2. 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 Governmental Procurement and the Fraud that Accompanies It

3. Procurement Fraud2 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

4. Procurement Fraud3 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

5. Procurement Fraud4 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.

6. Procurement Fraud5 Fraud Intentional deception perpetrated to secure unlawful gain

7. Procurement Fraud6 Fraud Triangle

8. 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 Fraud7

9. 8 Fraud Circle Money? People? Fraud!

10. Procurement Fraud9 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.

11. Procurement Fraud10 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

12. Procurement Fraud11 The Procurement Process The Essential Phases Identify Need Establish Specifications Solicit & Evaluate Bids & Proposals Draft & Negotiate & Award Contract Monitor Performance

13. Procurement Fraud12 Organization and Terminology By Phase Vulnerabilities Susceptibilities to attack Considerations Things kept in mind in making decisions or evaluating facts

14. Procurement Fraud13 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

15. Procurement Fraud14 Identify Need Vulnerabilities Considerations

16. Procurement Fraud15 Identify Need Vulnerabilities Unneeded goods or services Excess goods or services Unmerited urgency

17. Procurement Fraud16 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?

18. Procurement Fraud17 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

19. Procurement Fraud18 Establish Specifications Vulnerabilities Considerations

20. Procurement Fraud19 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

21. Procurement Fraud20 Establish Specifications Considerations Contractor involved in writing specifications Specifications designed to fit but one contractor Contractor provided with advance information Requirement splitting

22. Procurement Fraud21 What a Surprise! “To us contractors, money is always a good thing.” An executive of a Federal contractor

23. Procurement Fraud22 Solicit & Evaluate Bids & Proposals Vulnerabilities Considerations

24. Procurement Fraud23 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

25. Procurement Fraud24 Solicit & Evaluate Bids & Proposals Vulnerabilities (Continued) Change order schemes S-/ W-/ M-/ L-/ D-/ BE misrepresentation

26. Procurement Fraud25 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

27. Procurement Fraud26 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

28. Procurement Fraud27 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

29. Procurement Fraud28 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)

30. Procurement Fraud29 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

31. Procurement Fraud30 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

32. Procurement Fraud31 Solicit & Evaluate Bids & Proposals Considerations (Continued) Storefronting between natural rivals Losers’ bids deemed non-responsive / non-compliant / incomplete

33. Procurement Fraud32 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

34. Procurement Fraud33 Draft & Negotiate & Award Contract Vulnerabilities Considerations

35. Procurement Fraud34 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

36. Procurement Fraud35 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

37. Procurement Fraud36 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

38. Procurement Fraud37 Draft & Negotiate & Award Contract Considerations (Continued) Failure to disclose required information Disqualification of a qualified offeror without adequate or adequately documented justification

39. Procurement Fraud38 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.

40. Procurement Fraud39 A Pie Chart

41. Procurement Fraud40 Monitor Performance Vulnerabilities Considerations

42. Procurement Fraud41 Monitor Performance Vulnerabilities False claims False pricing data False time records Progress payment fraud Product substitution Ghost employees

43. Procurement Fraud42 Monitor Performance Vulnerabilities Contract swapping Undisclosed employee ownership or financial interest in contractor or subcontractors

44. Procurement Fraud43 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

45. Procurement Fraud44 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

46. Procurement Fraud45 Monitor Performance Considerations (Continued) Material mischarging: price Material mischarging: quantity Material mischarging: quality Labor mischarging: time Labor mischarging: rate Systemic mischarging: extension

47. Procurement Fraud46 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

48. Procurement Fraud47 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.

49. Procurement Fraud48 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

50. Procurement Fraud49 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

51. Procurement Fraud50 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

52. Procurement Fraud51 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

53. Procurement Fraud52 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

54. Procurement Fraud53 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

55. Procurement Fraud54 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

56. Procurement Fraud55 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

57. Procurement Fraud56 Universal Elements / Causes Bribery Kickbacks Conflict of Interest MONEY MAKES THE WORLD GO AROUND

58. Procurement Fraud57 Universal Indicators of Fraud Unaccountably lavish lifestyles Excessive socialization between employees and contractors Favoritism Post-service employment Avoidance of standard procedures / audit / oversight

59. Procurement Fraud58 Universal Indicators of Fraud (Continued) Unwarranted praise Excessive urgency Avoidance of oversight Employees shifting between contractors Repetitive use of subcontractors Interlocking ownership or management

60. Procurement Fraud59 Universal Enablers Apathy / Disinterest Lack of Knowledge / Understanding Sergeant Schultzing

61. Procurement Fraud60 Universal Remedies Knowledge and Understanding Vigilance Predictable Punishment Ethics

62. Procurement Fraud61 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

63. Procurement Fraud62 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.”

64. Procurement Fraud63 It Can’t Happen Here