Post on 09-Jul-2020
transcript
1
FRAUD Detection & Incident Response
for Fraud Examiners & Auditors
ACFE Omaha Chapter
June 30, 2020
John J. Hall, CPA John@JohnHallSpeaker.com
(312) 560-9931 www.FraudPreventionPro.com
Precision & Clarity
• Thinking • Planning • Actions • Solutions
3
9
Estimated ‘Fraud’ Losses
Most Recent Fiscal Year
$ ________
POP QUIZ #1
Types of fraud that account
for most of your losses
POP QUIZ #2
11
Fraud Loss Scorecard HIGH LOW
1 Disbursements $ XXX $ XXX 2 Inventory
3 Construction/Facilities
4 Health Care Costs
5 Payroll
6 T&M contracts
7 T&E reimbursement
8 Other – Unique to You
TOTAL $ XXX $ XXX
12
Fraud Loss Scorecard HIGH LOW
1 Disbursements $ XXX $ XXX 2 Inventory
3 Construction/Facilities
4 Health Care Costs
5 Payroll
6 T&M contracts
7 T&E reimbursement
8 Other – Unique to You
TOTAL $ XXX $ XXX
4
13
ACFE.com
14
Fraud Loss Scorecard HIGH LOW
1 Disbursements $ XXX $ XXX 2 Inventory
3 Construction/Facilities
4 Health Care Costs
5 Payroll
6 T&M contracts
7 T&E reimbursement
8 Other – Unique to You
TOTAL $ XXX $ XXX
1%2% 1%
15 16
DETECTED
NOTDETECTED
5
17
#1: Shrink the Pie
18
#2: Find More of What’s Left FASTER
DETECTED
19
1. Managers and staff 2. Examiners & internal audit 3. External auditors 4. Other third parties 5. The thief (fraudster) 6. Luck or accident
How Fraud is Found
1. Deterrence and Prevention
2. Early Detection
3. Effective Handling
Fraud Risk Management Framework
ORGANIZATIONS MUST BE PREPARED AT ALL THREE LEVELS
6
1. Deterrence and Prevention
2. Early Detection
3. Effective Handling
Fraud Risk Management Framework
ORGANIZATIONS MUST BE PREPARED AT ALL THREE LEVELS
Law Enforcement
Insurance Company
Control Weakness
Audit
Exception
Pattern
Review Of Records
Interviews
Interrogation
Tip
Case File
Bonding Claim
Audit Report
DetectionMode
Three-Step Fraud Detection 1. Think like a thief
a) Individual and group brainstorming
2. Use discovery techniques aggressively a) Discovery or attribute testing b) Detection-Focused interviews c) Monitoring for fraud indicators
3. Determine the cause of all indicators a) Root Cause Analysis
Three-Step Fraud Detection 1. Think like a thief
a) Individual and group brainstorming
2. Use discovery techniques aggressively a) Discovery or attribute testing b) Detection-Focused interviews c) Monitoring for fraud indicators
3. Determine the cause of all indicators a) Root Cause Analysis
7
Fraud Risk Brainstorming:
Think Like A Thief (when we don’t know how)
THE CHALLENGE
W.C.G.W. What Could Go Wrong
W.W.I.L.L. What Would It Look Like
Ask and Answer
The Beauty of “Hey Boss!” Questions
Easy Path to Clarity …begin (plan)
with the PRESUMPTION
that a fraud event has already occurred
THE SECRET SAUCE
8
Assume you are committing
the fraud
THE SECRET SECRET SAUCE
Commit Convert Conceal
THE THREE C’s
RED FLAGS
Observablesignsinrecordsorbehaviors
Nature Extent Timing
Backend of Brainstorming
9
Really Getting Probabilities
2 x Sauce + 3C + N.E.T.
Three-Step Fraud Detection 1. Think like a thief
a) Individual and group brainstorming
2. Use discovery techniques aggressively a) Discovery or attribute testing b) Detection-Focused interviews c) Monitoring for fraud indicators
3. Determine the cause of all indicators a) Root Cause Analysis
Discovery- Based Tests
A
B
C
ALL TRANSACTIONS
OK
KNOWN PROBLEMS
HIDDEN PROBLEMS
10
Create ‘Valid’ Tests 1. There are only two types of samples:
ü Valid ü Invalid
2. Constant focus on test ‘purpose’ 3. Should answer “Do we have this
issue?” 4. Make sure every sample chosen has
a ‘valid’ chance of success
Fraud Risk
Cash Disbursements – Fake Vendor: • Fake documents are introduced
into the payments system, • The invoice is from a “consultant”
for “services rendered” • Approval signatures are forged • Funds are disbursed by check, • The check is deposited into the
personal checking account of a volunteer
• The transaction is charged to Consulting Expenses in the accounting system
Fraud Risk
Cash Disbursements – Fake Vendor: • Fake documents are introduced
into the payments system, • The invoice is from a “consultant”
for “services rendered” • Approval signatures are forged • Funds are disbursed by check, • The check is deposited into the
personal checking account of a volunteer
• The transaction is charged to Consulting Expenses in the accounting system
Indicator
Symptoms
Red Flags
What would it LOOK like?
Fraud Risk
Cash Disbursements – Fake Vendor: • Fake documents are introduced
into the payments system, • The invoice is from a “consultant”
for “services rendered” • Approval signatures are forged • Funds are disbursed by check, • The check is deposited into the
personal checking account of a volunteer
• The transaction is charged to Consulting Expenses in the accounting system
Indicator
• Generic looking invoice • Unknown vendor / contractor • Address:
ü Same as employee or volunteer ü PO Box ü “Mailboxes, Etc.”, etc. ü “Hold check for pickup”
• No phone number on invoice • Unknown charges on cost
center reports • Check:
ü Clears too fast ü Funny endorsements ü Geography
(AICPA, ACFE, IIA, others)
11
Detection Steps
Indicator
Fraud Risk
Cash
Disbursements – Fake Vendor: • Fake
documents are introduced into the payments system,
• The invoice is from a “consultant” for “services rendered”
• Approval signatures are forged
• Generic looking invoice
• Unknown vendor / contractor
• Address: ü Same as employee or volunteer
ü PO Box ü Mailboxes, Etc.
ü Prison… ü “Hold check for pickup”
• No phone number on invoice
A
Detection Steps
Indicator
Fraud Risk
Cash
Disbursements – Fake Vendor: • Fake
documents are introduced into the payments system,
• The invoice is from a “consultant” for “services rendered”
• Approval signatures are forged
• Generic looking invoice
• Unknown vendor / contractor
• Address: ü Same as employee or volunteer
ü PO Box ü Mailboxes, Etc.
ü Prison… ü “Hold check for pickup”
• No phone number on invoice
• Reconcile all bank accounts immediately upon receipt of the bank statement
• Examine all cancelled checks • Periodically review all vendors
and contractors for existence and legitimacy
• REVIEW ALL MONTH END TRANSACTION REPORTS 100%
• “Positive Pay” • Use Computer Data Mining
Techniques to Surface Fraud Indicators
Detection Steps
Indicator
Fraud Risk
• Reconcile all bank accounts immediately upon receipt of the bank statement
• Examine all cancelled checks
• Periodically review all vendors and contractors for existence and legitimacy
• REVIEW ALL MONTH END TRANSACTION REPORTS 100%
• “Positive Pay” • Use Computer Data Mining
Techniques to Surface Fraud Indicators
Cash Disbursements – Fake Vendor:
• Fake documents are introduced into the payments system,
• The invoice is from a “consultant” for “services rendered”
• Approval signatures are forged
• Funds are disbursed by check,
• The check is deposited into the personal checking account of a volunteer
• The transaction is charged to Consulting Expenses in the accounting system
• Generic looking invoice • Unknown vendor /
contractor • Address:
ü Same as employee or volunteer
ü PO Box ü Mailboxes, Etc. ü Prison… ü “Hold check for
pickup” • No phone number on
invoice • Unknown charges on cost
center reports • Check:
ü Clears too fast ü Funny endorsements ü Geography
12
Three-Step Fraud Detection 1. Think like a thief
a) Individual and group brainstorming
2. Use discovery techniques aggressively a) Discovery or attribute testing b) Detection-Focused interviews c) Monitoring for fraud indicators
3. Determine the cause of all indicators a) Root Cause Analysis
Four Powerful Words
“Tell me what happened”
Powerful Follow-Up Question
“How could we prove that?”
ACFE Self Study “Finding the Truth”
www.ACFE.com
A Great Resource
13
Three-Step Fraud Detection 1. Think like a thief
a) Individual and group brainstorming
2. Use discovery techniques aggressively a) Discovery or attribute testing b) Detection-Focused interviews c) Monitoring for fraud indicators
3. Determine the cause of all indicators a) Root Cause Analysis
1. Standard reconciliations 2. Poor performance 3. Top performance 4. Timing differences 5. Suspense and clearing accounts 6. Complaints 7. Overtime by employee type 8. Top travelers and earners
Monitoring
9. Consulting and other third party services billing
10. Warranty activity 11. Adjustments and overrides:
• Sales prices • Receivable accounts • Cash accounts • Inventory
12. Closing entries 13. Failures
Monitoring 14. Common names and addresses for
refunds or credits 15. Goods purchased in excess of
needs / slow turnover 16. Duplicate payments 17. Regular meetings with key
executives
Monitoring
14
Three-Step Fraud Detection 1. Think like a thief
a) Individual and group brainstorming
2. Use discovery techniques aggressively a) Discovery or attribute testing b) Detection-Focused interviews c) Monitoring for fraud indicators
3. Determine the cause of all indicators a) Root Cause Analysis
Determine the Real Cause
of Indicators
Root Cause Analysis
If a condition exists is interesting
Why it exists is important
Root Cause Analysis 1. What happened? 2. What were the root causes?
===============================================================
3. What options are available that will deal with the problem?
4. What is the cost of acting upon each of the available options?
5. Which decision options will provide the best solution?
15
Three-Step Fraud Detection 1. Think like a thief
a) Individual and group brainstorming
2. Use discovery techniques aggressively a) Discovery or attribute testing b) Detection-Focused interviews c) Monitoring for fraud indicators
3. Determine the cause of all indicators a) Root Cause Analysis
Go DEEP
Purchasing Cards ‘The 3 C’s’
Commission Conversion
Concealment
16
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Dallas ISD Purchasing Cards
“Secretary charges
$383,788, has no receipts”
Dallas Morning
News July 2, 2006
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By Tawnell Hobbsthobbs@dallasnews.com1:52 pm on April 29, 2009 | Permalink
comments (0)
DISD auction of p-card repos has ended
DISD’s auction of p-card repos ended today. In all, it lookslike the district made $12,175 off the loot. The diamondjewelry set (pictured at right) brought in the most moneyat $2,900. Other items that sold on the high end include adiamond ring ($850) and a diamond bangle bracelet($550).
But the amount made from the auction barely puts a dentin the amount of money that Gloria Orapello, a formerDISD secretary, owes for abusing her district credit card.Orapello was sentenced to a year in prison and ordered tomake $100,000 restitution to the district. Some of theauctioned items were illegally purchased by her.
The 72 items that were up for bid were turned over toDISD by the FBI. The district will keep the money madefrom the auction and proceeds from the sale will reducethe restitution owed by that amount.
This entry was posted in Waste and abuse and tagged P-card auction by Tawnell Hobbs. Bookmark the permalink[http://educationblog.dallasnews.com/2009/04/disd-auction-of-p-card-repos-h.html/] .
00 0
17
Purchasing, Accounts Payable &
Vendor Fraud
RED FLAGS
Observablesignsinrecordsorbehaviors
Wrongdoing and
Bad Practices Often Look The Same
ü ValidbusinesslicenseandTINü Sentonelowvalueitemü UPSreceipt–Falsesecurity
19
What Happened • $3.5 million over seven years
• 3 parts 1. Payments sent to a janitorial services company
owned by the controller and his wife 2. Work on two homes and a beach condo 3. Gift cards from a national warehouse club
retailer
• Month end journal entries were routinely used to move costs to under budget accounts
• Financial performance deteriorated over the life of the scheme
Who Did It • 63 year old controller • Male, married with grandchildren • Poor health • Approaching retirement • Marginal performer • 25 year employee at time scheme started • Could initiate, approve & post entries • Month end authority allowed moving
costs by journal entry
VEITDORNO.
767767
;77
767767767767767767767767767767767'7 67767'7 67'767
769769
REGISTERNO.
IIr,11/OICENO.
0405-00345 L0047505850405-00238 10046587950405 -a0202 10046993020404 -00320 10046242980403 -04470 10043470960403-00433 10045023450403 -00421 10044955510403-00327 L0044863610403-00022 1004341-0340403 -00021 10043400510403-00020 r_0042694tt0403-000r_9 L0042767t3o402-00245 L0042546j.7o402-00244 L0042s292L0402-00055 L0042035760401-00505 10041583610401-00419 1004]- t42760401 -00260 1003911307040r_-00044 1004100367
VENDOR
ALBA}IY INTERNATIONAL0408-00404 31871_
09-09-0408-r_8-0406-29-0403-19-0407-2L-04
VENDOR TOTAL
03-25-0402-L7 -0401-05-04
VENDOR TOTAL
nav5-Lt-u+Lz- r>-u3
VENDOR TOTAL
INC.10_02_0310_02_0310_05_0310_05_0310_08_03
VENDOR TOTAL
NETAMOUNT
33.41az.rL
550.00342 .42295 .63501.33r50.51
39.7t666.84666.84
2836.7L1048.98
482,75181.05
6t- .011r.4 .5L
96.31592.2L258.9L
L2t42.37
239 . OL
239.0L *
4s0.00250.00157.50525.00L27.50
1510.00 *
787 .74368.72]-96 .87
753 .33 *
1200.001200.00
2440 .00 *
489.60489 .60489.60458 .645r2 .64
2440 .08 *
ITirVOICEDATE
05-14-0404-26-0405-04-0404-19-0402 -24- 0403-24-0403 -23 - 0403-22-0402-23 - 0402 -23 - 0402-09-0402-10-0402-05-0402-05-040]--27 -04ot-20 - 0401-09-04r_1- 07 - 0301-07-04
TOTAL
07 -23-04
DUEDATE
E AP3-Z)5-205-204-303-303-303-303 -263-033-033-033-03z- L62-!62-04r_-30]--2Lr-201- 13
8-31
9-248-307 -23
. 3-26L-23
5-203-03L-20
J-JI-
L-20
70-02LV-VZ
10-0510-0510-08
CHECKIF PAI
980309733397 66L97 04495A299603 r95955958 999477t9477L9420L94258940329403293550933 559286092!9492860
10L190
L0L97 69990695800934 85
97J,7 g9453492729
>) I LI92l-7 1
94016940I6:r.* u .L b940r5944l-6
VENDOR TOTAL
-',16 WINTER PI.JUMBTNG & HEATING5 0409-00200 4to4
. t6 0408-00352 5844776 0407 -00140 4037776 0403-00368 031_904776 0401-00438 5470
798 HESCO INC.798 0405-00206 340763798 0403 -00027 340543798 0401 -00275 340269
808 ARBON EQUIPMENT CORP.808 0403-00538 1309832B0B 0401-00281 1278547
813 GENERAL DELIVERY813 0403-00005 200786813 0403-00004 200'781
3 0403-00003 2aff i88,3 0403-00002 200895
813 0403-0000r 200895
VEITDORNO.
767767
;77
767767767767767767767767767767767'7 67767'7 67'767
769769
REGISTERNO.
IIr,11/OICENO.
0405-00345 L0047505850405-00238 10046587950405 -a0202 10046993020404 -00320 10046242980403 -04470 10043470960403-00433 10045023450403 -00421 10044955510403-00327 L0044863610403-00022 1004341-0340403 -00021 10043400510403-00020 r_0042694tt0403-000r_9 L0042767t3o402-00245 L0042546j.7o402-00244 L0042s292L0402-00055 L0042035760401-00505 10041583610401-00419 1004]- t42760401 -00260 1003911307040r_-00044 1004100367
VENDOR
ALBA}IY INTERNATIONAL0408-00404 31871_
09-09-0408-r_8-0406-29-0403-19-0407-2L-04
VENDOR TOTAL
03-25-0402-L7 -0401-05-04
VENDOR TOTAL
nav5-Lt-u+Lz- r>-u3
VENDOR TOTAL
INC.10_02_0310_02_0310_05_0310_05_0310_08_03
VENDOR TOTAL
NETAMOUNT
33.41az.rL
550.00342 .42295 .63501.33r50.51
39.7t666.84666.84
2836.7L1048.98
482,75181.05
6t- .011r.4 .5L
96.31592.2L258.9L
L2t42.37
239 . OL
239.0L *
4s0.00250.00157.50525.00L27.50
1510.00 *
787 .74368.72]-96 .87
753 .33 *
1200.001200.00
2440 .00 *
489.60489 .60489.60458 .645r2 .64
2440 .08 *
ITirVOICEDATE
05-14-0404-26-0405-04-0404-19-0402 -24- 0403-24-0403 -23 - 0403-22-0402-23 - 0402 -23 - 0402-09-0402-10-0402-05-0402-05-040]--27 -04ot-20 - 0401-09-04r_1- 07 - 0301-07-04
TOTAL
07 -23-04
DUEDATE
E AP3-Z)5-205-204-303-303-303-303 -263-033-033-033-03z- L62-!62-04r_-30]--2Lr-201- 13
8-31
9-248-307 -23
. 3-26L-23
5-203-03L-20
J-JI-
L-20
70-02LV-VZ
10-0510-0510-08
CHECKIF PAI
980309733397 66L97 04495A299603 r95955958 999477t9477L9420L94258940329403293550933 559286092!9492860
10L190
L0L97 69990695800934 85
97J,7 g9453492729
>) I LI92l-7 1
94016940I6:r.* u .L b940r5944l-6
VENDOR TOTAL
-',16 WINTER PI.JUMBTNG & HEATING5 0409-00200 4to4
. t6 0408-00352 5844776 0407 -00140 4037776 0403-00368 031_904776 0401-00438 5470
798 HESCO INC.798 0405-00206 340763798 0403 -00027 340543798 0401 -00275 340269
808 ARBON EQUIPMENT CORP.808 0403-00538 1309832B0B 0401-00281 1278547
813 GENERAL DELIVERY813 0403-00005 200786813 0403-00004 200'781
3 0403-00003 2aff i88,3 0403-00002 200895
813 0403-0000r 200895
Lessons?
805 ??
20
Symptoms, Red Flags & Indicators • Missing documents
• Unqualified accounting assistant • Poor financial performance • Large budget variances • Journal entries • Missed closing deadlines • Known related party • Dramatic change in lifestyle • Unusual behavior
Lessons for Management
• Highest threat from inside • Need for real oversight • True variance analysis • True performance analysis • Monitor related parties • Monitor spend levels • Use “How Do I Know” • When in doubt, DOUBT
Pat H. 1. Missing, inadequate or altered documents 2. Business expenses submitted for
restaurants near an employee’s home, or on weekends or holidays when no legitimate work was scheduled
3. Meal descriptions of ‘business meal’ without further description
4. Even dollar ‘meals’ – that might indicate actually refilling gift cards
20 Procurement Red Flags
21
5. Duplicate charges for meals, transportation and accommodations
6. Counts of supplies, equipment or other assets show a pattern on missing items
7. Unusually high labor hours or rates – especially compared to a baseline norm
8. Unusual quantity or type of supplies, tools, or other small-dollar items
20 Procurement Red Flags 9. Change in banking or other payment
information for existing suppliers and contractors (especially for low-frequency or inactive/dormant entities)
10. Charges from unknown suppliers found on management reports
11. Unexpected charges in excess of budgeted or otherwise planned amounts
12. Good or services purchased in excess of needs or normal volumes
20 Procurement Red Flags
13. Amounts of invoices fall just below the threshold for review
14. Employee handles all matters related to a vendor even though it might be outside or below his or her normal duties
15. Vendors with an unusual business volume for no apparent reason
16. ‘Customer’, employee and third-party complaints (including credit card charges)
20 Procurement Red Flags 17. Adjustments that override original
transactions 18. Cash over or under 19. Common names or addresses for refunds
or credits (including bank accounts) 20. Significant unexplained items in
reconciliations
20 Procurement Red Flags
22
Fraud Exposures in Contracting
What Could Go Wrong? 1. Determination of need 2. Documenting deliverables 3. Develop internal budget 4. Identify potential suppliers / contractors 5. Solicit bids 6. Negotiate and finalize terms 7. Award the work 8. The work itself 9. Administration, billing and payment review 10. Closeout and final settlements
Inflated Labor Hours
Construction Giant Lend Lease (Bovis) Charged withDefrauding Clients in Three Separate Schemes and
Will Pay Over $50 Million and InstituteComprehensive Reforms
Former Principal in Charge of Bovis’ New York OfficePleads Guilty to Fraud Charge, Faces up to 20 Years in
Prison
U.S. Attorney’s OfficeApril 24, 2012
Eastern District of New York(718) 254-7000
Earlier today, the U.S. Attorney’s Office for the Eastern District of New York filed fraud charges againstthe construction firm Lend Lease (US) Construction LMB Inc. (formerly Bovis Lend Lease LMB Inc.)(“Bovis”) and James Abadie, the former principal in charge of Bovis’ New York office. Abadie pled guiltythis morning in United States District Court to conspiring to commit mail and wire fraud by fraudulentlyoverbilling Bovis’ clients for over a decade. Also this morning, Bovis entered into a deferred prosecutionagreement with the U.S. Attorney’s Office for the Eastern District of New York and the New York CountyDistrict Attorney’s Office in which Bovis admitted to fraudulently overbilling clients for over 10 years.Bovis also admitted defrauding two of its public clients by falsely misrepresenting the work performed byits minority business enterprise partners, thus fraudulently obtaining payments on lucrative contracts.The deferred prosecution agreement requires Bovis to pay up to $56 million in penalties to the federalgovernment and restitution to victims and to institute far-reaching corporate reforms designed toeliminate future problems and enforce best industry practices.
The charges and dispositions were announced by Loretta E. Lynch, United States Attorney for theEastern District of New York; Cyrus R. Vance, Jr., District Attorney, New York County; Janice K.Fedarcyk, Assistant Director in Charge, Federal Bureau of Investigation; Robert E. Van Etten, InspectorGeneral, The Port Authority of New York and New Jersey, Office of the Inspector General; Brian D.Miller, Inspector General, General Services Administration, Office of the Inspector General; Robert L.Panella, Special Agent in Charge, Department of Labor, Office of Inspector General; and Rose GillHearn, Commissioner of the New York City Department of Investigation.
Bovis is one of the largest construction firms operating in New York City. Bovis provides construction,project management, and consulting services on large-scale public and private construction projects.Bovis is a U.S. subsidiary of the company Lend Lease Corporation Limited (“Lend Lease”), which, as of2009, operated in over 40 countries in Asia and Europe, as well as in Australia and the United States.Bovis’s New York office is its largest. In 2008, Bovis employed over 1,000 people in the United States,with the majority working in the New York office.
The Overbilling Scheme
As alleged in the felony information filed in court today (the “Bovis Information”), Bovis intentionallyand fraudulently billed clients, from at least 1999 to 2009, for hours that were not worked by labor
foremen from Local 79 Mason Tenders’ District Council of Greater New York (“Local 79”). Bovissystematically added one to two hours of unworked overtime per day to the timesheets for laborforemen. Bovis also systematically completed and submitted timesheets falsely listing unworked hoursas worked when labor foremen were absent for sick days, major holidays, and weeks of vacation. Bovisfraudulently billed its clients for this unworked time and, on public projects, falsely submitted certifiedpayrolls, defrauding taxpayers. Finally, Bovis made extra, undisclosed lump sum and stipend paymentsto a select group of labor foremen and billed those payments to clients as well. The clients were unawareof these practices. Pursuant to the deferred prosecution agreement, Bovis has admitted all of theallegations in the Bovis Information.
As alleged in a separate felony information also filed in court today (the “Abadie information”),defendant James Abadie played a critical role in executing Bovis’s overbilling practices when he servedas the principal in charge of Bovis’ New York office from 2002 to June 2009 and as the generalsuperintendent at Bovis prior to 2002. As principal in charge, all aspects of project operations and unionlabor issues fell under Abadie’s supervision. As the general superintendent for Bovis, Abadie personallyoversaw the day-to-day field operations on all projects and had extensive involvement with managingunion labor. While in both positions, Abadie explicitly and fraudulently directed his subordinates tocarry out the practice of adding unworked hours to labor foremen’s timesheets, knowing that these
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Home • New York • Press Releases • 2012 • Construction Giant Lend Lease (Bovis) Charged with Defrauding Clients in Three Separate Schemes and Will Pay Over $50...
BovisLendLease8Plus2
InflatedLaborHours
23
Inflated Labor & Burden
Rates
T&M$RATE$SHEETUNION$WORKERS
Millwright$$$$$$$$Rate$Buildup Basis Level$4
BASE$RATE$(including$vacation) 45.87$''''''''''''
FRINGE$BENEFITS 14.99$''''''''''''
ADMIN/PROFIT/OVERHEAD 0.00% ,$''''''''''''''''
SMALL$TOOLS 4.00% 1.83$''''''''''''''
CONSUMABLES 4.00% 1.83$''''''''''''''Total$Fee 8.00% 3.67$''''''''''''''
PAYROLL$TAXES$(At$Net$Tax$Rates)Social'Security
(Gross'Tax'Rate'='___'%) 7.65% 3.51$''''''''''''''State'Unemployment'Compensation
(Gross'Tax'Rate'='___'%) 6.55% 3.00$''''''''''''''Federal'Unemployment'Compansation
(Gross'Tax'Rate'='___'%) 0.80% 0.37$''''''''''''''Total$Taxes 15.00% 6.88$''''''''''''''
INSURANCEWorker's'Compansation','Rate 7.45% 3.42$''''''''''''''General'Liability'&'Misc.'Insurances 7.21% 3.31$''''''''''''''
Umbrella/LiabilityTotal$Insurance 14.66% 6.72$$$$$$$$$$$$$$$
TOTAL$STRAIGHT$TIME$BILLING$RATE 78.13$''''''''''''
Time$and$1/2$Premium:Time'and'1/2'Base'Rate 22.94$''''''''''''Unbrella/Liability'Insurance ,$''''''''''''''''Payroll'Taxes 3.44$''''''''''''''
Subtotal 26.38$''''''''''''TOTAL$TIME$AND$1/2$BILLING$RATE 104.51$''''''''''
Double$Time$Premium:Double'Time'Base'Rate 45.87$''''''''''''Unbrella/Liability'Insurance ,$''''''''''''''''Payroll'Taxes 6.88$''''''''''''''
Subtotal 52.75$''''''''''''TOTAL$DOUBLE$TIME$BILLING$RATE 130.89$''''''''''
InflatedLaborRates
Subcontracts
Project Background 1. Renovation of two existing client facilities 2. Collusion between client executive and
long-term trusted construction company executive (25 year relationship)
3. Sole source contract award (no bid) 4. Not managed by construction department 5. Overcharges of over $3 million on
contract value of $14.5 million (21%)
24
Case Details 1. Overbilling through real and fictitious sub-
contractors a) Internal project budget b) Contract value c) Schedule of values
2. $250,000 kickback paid to owner executive 3. Fabricated Change Orders 4. Architect knowingly approved inflated costs 5. Insurance claim for activities of owner
company executive
COST PAYEECODE REF # JR DATE DOCUMENT DESCRIPTION LABOR MATERIAL SUBCON EQUIP OTHER TOTAL
Cost Code 1015: EIFS/Base Bldg (Exterior Insulation Finishing System)
1015 894-0001 AP 8/27/07 Inv# SC01-1015 6038 ABC Construction 125,000.00 125,000.001015 280-0001 AP 9/16/07 Inv# ES333 6038 Diamond Stone 46,163.00 46,163.001015 894-0002 AP 9/26/07 Inv# SC02-1015 6038 ABC Construction 25,000.00 25,000.001015 051-0001 AP 9/30/07 Inv# 392112 6038 Venus Contractors Inc. 80,956.54 80,956.541015 422-0001 AP 10/5/07 Inv# ES335 6038 Diamond Stone 27,555.00 27,555.001015 966-0025 AP 12/26/07 Inv# SC-01 6038 Diamond Stone 1,545.00 1,545.001015 940-0001 AP 2/28/08 Inv# SC03-1015 6038 ABC Construction 7,100.00 7,100.001015 851-0002 AP 3/25/08 Inv# ES352 6038 Diamond Stone 879.50 879.50
0.00 0.00 157,100.00 0.00 157,099.04 314,199.04
Cost Code 1028: Structural / Seizmic Work
1028 819-0004 AP 7/24/07 Inv# SC01-1028 6038 ABC Construction 70,000.00 70,000.001028 165-0001 AP 8/1/07 Inv# 07-67611 6038 Kidder Metal Fabricators 62,000.00 62,000.001028 894-0008 AP 9/26/07 Inv# SC02-1028 6038 ABC Construction 170,300.00 170,300.001028 498-0005 AP 10/9/07 Inv# 3277 6038 Structural Imaging LLC 475.00 475.001028 257-0004 AP 2/19/08 Inv# SC-I073 6038 ABC Construction -7,000.00 -7,000.00
- - 233,300.00 - 62,475.00 295,775.00
“Job Cost Report”
COST PAYEECODE REF # JR DATE DOCUMENT DESCRIPTION LABOR MATERIAL SUBCON EQUIP OTHER TOTAL
Cost Code 1015: EIFS/Base Bldg (Exterior Insulation Finishing System)
1015 894-0001 AP 8/27/07 Inv# SC01-1015 6038 ABC Construction 125,000.00 125,000.001015 280-0001 AP 9/16/07 Inv# ES333 6038 Diamond Stone 46,163.00 46,163.001015 894-0002 AP 9/26/07 Inv# SC02-1015 6038 ABC Construction 25,000.00 25,000.001015 051-0001 AP 9/30/07 Inv# 392112 6038 Venus Contractors Inc. 80,956.54 80,956.541015 422-0001 AP 10/5/07 Inv# ES335 6038 Diamond Stone 27,555.00 27,555.001015 966-0025 AP 12/26/07 Inv# SC-01 6038 Diamond Stone 1,545.00 1,545.001015 940-0001 AP 2/28/08 Inv# SC03-1015 6038 ABC Construction 7,100.00 7,100.001015 851-0002 AP 3/25/08 Inv# ES352 6038 Diamond Stone 879.50 879.50
0.00 0.00 157,100.00 0.00 157,099.04 314,199.04
Cost Code 1028: Structural / Seizmic Work
1028 819-0004 AP 7/24/07 Inv# SC01-1028 6038 ABC Construction 70,000.00 70,000.001028 165-0001 AP 8/1/07 Inv# 07-67611 6038 Kidder Metal Fabricators 62,000.00 62,000.001028 894-0008 AP 9/26/07 Inv# SC02-1028 6038 ABC Construction 170,300.00 170,300.001028 498-0005 AP 10/9/07 Inv# 3277 6038 Structural Imaging LLC 475.00 475.001028 257-0004 AP 2/19/08 Inv# SC-I073 6038 ABC Construction -7,000.00 -7,000.00
- - 233,300.00 - 62,475.00 295,775.00
Sort by Cost Code COST PAYEE
CODE REF # JR DATE DOCUMENT DESCRIPTION LABOR MATERIAL SUBCON EQUIP OTHER TOTAL
Cost Code 1015: EIFS/Base Bldg (Exterior Insulation Finishing System)
1015 894-0001 AP 8/27/07 Inv# SC01-1015 6038 ABC Construction 125,000.00 125,000.001015 280-0001 AP 9/16/07 Inv# ES333 6038 Diamond Stone 46,163.00 46,163.001015 894-0002 AP 9/26/07 Inv# SC02-1015 6038 ABC Construction 25,000.00 25,000.001015 051-0001 AP 9/30/07 Inv# 392112 6038 Venus Contractors Inc. 80,956.54 80,956.541015 422-0001 AP 10/5/07 Inv# ES335 6038 Diamond Stone 27,555.00 27,555.001015 966-0025 AP 12/26/07 Inv# SC-01 6038 Diamond Stone 1,545.00 1,545.001015 940-0001 AP 2/28/08 Inv# SC03-1015 6038 ABC Construction 7,100.00 7,100.001015 851-0002 AP 3/25/08 Inv# ES352 6038 Diamond Stone 879.50 879.50
0.00 0.00 157,100.00 0.00 157,099.04 314,199.04
Cost Code 1028: Structural / Seizmic Work
1028 819-0004 AP 7/24/07 Inv# SC01-1028 6038 ABC Construction 70,000.00 70,000.001028 165-0001 AP 8/1/07 Inv# 07-67611 6038 Kidder Metal Fabricators 62,000.00 62,000.001028 894-0008 AP 9/26/07 Inv# SC02-1028 6038 ABC Construction 170,300.00 170,300.001028 498-0005 AP 10/9/07 Inv# 3277 6038 Structural Imaging LLC 475.00 475.001028 257-0004 AP 2/19/08 Inv# SC-I073 6038 ABC Construction -7,000.00 -7,000.00
- - 233,300.00 - 62,475.00 295,775.00
Sort by Vendor
25
COST PAYEECODE REF # JR DATE DOCUMENT DESCRIPTION LABOR MATERIAL SUBCON EQUIP OTHER TOTAL
Cost Code 1015: EIFS/Base Bldg (Exterior Insulation Finishing System)
1015 894-0001 AP 8/27/07 Inv# SC01-1015 6038 ABC Construction 125,000.00 125,000.001015 280-0001 AP 9/16/07 Inv# ES333 6038 Diamond Stone 46,163.00 46,163.001015 894-0002 AP 9/26/07 Inv# SC02-1015 6038 ABC Construction 25,000.00 25,000.001015 051-0001 AP 9/30/07 Inv# 392112 6038 Venus Contractors Inc. 80,956.54 80,956.541015 422-0001 AP 10/5/07 Inv# ES335 6038 Diamond Stone 27,555.00 27,555.001015 966-0025 AP 12/26/07 Inv# SC-01 6038 Diamond Stone 1,545.00 1,545.001015 940-0001 AP 2/28/08 Inv# SC03-1015 6038 ABC Construction 7,100.00 7,100.001015 851-0002 AP 3/25/08 Inv# ES352 6038 Diamond Stone 879.50 879.50
0.00 0.00 157,100.00 0.00 157,099.04 314,199.04
Cost Code 1028: Structural / Seizmic Work
1028 819-0004 AP 7/24/07 Inv# SC01-1028 6038 ABC Construction 70,000.00 70,000.001028 165-0001 AP 8/1/07 Inv# 07-67611 6038 Kidder Metal Fabricators 62,000.00 62,000.001028 894-0008 AP 9/26/07 Inv# SC02-1028 6038 ABC Construction 170,300.00 170,300.001028 498-0005 AP 10/9/07 Inv# 3277 6038 Structural Imaging LLC 475.00 475.001028 257-0004 AP 2/19/08 Inv# SC-I073 6038 ABC Construction -7,000.00 -7,000.00
- - 233,300.00 - 62,475.00 295,775.00
Duplicate Charges Surface
Billed and Paid Costs
Actual Costs
Total
Overcharge
A - $10,110,000 $8,660,000 $1,450,000
B - $4,410,000 $2,825,000 $1,585,000
Total - $14,520,000 $11,485,000 $3,035,000
Summary of Losses
Plus: 30% Penalty $910,000 Audit and legal costs $250,000
Non- Reimbursable
Costs
26
The Fishing Trip(s) Falsification of Records
Insurance Records
4Post-ItNotes3yellow1pink
Change Order Risk
27
1. Not priced in accordance with contract 2. Markups for fee billed incorrectly 3. Material prices do not reflect actual cost
due to trade discounts & other issues 4. Material quantity estimates not accurate 5. Labor hours overstated due to poor
estimating techniques
10 Change Order Exposures 6. Labor rate and/or burden exceeds actual 7. Improper charges for overtime versus
premium time 8. Buyouts of lower-tiered subcontractors
not disclosed 9. Change orders for work already included
in the base contract 10. Fabricated change orders
• Move water line
10 Change Order Exposures
Varsity Contractors, Inc.401 NE Northgate Way 1Seattle, WA 98125 Contract No. 1472602045
Phone: Date: 11/25/XXXX
Previous Approved Changes: -$ 36,479.00$
8,323.37$
To: 44,802.37$
1 243.52$
2 1,875.50$
3 3,115.75$
4 574.75$
5 2,513.85$
Subtotal 8,323.37$
$ 8,323.37
Varisty Contractors, Inc.Tony Homan/ Project Manager
R.E Crawford Construction, General Corporation
Total:
Breaking out of concrete from sidewalk for asphalt prep
Crushed rock import for trench backfill
Subtotal of all of the above added expenses due to changes to contract
Furnish all necessary labor, material and equipment to provide the following additional work as approved by the OWNER:
Terms and conditions of original contract apply to all Change Orders.
Changes Approved Changes ApprovedJoel Senchur
Install new gate valve, tee, 6" DI pipe w/mega lugs and (2) 45 degree bends for unknown 6 inch service line for hydrant.
Reconnect unkown 2" water service to Bank Of America
CONTRACT CHANGE ORDER AUTHORIZATION
Change Order
Original Contract Amount:
Add:
General Contractor:Address:
Total Revised Contract Amt.:
Project Address:Gottschalks 8 inch water relocate
VARSITY CONTRACTORS, INC.
Project Name:
Locate services
401 NE Northgate WaySeattle, Wa 98125
R.E C.
Varsity Contractors, Inc.401 NE Northgate Way 1Seattle, WA 98125 Contract No. 1472602045
Phone: Date: 11/25/XXXX
Previous Approved Changes: -$ 36,479.00$
8,323.37$
To: 44,802.37$
1 243.52$
2 1,875.50$
3 3,115.75$
4 574.75$
5 2,513.85$
Subtotal 8,323.37$
$ 8,323.37
Varisty Contractors, Inc.Tony Homan/ Project Manager
R.E Crawford Construction, General Corporation
Total:
Breaking out of concrete from sidewalk for asphalt prep
Crushed rock import for trench backfill
Subtotal of all of the above added expenses due to changes to contract
Furnish all necessary labor, material and equipment to provide the following additional work as approved by the OWNER:
Terms and conditions of original contract apply to all Change Orders.
Changes Approved Changes ApprovedJoel Senchur
Install new gate valve, tee, 6" DI pipe w/mega lugs and (2) 45 degree bends for unknown 6 inch service line for hydrant.
Reconnect unkown 2" water service to Bank Of America
CONTRACT CHANGE ORDER AUTHORIZATION
Change Order
Original Contract Amount:
Add:
General Contractor:Address:
Total Revised Contract Amt.:
Project Address:Gottschalks 8 inch water relocate
VARSITY CONTRACTORS, INC.
Project Name:
Locate services
401 NE Northgate WaySeattle, Wa 98125
R.E C.
BOGUS
28
1. Unclear or unreasonable specifications 2. No audit terms in contact 3. Atypical ‘application of payment’ forms 4. Missing or disorganized backup 5. Failure to track or report use of
allowances and contingencies 6. Undocumented workers on project 7. Changes in schedule of values without
explanation
20 Contracting Red Flags
Example Allowances
29
8. Subcontractor complaints about payments from general contractor
9. Missing lien waivers 10. Unusual bid patterns 11. Bid losers hired as subcontractors 12. Missing documents 13. Undisclosed related parties
20 Contracting Red Flags 14. Material substitutions without approval 15. Excess material purchases 16. Change order manipulation 17. Front end loading in billing 18. Overstated units, hours, equipment used 19. Undervalued deductive change orders 20. Diverting lump sum work to T&M projects
20 Contracting Red Flags
1. Analyze bids looking for patterns by vendor or purchasing agent
2. Confirm losing bids, failure to respond 3. Audit vendors - transactions, T&Es, 1099s 4. Surprise inspect at receiving points 5. Match PO, proof or receipt, & invoice 6. Observe inventory held by others 7. Observe highly tempting items
20 Detection Suggestions 8. For sole source suppliers, confirm
existence, prove ownership, test prices, find other sources, analyze usage volume
9. Reconcile inventory, purchases and usage of items subject to pilferage
10. Audit rental of equipment (including equipment used by contractors)
11. Verify accuracy of items stored in containers (gas, liquids, other)
20 Detection Suggestions
30
12. Audit areas where vendors come in, take stock, and replenish on their own
13. Audit purchases that do not go through normal purchasing procedures
14. Audit maintenance agreements 15. Audit property management agreements 16. Audit costs on cost-plus agreements to
original documentation. Look for creative interpretations of the term “Cost”
20 Detection Suggestions 17. Pull LexisNexis and D&B reports, and
enter vendor names into press databases 18. Use computer to look for multiple PO and
split bills 19. Confirm delivery locations 20. Verify address and other master file
changes by vendors
20 Detection Suggestions
1. Deterrence and Prevention
2. Early Detection
3. Effective Handling
Fraud Risk Management Framework
ORGANIZATIONS MUST BE PREPARED AT ALL THREE LEVELS
Law Enforcement
Insurance Company
Control Weakness
Audit
Exception
Pattern
Review Of Records
Interviews
Interrogation
Tip
Case File
Bonding Claim
Audit Report
DetectionMode
InvestigativeMode
31
1. Know what happens at alarm 2. Investigation 3. Loss recovery 4. Control weaknesses 5. External parties 6. Publicity 7. HR issues 8. Employee morale issues
Effective Fraud Handling
1. Denial–Dismay–Anger–Empathy 2. Confusion 3. In some – paralysis of thought
and action 4. Fear
What We Can Expect
1. Calm, objective leadership 2. Protection of the innocent 3. Certainty 4. Confident consistent action 5. Resources
What We Need to Provide 1. Experienced investigators 2. Forensic accountants 3. Information technology experts 4. Computer forensics specialists 5. Other technical specialists 6. Security / loss prevention 7. Internal auditors 8. Human resources 9. Legal and Compliance
Investigative Resources
32
1. Deterrent effect 2. People should know what to
expect if they commit fraud 3. Discipline including
termination and reporting 4. No surprises 5. Can enhance morale
Communicate Consequences 1. “It’s best not to…” 2. “They won’t do anything” 3. Fraud by management 4. Fraud for the organization 5. Confidential information 6. Fear of litigation
Report to the Authorities?
Get Competent Advice Be Consistent
1. Be clear: who talks to the press 2. Craft the message in advance 3. Don’t be pulled into speculation 4. Make sure all employees know what
to do (and what to avoid) if approached by the press
5. It’s OK to smile politely, say nothing, and walk away
What if the Press Finds Out? 1. First priority is protection of the
innocent 2. Share at the appropriate time 3. Emphasize the lessons learned 4. Assure that the handling is
professional, fair and respectful 5. Take confident action and do the
right thing – for them
What About the Employees?
33
1. Deterrence and Prevention
2. Early Detection
3. Effective Handling
Fraud Risk Management Framework
ORGANIZATIONS MUST BE PREPARED AT ALL THREE LEVELS
Together – on our watch –
we will no longer tolerate Lies, Deception,
Wrongdoing, Misconduct, Theft, or Outright Fraud
Fraud Prevention Pro Manifesto
John J. Hall
John@JohnHallSpeaker.com
www.JohnHallSpeaker.com
www.FraudPreventionPro.com
(312) 560-9931
Questions, Comments, Feedback Let me know how I can help! Thank You
www.JohnHallSpeaker.com www.FraudPreventionPro.com
JOHN J.HALL