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Editor’s Note: This post is from regular contributor Norman Katz, Sourcing Innovation’s resident expert on supply chain fraud and supply chain risk. Catch up on his column in the archive.

A Florida Department of Children and Families supervisor – with 20 years at the agency – bleeds off small amounts of money – not greater than $900 at a time, though sometimes several times per day – from funds set aside for families in need. Total take before she was caught: $1.54 million, money that could have reportedly fed 8,810 families for one month. The supervisor used her knowledge of the agency’s inner workings to get around the system of checks and balances that were in place at the time.

The city of Fort Lauderdale (FL) fails a federal audit for the failure to adequately document how monies dedicated to helping poor people were allocated. The penalty: the city will repay the federal government $2.5 million. The city is accused of sloppy record-keeping, possibly over a 20-year period, a lack of understanding about how federal money must be spent, and a failure to properly training employees. Oddly, I think, the city passed the federal agency’s local office audit, only to fail when the national auditors came to town.

(During the 20 years, the city received some $49 million in this particular grant money; the $2.5 million that was poorly documented represents about 5% of all the monies received over the 20-year period.)

In both cases, a failure of the internal system of monitoring and controls led to the problems. The DCF supervisor theft of funds is clearly fraud – theft is also illegal pretty much all the time. In the case of the city’s sloppiness, this is not fraud according to a director for the city, and I believe that to be truthful.

In the case of the DCF supervisor, the fraud was perpetrated with the intent to deceive for her own gain as well as the gain of others. There was a breach of confidence in her relationship with her employer, the state of Florida. There was a purpose to her actions. What makes her theft more unpalatable is that, literally, she took food out of the mouths of people in need to feed her greed.

In the case of the city, there does not seem to be any intent to deceive; we don’t know for sure if the money was spent according to federal guidelines because sufficient documentation was not done, which was the source of the audit failure. However, based on the article I read, there is no indication that the monies poorly documented did not go to help people in need, it’s just that it wasn’t documented well enough. Very likely, the monies went to where they were determined to be needed.

Should the city have known better? Yes. Will the city pay the penalty for their mistake? Yes. Should the federal agency’s local office audit have caught the problem before the federal audit? Yes.

Did the DCF improve their internal controls and monitoring? Well, we hope so.

For activities to be fraudulent there needs to be purpose and intent. The DCF supervisor purposefully worked around the checks and balances with the intent on stealing something not belonging to her.

Inasmuch as good governance compliance requires adherence to rules and regulations, the city of Fort Lauderdale did not perform their due diligence in understanding the documentation requirements for spending federal money. While there could have been intent to deceive so as to allocate the money for some other uses than what it was intended, that does not seem to be the case.

The city will be penalized for their lack of performance, just like the DCF supervisor will be penalized for what she did.

But don’t think that sloppiness cannot be branded as fraud; as Sarbanes-Oxley informs us, management in public companies must understand the business and the activities of the employees they (directly) supervise. Thus, purposeful, willful negligence can be seen as fraudulent behavior, and private enterprises and government agencies are not exempt from good behavior.

Norman Katz, Katzscan