Deterring and Detecting Government Procurement Fraud

2. Deterring and Detecting Government Procurement Fraud Breakout Session #107 Name: Michael A. Smigocki, CPA/ABV, CVA Sr. Managing Director Federal Strategies Group, LLC July 19, 2010 11:15am – 12:30pm 1

3. Federal Strategies Group, LLC Management Consultants and Forensic Accounting Specialists to the Government Contracting Industry. 4 Principal Areas of Service Management/Regulatory Consulting including business valuations Outsourced/Co-sourced accounting, CFO, contracts and internal audit services Forensic accounting and Expert Testimony Training programs

4. To Be Covered Fraud Overview Fraud and Government Contracting Red Flags Deterrence and Detection Strategies

5. “There is no kind of dishonesty into which otherwise good people more easily and more frequently fall than that of defrauding the government.” Benjamin Franklin

6. What is Fraud? Common definitions Intentional use of deception Unlawful gain. To deprive or injure another.

7. What is Fraud? Individual vs. Organizational Fraud Individual defrauds the Company for individual gain. Company defrauds the Government for Organizational gain.

8. What is Fraud? Characteristics of Individual Fraudsters Job dissatisfaction (#1 cause!) Failure to achieve social and/or financial success. Mid-life crisis. Addictions (gambling, drugs, alcohol). Marital problems and divorce.

9. What is Fraud? Characteristics of Organizational Fraudsters Culture of aggression. Lack of emphasis on internal controls. Lack of concern for laws, regulations. High turnover of personnel.

10. Fraud & Government Contracting Federal Statutes Related to Fraud False Claims Act (18 U.S.C. § 287) Procurement Integrity Act (41 U.S.C. § 423) Sarbanes Oxley Act of 2002 Mandatory Disclosure Rule (FAR subparts 3.1004 and 52.203-13)

11. Fraud & Government Contracting Most Common Procurement Fraud Schemes Bribes & Kickbacks Change Order Abuse Collusive bidding Excluding qualified bidders Failure to meet contract specs False, inflated or duplicative invoices

12. Fraud & Government Contracting Most Common Procurement Fraud Schemes Phantom vendors Product substitution Purchases for personal use Co-mingling of contracts Conflicts of interest Cost mischarging

13. Fraud & Government Contracting Most Common Procurement Fraud Schemes Defective pricing Split purchases False statements and claims Imprest fund abuse Leaking of bid information Manipulation of bids

14. Fraud & Government Contracting Most Common Procurement Fraud Schemes Rigged specifications Unbalanced bidding Unjustified sole source Unnecessary purchases Revenue recognition

15. Fraud & Government Contracting Most Common Detection Methods for Government Procurement Fraud Hotline tip 47% Management review 12% Internal audit 15% Account reconciliation 5% External audit 7% Other 14%

16. Red Flags in Detection of Procurement Fraud Bribes, Kickbacks & Conflicts of Interest Contractor receiving favorable treatment over extended period of time. Unexplained increase in wealth by procurement officials. Close association/inappropriate gifting.

17. Red Flags in Detection of Procurement Fraud Bribes, Kickbacks & Conflicts of Interest (con’t) Unjustified high prices/large price increases. High volume of purchases.

18. Red Flags in Detection of Procurement Fraud Defective Pricing Contractor unable to provide adequate documentation upon request. Incomplete documentation for cost proposals. Use of out-of-date pricing information.

19. Red Flags in Detection of Procurement Fraud Defective Pricing (con’t) Unrealistically high profit margins during contract performance. Subcontractor prices that differ from proposed prices.

20. Red Flags in Detection of Procurement Fraud Cost Mischarging (particularly with labor contracts) Discrepancies or errors in labor costs. Discrepancies or errors in material costs. Questionable cost transfers.

21. Red Flags in Detection of Procurement Fraud False, Inflated or Duplicative Invoicing Discrepancies or errors in invoices and contractor data. Duplicative documents presented for payment. Multiple payments in the same or similar amounts.

22. Red Flags in Detection of Procurement Fraud Revenue Recognition Recording revenue prior to performing services. Failure to use percentage of completion on fixed price contracts. Recording revenue using target rates, not actual rates.

23. Red Flags in Detection of Procurement Fraud Revenue Recognition (con’t) Failure to record forward losses on contracts. Failure to segregate direct costs by contract.

24. Deterrence Strategies Understanding Procurement Fraud Easier to deter fraud than to detect it. Fear of detection is the most significant deterrent.

25. Deterrence Strategies Deterrence of Fraud – Contractor’s Perspective Establish a Culture of Ethics and Integrity (“Tone at the Top”) Accountability. Institute a Code of Business Ethics and Conduct. Employee training on Ethics and Conduct.

26. Deterrence Strategies Deterrence of Fraud – Contractor’s Perspective (con’t) Employee training on ethics and conduct. Provide a confidential reporting mechanism. Establish an effective internal audit.

27. Deterrence Strategies Deterrence of Fraud – Government’s Perspective Perform a Threat Analysis against the previously mentioned schemes. Assess likelihood of schemes occurring in your organization. Develop testing programs to ensure compliance. Conduct on-going training to enhance fraud awareness.

28. Questions? Michael A. Smigocki, CPA/ABV, CVA Senior Managing Director Federal Strategies Group, LLC. 15850 Crabbs Branch Way, Suite 310 Rockville, MD 20855 (301) 770-5850 Ext. 400 MikeS@Fedstrat.com