gregory f. vokoun, mba, cpa/cff, cia, cfe, cgfm, cgap professional practice administrator general...

Gregory F. Vokoun, MBA, CPA/CFF, CIA, CFE, CGFM, CGAP

Professional Practice AdministratorGeneral Accounting Office

Arizona Department of Administration

Governmental Procurement and the Fraud that Accompanies It

Procurement Fraud 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 Buildings

Roads Sewers Weapons Professional fees Street lights Communication After school care Printing Etc.

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 Etc.

Procurement Fraud 10

The Procurement ProcessThe Essential Phases

Identify Need Establish Specifications Solicit & Evaluate Bids & Proposals Draft & Negotiate & Award

Contract Monitor Performance


Organization and Terminology

By Phase Vulnerabilities

Susceptibilities to attack Considerations

Things kept in mind in making decisions or evaluating facts


Identify NeedVulnerabilities

Unneeded goods or services Excess goods or services Unmerited urgency


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?


Establish SpecificationsVulnerabilities

Unnecessarily restrictive specifications

Vague / incomplete / defective specifications

Unwarranted feature creep Specifications that don’t add value Inappropriate or missing

performance / quality standards


Establish SpecificationsConsiderations

Contractor involved in writing specifications

Specifications designed to fit but one contractor

Contractor provided with advance information

Requirement splitting


Solicit & Evaluate Bids & ProposalsVulnerabilities

Bid rigging Contract unbalancing Bid rotation and sporadic bidding Kickbacks / “pay-to-play” schemes Token / complimentary / shadow

bids Market allocation


Solicit & Evaluate Bids & ProposalsVulnerabilities (Continued)

Change order schemes S-/ W-/ M-/ L-/ D-/ BE

misrepresentation


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


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



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



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)



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



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



Storefronting between natural rivals

Losers’ bids deemed non-responsive / non-compliant / incomplete


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


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


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


Draft & Negotiate & Award ContractConsiderations (Continued)

Failure to disclose required information

Disqualification of a qualified offeror without adequate or adequately documented justification


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.


Monitor PerformanceVulnerabilities

False claims False pricing data False time records Progress payment fraud Product substitution Ghost employees


Monitor PerformanceVulnerabilities

Contract swapping Undisclosed employee ownership

or financial interest in contractor or subcontractors


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


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



Material mischarging: price Material mischarging: quantity Material mischarging: quality Labor mischarging: time Labor mischarging: rate Systemic mischarging: extension



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



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.



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



Socialization between employee and contractor / vendor

Vendor / contractor and employee address / phone match

Post office boxes Change orders: numerous / costly Contractor inability to perform



Payments made that are unsupported by invoices

Multiple purchases under bid limits Misdirection Protests Failure to take advantage of

existing contracts



Off-contract purchases Emergency procurements Sole source procurements Impractical to compete procurements Latent defects Double billing Improper indirect cost pool

components



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



High rate of rejections Required certifications not signed Vendor, not buyer, selects samples

for testing No warranties provided Gratuities Failure to claim discounts



Labor Match between budget & actual too

good Alteration to timecards Timecards filled out by management Inconsistencies between timecards &

bills Job misclassification Reallocation of charges



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


Universal Elements / Causes

Bribery Kickbacks Conflict of Interest

MONEY MAKES THE WORLD GO AROUND


Universal Indicators of Fraud

Unaccountably lavish lifestyles Excessive socialization between

employees and contractors Favoritism Post-service employment Avoidance of standard

procedures / audit / oversight


Universal Indicators of Fraud(Continued)

Unwarranted praise Excessive urgency Avoidance of oversight Employees shifting between

contractors Repetitive use of subcontractors Interlocking ownership or

management


Universal Enablers

Apathy / Disinterest Lack of Knowledge / Understanding Sergeant Schultzing


Universal Remedies

Knowledge and Understanding Vigilance Predictable Punishment Ethics


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.”


[email protected]

gregory f. vokoun, mba, cpa/cff, cia, cfe, cgfm, cgap professional practice administrator general...

Documents

procurement fraud13

procurement fraud20

procurement fraud18

procurement fraud16

procurement fraud14

procurement fraud22

procurement fraud17

procurement fraud21