1. Governmental Procurement and the Fraud that Accompanies It
Gregory F. Vokoun, MBA, CPA/CFF, CIA, CFE, CGFM, CGAP
Professional Practice Administrator
General Accounting Office
Arizona Department of Administration

2. 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

3. Omissions This presentation will not
Cover every aspect of the extended procurement process
List every possible fraud vulnerability or fraud consideration
Give lessons in Benford’s Law, Excel or ACL, data mining, etc.
Discuss all the slides or all the bullet points on a given slide
Procurement Fraud

4. Outline This presentation will
Spotlight procurement’s centrality to government operations
Briefly introduce the (simplified) procurement process
Introduce fraud vulnerabilities and considerations by phase of the procurement process
Provide points meriting reflection
Procurement Fraud

5. Cautions
Some vulnerabilities and considerations will be listed in more than one phase of the procurement process
The fact that a fraud vulnerability and a fraud consideration exist in a given situation does not mean that a fraud has occurred, only that it may have
Procurement Fraud

6. 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.
Procurement Fraud

7. Fraud Triangle
Procurement Fraud

8. 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
Procurement Fraud

9. Fraud Circle
Money? People? Fraud!
Procurement Fraud

10. The Procurement Process The Essential Phases
Identify Need
Establish Specifications
Solicit & Evaluate Bids & Proposals
Draft & Negotiate & Award Contract
Monitor Performance
Procurement Fraud

11. Organization and Terminology
By Phase
Vulnerabilities
Susceptibilities to attack
Considerations
Things kept in mind in making decisions or evaluating facts
Procurement Fraud

12. Identify Need
Vulnerabilities
Considerations
Procurement Fraud

13. Identify Need Vulnerabilities
Unneeded goods or services
Excess goods or services
Unmerited urgency
Procurement Fraud

14. 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

15. Establish Specifications
Vulnerabilities
Considerations
Procurement Fraud

16. 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
Procurement Fraud

17. Establish Specifications Considerations
Contractor involved in writing specifications
Specifications designed to fit but one contractor
Contractor provided with advance information
Requirement splitting
Procurement Fraud

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

19. 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

20. 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

21. 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

22. 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

23. 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

24. 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

25. 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

26. 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

27. Solicit & Evaluate Bids & Proposals Considerations (Continued)
Storefronting between natural rivals
Losers’ bids deemed non-responsive / non-compliant / incomplete
Procurement Fraud

28. Draft & Negotiate & Award Contract
Vulnerabilities
Considerations
Procurement Fraud

29. 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

30. 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

31. 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

32. Draft & Negotiate & Award Contract Considerations (Continued)
Failure to disclose required information
Disqualification of a qualified offeror without adequate or adequately documented justification
Procurement Fraud

33. 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

34. Monitor Performance
Vulnerabilities
Considerations
Procurement Fraud

35. Monitor Performance Vulnerabilities
False claims
False pricing data
False time records
Progress payment fraud
Product substitution
Ghost employees
Procurement Fraud

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

37. 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

38. 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

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

40. 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

41. 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

42. 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

43. 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

44. 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

45. 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
Procurement Fraud

46. 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

47. 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

48. 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

49. 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 Business Enterprises
Procurement Fraud

50. Universal Elements / Causes
Bribery
Kickbacks
Conflict of Interest
MONEY MAKES THE WORLD GO AROUND
Procurement Fraud

51. 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

52. 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

53. Universal Enablers Apathy / Disinterest
Lack of Knowledge / Understanding
Sergeant Schultzing
Procurement Fraud

54. Universal Remedies Knowledge and Understanding Vigilance
Predictable Punishment
Ethics
Procurement Fraud

55. 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

56. Thanks!
Procurement Fraud