Gregory F. Vokoun, MBA, CPA/CFF, CIA/CRMA, CFE, CGFM, CGAP, CGMA
Statewide Geriatric Accountant (Professional Practice Administrator)
General Accounting OfficeArizona Department of Administration
Governmental Procurement and the Fraud that Accompanies It
Procurement Fraud 2
Standard
“In planning the audit, auditors should consider risks due to fraud that could significantly affect their audit objectives and the results of their audit.”
Yellow Book, Chapter 7
Procurement Fraud 3
Learning Objectives
Gain familiarity with procurement process
Gain familiarity with fraud vulnerabilities in the procurement process
Gain familiarity with fraud considerations in the procurement process
Earn an hour of CPE
Procurement Fraud 4
Procurement’s Centrality to Governmental Operations
Supplies Equipment Buildings School lunches Health insurance Heavy equipment Maintenance Transportation Buildings
Roads Sewers Weapons Professional fees Street lights Communication After school care Printing Etc.
Procurement Fraud 5
Fraud
Intentional deception perpetrated to secure
unlawful gain
Procurement Fraud 6
Fraud Triangle
Procurement’s Vulnerability Because it is so central to operations,
Procurement is involved in one way or another in the expenditure of a significant portion of a governmental entity’s funds.
Because it is involved in the expenditure of funds, Procurement is the target of fraudulent endeavors.
In other words, PROCUREMENT offers a great deal of OPPORTUNITY for FRAUD.
Procurement Fraud 7
Procurement Fraud 8
Fraud Circle
Money? People? Fraud!
Procurement Fraud 9
Procurement Fraud Perpetrators Government employees or management
Procurement personnel Purchasing personnel Receiving personnel Payment personnel Program personnel Contract administration personnel Accounting personnel Management personnel Audit personnel Etc.
Contractor employees or management Etc.
Procurement Fraud 10
Faith-based Contracting
“A procurement process whereby the government essentially hopes and prays that
the contractor does not rip them off too badly.”
Bruce Causseaux, USGAO
Procurement Fraud 11
The Procurement ProcessThe Essential Phases
Identify Need Establish Specifications Solicit & Evaluate Bids & Proposals Draft & Negotiate & Award
Contract Monitor Performance
Procurement Fraud 12
Organization and Terminology
By Phase Vulnerabilities
Susceptibilities to attack Considerations
Things kept in mind in making decisions or evaluating facts
Procurement Fraud 13
Founding Father’s Observation
“There is no kind of dishonesty into which otherwise good people more easily and frequently fall than that of defrauding the government.”
Benjamin Franklin, Publisher and Inventor
Procurement Fraud 14
Identify Need
Vulnerabilities Considerations
Procurement Fraud 15
Identify NeedVulnerabilities
Unneeded goods or services Excess goods or services Unmerited urgency
Procurement Fraud 16
Identify NeedConsiderations
Why was this particular good or service purchased?
Why was so much of a particular good purchased?
Why is so much of this service needed? What does it do? Why does it cost so much?
Was this really an emergency procurement?
Is this really the only provider of a particular good or service?
Procurement Fraud 17
Something to Think About
“There’s something civil servants have that the private sector doesn’t and that is the duty of loyalty to the greater good—the duty of loyalty to the collective best interest of all rather than the interest of a few. Companies have duties of loyalty to their shareholders, not to the
country.” David Walker, former Comptroller General of the USA
Procurement Fraud 18
Establish Specifications
Vulnerabilities Considerations
Procurement Fraud 19
Establish SpecificationsVulnerabilities
Unnecessarily restrictive specifications
Vague / incomplete / defective specifications
Unwarranted feature creep Specifications that don’t add value Inappropriate or missing
performance / quality standards
Procurement Fraud 20
Establish SpecificationsConsiderations
Contractor involved in writing specifications
Specifications designed to fit but one contractor
Contractor provided with advance information
Requirement splitting
Procurement Fraud 21
What a Surprise!
“To us contractors, money is always a good thing.”
An executive of a Federal contractor
Procurement Fraud 22
Solicit & Evaluate Bids & Proposals
Vulnerabilities Considerations
Procurement Fraud 23
Solicit & Evaluate Bids & ProposalsVulnerabilities
Bid rigging Contract unbalancing Bid rotation and sporadic bidding Kickbacks / “pay-to-play” schemes Token / complimentary / shadow
bids Market allocation
Procurement Fraud 24
Solicit & Evaluate Bids & ProposalsVulnerabilities (Continued)
Change order schemes S-/ W-/ M-/ L-/ D-/ BE
misrepresentation
Procurement Fraud 25
Solicit & Evaluate Bids & ProposalsConsiderations
Falsification / misrepresentation of credentials / certifications / experience / financial performance / successes
Excessive / repetitive use of one contractor in a competitive field
Inadequate publication of solicitation
Fraternization with contractors Recommendations / endorsements
Procurement Fraud 26
Solicit & Evaluate Bids & ProposalsConsiderations (Continued)
Turns taken in submitting low bids Pattern in awards to vendors Winning contractor uses losers as
subcontractors Competitors refrain from bidding Competitors submit unreasonably
high bids
Procurement Fraud 27
Solicit & Evaluate Bids & ProposalsConsiderations (Continued)
Eminently qualified contractors uncharacteristically refrain from bidding on contracts: aspects of project; certain locations; entire contracts
Most competitors submit excessively high bids so the contract goes to the competitor with the merely somewhat high bid
Procurement Fraud 28
Solicit & Evaluate Bids & ProposalsConsiderations (Continued)
False, out-of-date, misleading data used to support proposal
S-/ W-/ M-/ L-/ D-/ BE certifications Bid patterns: too close, too high,
round numbers, identical margins or percentages (either winners or losers)
Procurement Fraud 29
Solicit & Evaluate Bids & ProposalsConsiderations (Continued)
Different contractors making identical errors in bids
Different / losing contractors with same bids / identical line items
Bid prices drop when new bidder enters market
Similarities between multiple bidders: same addresses, phones, people
Procurement Fraud 30
Solicit & Evaluate Bids & ProposalsConsiderations (Continued)
Persistent and unjustified high prices from all bidders compared in local market compared to other markets
Joint venture bids by firms that usually bid independently
Procurement Fraud 31
Solicit & Evaluate Bids & ProposalsConsiderations (Continued)
Storefronting between natural rivals
Losers’ bids deemed non-responsive / non-compliant / incomplete
Procurement Fraud 32
The Buck Stops Here
“I have never yet found a contractor, who if not watched, would not leave the government holding the bag.”
Harry S. Truman, former US President
Procurement Fraud 33
Draft & Negotiate & Award Contract
Vulnerabilities Considerations
Procurement Fraud 34
Draft & Negotiate & Award ContractVulnerabilities
Disclosure of confidential information resulting in a competitive advantage
Poorly documented source selection
Failure to comply with procurement process
Bias or favoritism during evaluation process or contract award
Procurement Fraud 35
Draft & Negotiate & Award ContractVulnerabilities (Continued)
Misrepresentation of firm’s capabilities / qualifications
Awards to firms which are incapable or unqualified
False vendors Undisclosed employee ownership
or financial interest in vendor
Procurement Fraud 36
Draft & Negotiate & Award ContractConsiderations
Information possessed by one contractor but not by others
Poorly written or poorly followed policies governing source selection
Awards to contractors with poor histories of past performance
Socialization
Procurement Fraud 37
Draft & Negotiate & Award ContractConsiderations (Continued)
Failure to disclose required information
Disqualification of a qualified offeror without adequate or adequately documented justification
Procurement Fraud 38
Draft & Negotiate & Award ContractConsiderations (Continued)
Contractor gift(s) to employee(s) Post-award employment Unusual or unnecessary middlemen or
brokers Unwarranted favoritism of a given
contractor Matching addresses, etc., between
contractors, contractors and employees, etc.
Procurement Fraud 39
A Pie Chart
Procurement Fraud 40
Monitor Performance
Vulnerabilities Considerations
Procurement Fraud 41
Monitor PerformanceVulnerabilities
False claims False pricing data False time records Progress payment fraud Product substitution Ghost employees
Procurement Fraud 42
Monitor PerformanceVulnerabilities
Contract swapping Undisclosed employee ownership
or financial interest in contractor or subcontractors
Procurement Fraud 43
Monitor PerformanceConsiderations
Inadequate / undeservedly favorable evaluation of contractor’s performance
Altered inspection reports Missing / altered serial numbers /
model numbers / labels Requests for payments
inconsistent with prior cost data
Procurement Fraud 44
Monitor PerformanceConsiderations (Continued)
Frequent invoice / voucher errors Poor cost documentation Counterfeit labeling Claims for unallowable costs Little physical progress on contract
though significant costs have been billed
Procurement Fraud 45
Monitor PerformanceConsiderations (Continued)
Material mischarging: price Material mischarging: quantity Material mischarging: quality Labor mischarging: time Labor mischarging: rate Systemic mischarging: extension
Procurement Fraud 46
Monitor PerformanceConsiderations (Continued)
Double counting costs as both direct and indirect
Professional fees: large sums charged for “services rendered” with few details
Significant number of field failures Unauthorized changes Altered / missing / late test reports
Procurement Fraud 47
Monitor PerformanceConsiderations (Continued)
Unexpected / premature part failures
Restricted access to storage / production facilities
Restricted access to records Delayed access to records No segregation between
contracting, purchasing, receiving, storing, issuing, inspection, etc.
Procurement Fraud 48
Monitor PerformanceConsiderations (Continued)
Continued acceptance of high priced goods or services
Continued acceptance of substandard goods or services
Failure to file financial disclosure forms
Change in employee lifestyle Employee declines promotions
Procurement Fraud 49
Monitor PerformanceConsiderations (Continued)
Socialization between employee and contractor / vendor
Vendor / contractor and employee address / phone match
Post office boxes Change orders: numerous / costly Contractor inability to perform
Procurement Fraud 50
Monitor PerformanceConsiderations (Continued)
Payments made that are unsupported by invoices
Multiple purchases under bid limits Misdirection Protests Failure to take advantage of
existing contracts
Procurement Fraud 51
Monitor PerformanceConsiderations (Continued)
Off-contract purchases Emergency procurements Sole source procurements Impractical to compete
procurements Latent defects Double billing Improper indirect cost pool
components
Procurement Fraud 52
Monitor PerformanceConsiderations (Continued)
Altered, missing documents Irregularities between standard
stationary and other document logos
Unusually high volume purchased from one vendor
Vendor resists inspection Expect originals but get
photocopies
Procurement Fraud 53
Monitor PerformanceConsiderations (Continued)
High rate of rejections Required certifications not signed Vendor, not buyer, selects samples
for testing No warranties provided Gratuities Failure to claim discounts
Procurement Fraud 54
Monitor PerformanceConsiderations (Continued)
Labor Match between budget & actual too
good Alteration to timecards Timecards filled out by management Inconsistencies between timecards &
bills Job misclassification Reallocation of charges
Procurement Fraud 55
Monitor PerformanceConsiderations (Continued)
S-/ W-/ M-/ L-/ D-/ BEs Employees shuttle back and forth between
BEs Payments to be made to other than BE BE owner not involved after award Interlocking ownership between BE and non-
BE BE always uses same non-BE as
subcontractor BE owner without appropriate background
Procurement Fraud 56
Universal Elements / Causes
Bribery Kickbacks Conflict of Interest
MONEY MAKES THE WORLD GO AROUND
Procurement Fraud 57
Universal Indicators of Fraud
Unaccountably lavish lifestyles Excessive socialization between
employees and contractors Favoritism Post-service employment Avoidance of standard procedures /
audit / oversight
Procurement Fraud 58
Universal Indicators of Fraud(Continued)
Unwarranted praise Excessive urgency Avoidance of oversight Employees shifting between
contractors Repetitive use of subcontractors Interlocking ownership or
management
Procurement Fraud 59
Universal Enablers
Apathy / Disinterest Lack of Knowledge / Understanding Sergeant Schultzing
Procurement Fraud 60
Universal Remedies
Knowledge and Understanding Vigilance Predictable Punishment Ethics
Procurement Fraud 61
Procurement FraudWho Benefits?
“One of the side benefits of the contracting officers being so overwhelmed was that the existing contracts were extended rather than put up for new competitive bidding.”
A Federal Contractor
Procurement Fraud 62
Procurement FraudWho Pays?
“Ultimately, corruption schemes cause governments to overpay for services (since the lowest bidder would likely have been selected had corruption not taken place), thus benefiting the perpetrator at the expense of taxpayers.”
Procurement Fraud 63
It Can’t Happen Here