1. Governmental Procurement and the Fraud that Accompanies It
Gregory F. Vokoun, MBA, CPA/CFF, CIA/CRMA, CFE, CGFM, CGAP, CGMA
Statewide Geriatric Accountant
(Professional Practice Administrator)
General Accounting Office
Arizona Department of Administration
If the agenda and the film clip haven’t been sufficient evidence, this title slide settles the matter: this presentation is about Governmental Procurement
If you’re a contractor or vendor you should probably leave now—though you might want to sit through the session and call your lobbyist after the presentation.

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
And now…a word from our sponsor.
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
Roads
Sewers
Weapons
Professional fees
Street lights
Communication
After school care
Printing
Etc.
Why talk about procurement fraud? Procurement plays a central role critical to all governmental operations.
Procurement Fraud

5. Intentional deception
Fraud
Intentional deception
perpetrated to secure
unlawful gain
Black's Law Dictionary: "All multifarious means which human ingenuity can devise, and which are resorted to by one individual to get an advantage over another by false suggestions or suppression of the truth. It includes all surprise, trick, cunning, or dissembling, and any unfair way, which another is cheated."
deceit, trickery, or breach of confidence, perpetrated for profit or to gain some unfair or dishonest advantage
a fraud is an intentional deception made for personal gain
A deception deliberately practiced in order to secure unfair or unlawful gain.
Procurement Fraud

6. Fraud Triangle
Procurement Fraud

7. 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

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
All God’s Children
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 Process The Essential Phases
Identify Need
Establish Specifications
Solicit & Evaluate Bids & Proposals
Draft & Negotiate & Award Contract
Monitor Performance
There’s a lot more to procurement—Invitations for Bid vs. Requests for Proposals—Sole Source, Impractical to Compete—Small Business or Minority Owned Set Asides—Etc.
Also, a bit of overlap and different sequences (e.g., part of the contract is drafted in the Ts&Cs and the RFP---part of it at the time of award---part of it as part of contract modifications that may occur.
PERFORMANCE: Anything that happens after the contract is let: administration, billing, payment, construction, delivery, stocking, service, etc., etc., etc.
Procurement Fraud

12. Organization and Terminology
By Phase
Vulnerabilities
Susceptibilities to attack
Considerations
Things kept in mind in making decisions or evaluating facts
By phase—as good a way as any to organize this presentation—even better, a way to contextualize the elements of this presentation
I talk about vulnerabilities and considerations rather than control weaknesses and audit procedures. Why? Because I want to emphasize the thought processes rather than mechanical procedures.
Think about this for a moment—
ACFE Report to the Nation and sources of fraud discovery:
Tipsters, whistleblowers, stool pigeons, etc.
Accident
Alignment of the planets
Coded messages from outer space (Jody Foster decoding the instructions for building the perfect audit program)
Internal controls
A couple of other things
Finally auditors
We are specially edjumakated, we have lots of letters after our names, but Climate Change and the Melting of the Polar Ice Caps is responsible for uncovering more fraud than we are.
Why? We focus, at times, more on procedures, on audit programs, on ACL, on saying Benford’s Law, than we do on thinking about the audit, than thinking about fraud, than thinking about how a fraudster thinks about fraud. So, rather than using procedural terms, I want to use cerebral terms.
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 Need Vulnerabilities
Unneeded goods or services
Excess goods or services
Unmerited urgency
Procurement Fraud

16. Identify Need Considerations
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 Specifications Vulnerabilities
Unnecessarily restrictive specifications
Vague / incomplete / defective specifications
Unwarranted feature creep
Specifications that don’t add value
Inappropriate or missing performance / quality standards
Excessive limitations
Procurement Fraud

20. Establish Specifications Considerations
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
A fellow with Sikorsky Helicopter.
Procurement Fraud

22. Solicit & Evaluate Bids & Proposals
Vulnerabilities
Considerations
Procurement Fraud

23. Solicit & Evaluate Bids & Proposals Vulnerabilities
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 & Proposals Vulnerabilities (Continued)
Change order schemes
S-/ W-/ M-/ L-/ D-/ BE misrepresentation
Small Women Minority Local Disadvantaged Business Entities
Procurement Fraud

25. Solicit & Evaluate Bids & Proposals Considerations
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 & Proposals Considerations (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 & Proposals Considerations (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 & Proposals Considerations (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 & Proposals Considerations (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 & Proposals Considerations (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 & Proposals Considerations (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 Contract Vulnerabilities
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 Contract Vulnerabilities (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 Contract Considerations
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 Contract Considerations (Continued)
Failure to disclose required information
Disqualification of a qualified offeror without adequate or adequately documented justification
Procurement Fraud

38. Draft & Negotiate & Award Contract Considerations (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
The requisite graphic
Procurement Fraud

40. Monitor Performance
Vulnerabilities
Considerations
Procurement Fraud

41. Monitor Performance Vulnerabilities
False claims
False pricing data
False time records
Progress payment fraud
Product substitution
Ghost employees
What is performance? Anything that comes after the contract is let. That means delivery, construction, administration, billing, payment, etc., etc.
Procurement Fraud

42. Monitor Performance Vulnerabilities
Contract swapping
Undisclosed employee ownership or financial interest in contractor or subcontractors
Procurement Fraud

43. Monitor Performance Considerations
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 Performance Considerations (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 Performance Considerations (Continued)
Material mischarging: price
Material mischarging: quantity
Material mischarging: quality
Labor mischarging: time
Labor mischarging: rate
Systemic mischarging: extension
Procurement Fraud

46. Monitor Performance Considerations (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 Performance Considerations (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 Performance Considerations (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 Performance Considerations (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 Performance Considerations (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 Performance Considerations (Continued)
Off-contract purchases
Emergency procurements
Sole source procurements
Impractical to compete procurements
Latent defects
Double billing
Improper indirect cost pool components
Small/Women/Minority/Local/Disadvantaged
Procurement Fraud

52. Monitor Performance Considerations (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 Performance Considerations (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 Performance Considerations (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 Performance Considerations (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
Small/Women/Minority/Local/Disadvantaged
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 Fraud Who 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 Fraud Who 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 Procurement Fraud
A bit dated, but some things never really change.
IT CAN’T HAPPEN HERE by Sinclair Lewis
Procurement Fraud