain liquid, there is no outrage or interest. It is not until there is no money to satisfy the existing obligations that people b...