Watch For Bailout Fraud on the Horizon


Written by Tracy L. Coenen, CPA, CFF

If you thought that the $50 billion Ponzi scheme allegedly perpetrated by Bernard Madoff is big, get ready. The amount of fraud that is sure to arise out of all the federal government bailout activities will dwarf that by many multiples.

How do I know? The sheer magnitude of the bailout activity, coupled with the almost non-existent oversight of the funds, creates an environment ripe for fraud. Those in the position to perpetrate the fraud know that their chances of being caught are slim, and the chances of being severely punished are even slimmer.

Bailout Cost
What started out as “the $700 billion bailout” of the financial sector has grown tremendously. A multitude of bailout efforts now total over $2.5 trillion, and support a variety of industries. Most of the money is being directed to the finance industry, but there is plenty of money available to other industries such as automakers and state and local governments.

Even the initial bailout of $700 billion was poorly managed and has shown to have very little real oversight. Now the total is nearing four times that amount, and surely the oversight of the funds has not increased since the start of this financial nightmare.

In addition to the huge cost in terms of raw dollars being distributed, there is of course a cost of administration of the bailout programs. Even if there is little substantive oversight of how the funds are ultimately used, people still need to process the applications for funds and distribute the money. There is an enormous price tag even for basic administration costs.

Fraud Risks

The most basic risk related to the federal government bailout is that funds will be misused. It’s not clear, however, what would constitute a misuse of the funds. There appear to be very few limits on how companies use the funds allocated to them. Without clear guidelines for use of funds, there is little hope of defining what might be considered fraud.

Of course, the companies receiving bailout funds are making it seem as if they’ve segregated the money received from the federal government, and that they’ll use that money wisely. Yet I can’t help but be skeptical about a bank spending hundreds of millions of dollars on naming rights for a stadium at the same time the bank “needs” federal money.

A bank can pretend no bailout money is being used for the marketing budget or for executive bonus and perks, but the truth is that money spent on a marketing initiative can’t be spent on operations. So the actual source and use of funds for various bank activities isn’t as clear as the public relations departments of the banks would have us believe.

Suppose that we could determine what constitutes proper or improper use of bailout funds. Who would be held accountable? And who would carry out enforcement? It’s no secret that federal agencies are already stretched thin on other enforcement issues.

The Securities and Exchange Commission, Federal Bureau of Investigation, and other agencies openly admit that they don’t have enough people or resources to investigate as many matters as they could or should examine. So to expect that substantive enforcement of any issues surrounding the receipt and use of bailout funds will occur is unreasonable.

The Solution
The way to prevent fraud related to bailout funds was simply to not distribute taxpayer money to begin with. The last thing we needed was more government and more money forcibly taken from the hands of taxpayers and put into the hands of others. Creating more welfare in this country, whether corporate welfare or individual welfare, isn’t the right answer to the economic problems.

Obviously, it’s too late for my solution. Since huge amounts of money have already been given out, a different type of solution is needed. I don’t have that solution. Yes, more oversight and regulation is probably needed. It’s doubtful that we will get it.

More than likely, a couple of egregious instances of fraud related to bailout funds will be discovered and get lots of negative press. The other smaller frauds and scams will go without discussion or punishment. Federal agencies will do just enough to show the public that “something” is being done, but their actions won’t make a meaningful difference.

There simply isn’t enough money to do the kind of regulation warranted by the handing out of such large sums of money. That is yet another reason the bailout should have been avoided altogether. We should be making government simpler and less intrusive, doing things that will really stimulate private sector growth. Growing our government doesn’t make our economy better; it only adds layers of bureaucracy and endless opportunities to scam the system and the taxpayers.

Tracy L. Coenen CPA, MBA, CFE is president of Sequence Inc, a forensic accounting firm with offices in Milwaukee and Chicago. She is also the author of the book Essentials of Corporate Fraud, and can be reached at 414.727.2361 or [email protected].

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