Governmental Procurement and the Fraud that Accompanies It

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

Learning Objectives n n 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 2

Omissions n This presentation will not n n 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 3

Outline n This presentation will n n 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 4

Cautions n n 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 5

Procurement’s Centrality to Governmental Operations n n n n n Supplies Equipment Buildings School lunches Health insurance Heavy equipment Maintenance Transportation Buildings n n n n n Procurement Fraud Roads Sewers Weapons Professional fees Street lights Communication After school care Printing Etc. 6

Procurement Fraud Perpetrators n Government employees or management n n n Procurement personnel Purchasing personnel Receiving personnel Payment personnel Program personnel Contract administration personnel Accounting personnel Management personnel Audit personnel Etc. Contractor employees or management n Etc. Procurement Fraud 8

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

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

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

Identify Need Considerations n n n 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 14

Establish Specifications Vulnerabilities n n n Unnecessarily restrictive specifications Vague / incomplete / defective specifications Unwarranted feature creep Specifications that don’t add value Inappropriate or missing performance / quality standards Procurement Fraud 16

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

Solicit & Evaluate Bids & Proposals Vulnerabilities n n n Bid rigging Contract unbalancing Bid rotation and sporadic bidding Kickbacks / “pay-to-play” schemes Token / complimentary / shadow bids Market allocation Procurement Fraud 19

Solicit & Evaluate Bids & Proposals Vulnerabilities (Continued) n n Change order schemes S-/ W-/ M-/ L-/ D-/ BE misrepresentation Procurement Fraud 20

Solicit & Evaluate Bids & Proposals Considerations n n n 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 21

Solicit & Evaluate Bids & Proposals Considerations (Continued) n n n 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 22

Solicit & Evaluate Bids & Proposals Considerations (Continued) n n 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 23

Solicit & Evaluate Bids & Proposals Considerations (Continued) n n n 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 24

Solicit & Evaluate Bids & Proposals Considerations (Continued) n n 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 25

Solicit & Evaluate Bids & Proposals Considerations (Continued) n n 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 26

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

Draft & Negotiate & Award Contract Vulnerabilities n n 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 29

Draft & Negotiate & Award Contract Vulnerabilities (Continued) n n 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 30

Draft & Negotiate & Award Contract Considerations n n 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 31

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

Draft & Negotiate & Award Contract Considerations (Continued) n n n 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 33

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

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

Monitor Performance Considerations n n 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 37

Monitor Performance Considerations (Continued) n n n 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 38

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

Monitor Performance Considerations (Continued) n n n 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 40

Monitor Performance Considerations (Continued) n n n 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 41

Monitor Performance Considerations (Continued) n n n 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 42

Monitor Performance Considerations (Continued) n n n 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 43

Monitor Performance Considerations (Continued) n n n Payments made that are unsupported by invoices Multiple purchases under bid limits Misdirection Protests Failure to take advantage of existing contracts Procurement Fraud 44

Monitor Performance Considerations (Continued) n n n n Off-contract purchases Emergency procurements Sole source procurements Impractical to compete procurements Latent defects Double billing Improper indirect cost pool components Procurement Fraud 45

Monitor Performance Considerations (Continued) n n n 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 46

Monitor Performance Considerations (Continued) n n n 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 47

Monitor Performance Considerations (Continued) n Labor n n n 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 48

Monitor Performance Considerations (Continued) n S-/ W-/ M-/ L-/ D-/ BEs n n n 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 Procurement Fraud 49

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

Universal Indicators of Fraud n n n Unaccountably lavish lifestyles Excessive socialization between employees and contractors Favoritism Post-service employment Avoidance of standard procedures / audit / oversight Procurement Fraud 51

Universal Indicators of Fraud (Continued) n n n Unwarranted praise Excessive urgency Avoidance of oversight Employees shifting between contractors Repetitive use of subcontractors Interlocking ownership or management Procurement Fraud 52

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

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

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 55

Thanks! gregory. vokoun@azdoa. gov Procurement Fraud 56