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Protecting a School District from Procurement and Vendor

Fraud

James M. Sullivan, JD, CIGDirector, Dispute Advisory

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❯Public Policy – Competition

❯General concepts of Procurement rules and regulations

❯Statutory bidding requirements

❯Exceptions

❯Administrative procurement rules

❯Auditor’s Role and Responsibilities

❯Fraud Risks

❯Criminal conduct

❯M/WBE fraud

❯Vendor schemes

❯Fraud prevention and effective controls

Agenda

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Four major concepts provide the foundation

for State (Wisconsin) procurement activities:

❯ Competition

❯ Consistency

❯ Integrity

❯ Openness

State of Wisconsin Procurement Desk Guide – Wisconsin Department

of Administration

Public Policy

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❯Competition – contracts awarded to lowest responsible bidder or highest scoring proposer. Competition brings about lower prices and higher quality goods and services

❯Consistency – laws, policies and procedures

apply equally across state government,

helping agencies conduct transparent and

defensible procurements.

Concepts

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❯Integrity – decisions and activities measured

against a standard of fairness that will withstand

public and legal scrutiny.

❯Openness – Solicitations written in clear, understandable language. All records relating

to a procurement are open to public

inspection and should be maintained in a

central location.

Concepts

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❯Generally, competitive bidding is required for procurements over $50,000.

❯A formal legal process managed by a

procurement professional.

§16.70-16.78 Wis. Stats.

Statutory Bidding Requirements

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❯Competitive Solicitation

❯Request for Bids

❯Request for Proposals

❯Simplified Bidding

❯Best Judgment

❯Sole Source Waiver

❯Emergency Procurement

❯Waiver of Bidding Process

❯Other (Piggybacking, Collective,

Intergovernmental, Cooperative)

Alternate Methods

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❯Request for Bids

❯Most commodity and some service solicitations above

$50,000 are issued through an RFB

❯Clear specs – no brand names

❯Encourage competition

❯Awarded to lowest cost bidder that meets all RFB

requirements

Competitive Solicitation

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❯Request for Proposals❯ Used when award cannot be made strictly on

specifications or price

❯ Several firms qualified to furnish product or service

❯ Vendors propose how they would provide product

or service

❯ Committee evaluates and can negotiate price

❯Simplified Bids❯ $5,000 to $50,000

❯ Obtain quotes from three viable vendors

❯Best Judgment❯ Less than $5,000

Competitive Solicitation

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❯Sole Source Waiver❯ Unique or proprietary service available from only one source

❯ Grant specifies the sub-contractor

❯ Public emergency where time does not permit competitive

solicitation

❯ Purchase is subject to substantial time pressures (excluding administrative delays and processing confusion

At the state level, sole source waivers over $25,000 require

the Governor’s approval. State Procurement Director or a

designated procurement agent can approve less than

$25,000.

Exceptions to Competitive Process

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❯Emergency Procurement❯ Threat to public health, safety or welfare, or the Governor has

proclaimed an emergency.

❯ Within three business days following an emergency purchase,

agencies must write a justification stating:

❯ the nature of the threat

❯ the need for unforeseeable immediate action

❯ the reason why standard procurement processes could

not meet the purchasing need

❯ the steps taken to obtain competition

❯ Over $25,000 - approved by State Procurement Director

Exceptions to Competitive Process

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❯Waiver of Bidding Process – in limited situations where one or

more of the following is present:

❯ Uniqueness – one of a kind product available from only one

supplier

❯ Patent or Proprietary

❯ Intrinsic Value – historic, artistic or educational value

❯ Emergency – risk of human suffering or substantial property

damage

❯ Bidding is not possible – an award cannot be made strictly

on specifications or price

❯ Substantial time pressure

Exceptions to Competitive Process

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❯Piggybacking – use contract developed by another state

agency

❯Collective Purchasing – use contract from another state government or federal government with approval of

State Bureau of Procurement

❯ Intergovernmental Purchasing – purchase directly

from federal, state or local governments. Approved

by SBOP

❯Cooperative Purchasing – use a Wisconsin local

government contract with SBOP approval

Other Procurement Processes

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❯Can be more restrictive than statutory rules and detail policies, procedures and rules for other

types of procurement

❯RFP

❯$ thresholds requiring various levels of

approval

❯Criteria to be reviewed

❯Review process

❯Selection

❯Responsibility

Administrative Rules

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❯ Administrative Policy 3.09 (B) General Competitive procurements Requirement

1. Goods and services under $5,000 - no competitive procurement requirements.

2. Goods valued from $5,000 to $49,999, method determined by the Procurement Department, a minimum of three (3) competitive quotes.

3. Services valued from $5,000 to $49,999, method determined by the Procurement Department - either three competitive quotes, competitive sealed proposal, or a

competitive sealed bid.

4. Goods or non-professional services valued at $50,000 or over – competitive

sealed bid.

5. Professional services valued at $50,000 or over, where performance of the

services requires creative and individual talents, scientific knowledge, special

skills or training, artistic or professional skills, or is of a technical or

experimental nature - competitive sealed proposal (“RFP”) whose procedural

formality may consider the anticipated amount, with less formality at lower

dollar amounts, and higher formality at higher dollar amounts.

Milwaukee Public Schools

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❯Policy 6244 – over $20,000 approved by the Board

❯$1,000 or less – discretion of the Principal or

dept. head

❯$3,000 or less – discretion of Superintendent

❯$3,000 to $20,000 – discretion of the

Superintendent

❯ supported by 3 price quotations

❯Advertised bids

❯Formal competitive solicitation

❯Or exception

Madison Metropolitan School District

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❯Patent/Proprietary

❯Intrinsic Value

❯Emergency

❯Substantial Time Pressure

❯Named contractor in grant or community

partnership

❯Existing Open Cooperative Contract

❯Bid or Quotations recently sought

❯Sole source or uniqueness

❯Other good reason

MMSD - exceptions

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“Auditors should design the engagement to detect instances of

fraud and noncompliance with provisions of laws, regulations, contracts and grant agreements that may have a material effect

on the subject matter or the assertion thereon of the

examination engagement. Auditors should assess the risk and possible effects of fraud and noncompliance with provisions

of laws, regulations, contracts and grant agreements that

could have a material effect on the subject matter or an

assertion about the subject matter of the examination

engagement. When risk factors are identified, auditors

should document the risk factors identified,

the auditor’s response to those risk factors individually

or in combination, and the auditors’ conclusions.”Government Auditing Standards (Yellow Book)

Auditor’s Role

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Role❯Design audits to identify fraud indicators

❯Recognize fraud indicators

❯Document and report

Goal❯Promote economy, efficiency and effectiveness

❯Protect public interest

❯Bring about positive change in performance

❯ Increase accountability and integrity

❯Ensure taxpayer money is spent in the public’s

best interest

Auditor’s Role

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❯Includes❯Knowing or reckless misrepresentation of the truth❯Concealment of a material fact to induce another to act to his detriment

❯Unconscionable dealing

❯Common Law Fraud elements❯False representation or a concealment of a material fact❯Knowledge or reckless disregard of a statement’s falsity

❯ Intent to deceive❯Reliance by the deceived party❯Damage to the deceived party

Fraud

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❯Material❯Having influence or effect

❯Yellow Book - Includes quantitative and qualitative measures in relation to the subject matter of the

audit

❯AICPA - the auditor’s consideration of materiality is

a matter of professional judgment and is

influenced by the auditor’s perception of the

needs of users

❯ In Government sector threshold of materiality

may be lower

Assessing Risk – Materiality

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❯Organizational Fraud – fraud committed for the benefit of the organization and as a result, the indirect benefit of the individual

❯Get the job done

❯Bonuses, recognition, promotions, job retention

❯Don’t know the rules

❯Pressure

Procurement Fraud Risk

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❯Purchaser has to know the specs

❯Can’t create sole source

❯Should not be written by a bidder

❯Clearly specify products to be purchased

❯Understandable to bidders

❯ Identify Code or Certification requirements that must

be met

❯Can products be checked against specifications

❯All products included in tabulation

❯Compatible products

❯Do you really need…?

Risk of Waste / Fraud – Bid Specs

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❯Misrepresentations

❯Responsive – ability to perform

❯Responsible – good company

❯Bid Rigging

❯Bid Rotating

❯Disclosure of bidding information

Risk – Bids

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❯ Bid Suppression

❯ Competitors agree not to bid

❯ Usually payoff to non-bidding competitor

❯ Complimentary Bidding

❯ Bidders submit intentionally high bids or non-compliant bids

❯ Gives appearance of competition

❯ Bid Rotation

❯ Competitors take turns submitting the lowest bid on a series

of contracts

❯ Customer or Market Division

❯ Competitors divide customers or geographic locations

❯ No bids or complimentary bids in other areas

Bid Rigging Schemes

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❯Companies submit bids with identical individual

line items or lump sums

❯Bids exceed agency’s estimate of contract value

❯Bids exceed companies bids to other agencies

❯Winning bidder awards subcontracts to losing

bidder

❯Large gap between winning and losing bid

❯Same spelling or math errors, same

handwriting, address or fax

Bid Rigging- Indicators

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❯Wisconsin Statutes❯ 133.03 – Unlawful contracts; conspiracies

❯ Any contract in restraint of trade is illegal

❯ Monopolize any part of trade or commerce

❯ 133.04 – Price Discrimination; Intent to destroy competition

❯ Discriminate in price between different purchasers of like

items for the purpose of destroying competition

❯ 133.14 Illegal contracts void; recovery

❯ All contracts made by any person while a member of any

combination or conspiracy… shall be void

❯ 946.13 – direct or indirect private pecuniary interest

❯ 946.32 False Swearing – make a false statement under oath or

affirmation

Criminal Conduct

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❯Stringing❯With intent to evade bidding requirements –“strings” contracts or job orders

❯How many transactions?

❯Planning

❯Complicity (Organizational Fraud)

Criminal Conduct (Restraint of Trade?)

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❯Sole Source Procurement❯ Contracts may be awarded without the use of a specified method

of source selection when there is only one economically feasible source for the item.

❯ Unique qualifications of contractor to perform

❯ Others unable to perform to perform

❯Fraud Risk❯ Did specifications create sole source?

❯ Favored bidder

❯ Truly sole source

❯ Sufficient procedures – notice, evaluation, disclosure

❯ Avoid competition

Risk of Fraud – Sole Source

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❯ Emergency – waiver of bidding process❯ Threat to public health, safety or welfare, or the

Governor has proclaimed an emergency.❯ Issue

❯ Truly an emergency?❯ Poor planning can’t create an emergency

❯ Fraud Risk❯ Rushed timelines❯ Lack of vendor oversight❯ Excessive billing❯ Substandard work❯ Favored vendor ❯ Inappropriate relationship with decision

makers

Emergency

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❯Change Order

❯“…change in a contract term, other than as specifically provided for in contract, which authorizes or necessitates an increase or

decrease in the cost of the contract…”

❯Germane to original contract

❯Not foreseeable

Change Orders

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❯Fraud Risk

❯Foreseeable?

❯Bad specifications can’t create “unforeseeable”

❯Excessive billing

❯Avoid competition

❯Fair price on original scope?

Change Orders - Risk of Fraud

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❯ M/WBE Program - Aspirational goals for M/WBE participation in goods and services contracts to ameliorate the effects of historic racial and gender discrimination

❯ Fraud

❯ Certification

❯ Ownership

❯ Pass through

❯ Commercially useful function

❯ Misrepresent $$ received

❯ Crimes

❯ Federal – mail and wire fraud

❯ State violations

M/WBE Fraud

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❯Bribery (134.05, 943.85 fin. Inst.)

❯With the intent to influence the agent’s action

❯Gives, offers or promises

❯Any gift or gratuity

❯Briber / “Bribee”

Bribery

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❯“Wining and Dining”

❯Gifts

❯Improper hospitality

❯Risk

❯Fosters collusion, lack of vendor oversight

and management.

❯Looks like bribery

❯Avoid the appearance of impropriety

Improper Inducements

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❯Overbilling

❯Mischarging – charge unallowable costs(Explain)

❯Product substitution

❯False/Fraudulent Insurance/Bonding documents

❯Ghost Vendors

❯Anomalous payments

❯ Just under spending threshold - $24,999

❯Round dollar amounts

❯Payments to other address

❯Duplicate invoices

More Vendor Fraud

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❯Fixed Price

❯Encourages contractor to be efficient

❯Time and Materials

❯Does not encourage contractor

efficiency

❯Reimbursed for costs related to

performing

Fixed Price and Time and Materials

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❯Due Diligence

❯Ethics Policies / Codes of Conduct

❯Gift Ban

❯Debarment Policy

❯Segregation of Duties

❯Vendor Management

❯Duty to Cooperate / Right to Audit

❯Fraud Hotline / Whistleblower System

❯ Independent Monitor

❯Proactive - Audit / Review / Data Mining

Effective Controls

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❯ Due Diligence

❯ Who are we contracting with?

❯ References

❯ Excluded Parties List System – debarred?

❯ Know the marketplace – prevent over-pricing

❯ Ethics Policies / Codes of Conduct

❯ Applicable to vendors and employees

❯ Defines Business Relationship

❯ Defines Direct and Indirect economic interest

❯ Defines “Relative”

❯ Conflicts of Interest

❯ Contract Management Authority

❯ Post employment restrictions

Prevention and Effective Controls

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Code of Ethics for Public Officials and Employees (19.41 et seq.)

❯ No state official shall solicit or accept anything of value if it could reasonably be considered as a reward for public action or inaction.

No transportation, lodging, meals or food.

❯ 19.44(g) disclose any gifts having an aggregate value of more than

$50.00 within the taxable year.

❯ 19.56(2)(b) need not report if:

❯ Returned to the payor within 30 days of receipt

❯ Can show by clear and convincing evidence was unrelated

and did not arise from the recipient’s holding or having

held a public office

Gifts

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❯ Identify acts or omissions that constitute grounds for debarment

❯Fraud or criminal offense

❯Failure to perform

❯History of unsatisfactory performance

❯History of failure to meet M/WBE goals

❯Ethical misconduct

❯False statements

❯False claims

❯Refusal to cooperate

❯Debarred by another entity

❯Violating voluntary exclusion agreement

Debarment Policies

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❯Describe procedures

❯Voluntary exclusion, interim constraints and debarment – ineligible to enter into contracts

with entity

❯General or subcontractor

❯Debarment Lists

❯Prohibition effects

❯Controlling persons

❯Owners, officers, directors

❯Employees

❯Affiliates

Debarment Policies

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❯Segregation of duties

❯Order / Authorize services

❯Receive

❯Receipt

❯Review invoice

❯Request payment

❯Approve payment

❯Ledger entries

❯Evaluate vendor performance

❯Method of Payment

❯Employees pick up check?

Internal Controls

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❯Vendors managing vendors

❯Mandatory record retention

❯Emails

❯Billing records

❯Detailed / Itemized expense records

❯Records of payments to subcontractors

❯Right to Audit

❯Duty to cooperate

❯Positive pay

Internal Controls

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❯ Independent monitor

❯Defined scope based on presumed or identified areas

with a high risk of fraud

❯Fee paid by vendor

❯Fraud Hotline

❯Whistleblower system

❯Data mining

❯Employee / vendor data match

❯Phone #’s

❯Bank accounts

❯Addresses

❯PO Box

Other Controls

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❯ Communicate policies

❯ Training – rules, regulations and policies

❯ Cross-train staff

❯ Regularly Audit

❯ Whistleblower system

❯ Who will investigate

❯ Law enforcement not always the answer

❯ Evidentiary issues

❯ Preserve evidence

❯ Communicate with media

❯ Get out in front of the story

❯ Systems in place to detect, deter and punish vendor

fraud

Prevention Plans

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Questions?

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James Sullivan, JD, CIGDirector, Dispute Advisory Services

Sikich LLP

T: 312.648.6679

Email: jsullivan@sikich.com

www.sikich.com

Contact Information

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Naperville, IL 60563

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Chicago, IL 60606