| RISKS |
RED FLAGS |
BEST PRACTICES |
| Ghost Employees |
- Restricted access to records.
- Unexplained unfavorable labor variances.
|
- A ghost employee is the term applied to someone who gets paid but doesn’t exist. In the case of vendor management, a ghost employee is used to increase the cost in cost-plus type of contracts. A check is issued and cashed by another who pockets the money. This type of fraud exists in other contexts where an employee uses a ghost employee to steal from his/her employer. In the case of vendors, the fraud is perpetrated against the buyer and the vendor pockets the money.
|
| Kickback Schemes |
- Change in employee lifestyle.
- Employee declines promotions.
- Socialization between employees and contractor/vendor.
|
- Kickbacks involve an employee being compensated for in some way favoring a vendor. There are several behavioral indicators, like the red flags listed, that may point to an employee receiving kickbacks.
|
| Product Substitution |
- Altered inspection reports.
- Poor cost documentation.
- Counterfeit labeling.
- Missing/altered serial numbers, model numbers or labels.
- Significant number of field failures.
- Altered/missing/late test reports.
- Unexpected or premature part failures.
- Restricted access to storage/production facilities.
- Restricted/delayed access to records.
- Latent defects.
- High rejection rates.
- Required certifications not signed.
- Vendor, not buyer, selects samples for testing.
- No warranties provided.
|
- A common fraud scheme involves the delivery of goods of a lesser quality than was contracted for. To reduce the likelihood of this, goods should be inspected for conformity to specifications. In the case of certain types of goods, a chemical, metallurgical or similar type of test will need to be run on a sample to ensure that the product meets specifications.
|
| Progress Payment Fraud |
- Altered inspection reports.
- Physical progress inconsistent with billings.
- Requests for payments inconsistent with prior cost data provided.
- Restricted/delayed access to records.
- Vendor/contractor resists inspection.
- Required certifications not signed.
|
- Contracts spanning months or years generally require that the buyer make payments during the project, before its completion. These progress payments usually match the percentage of the project that has, at the time of payment, been completed. Vendors and contractors have been known to accelerate the payments made to them by misrepresenting the extent of project completion. To ascertain the extent of completion, the purchaser should, as applicable, make inspection visits to the construction or have software projects completed in modules that can be individually tested. In construction, subcontractors produce lien waivers for payments they received, and these should be available for review by the purchaser. All contracts should provide provisions allowing inspections, audits and proofs of completion. It is often of value to compare the progress of the current project against similar projects completed in the past. If it seems that billings exceed progress likely to have been made, it is a cause for further inquiries.
|
| Systematic Mischarging |
- Labor mischarging – extension.
- Material mischarging – extension.
- Restricted/delayed access to records.
|
- Automated billing programs can be altered to make sure invoices are for amounts greater than agreed. The invoices, with refooting, look fine. The way to control this type of fraud is to check, at least on a sample basis, the calculations shown on invoices.
|
| The Vendor, Contractor, or Supplier is Getting More than Provided for in the Contract |
- Frequent change orders.
- Unauthorized changes.
- Rates or prices in excess of contract or market norms.
- Missing or altered inspection reports.
- Undeservedly favorable evaluations of contractors.
- Missing/altered serial numbers/model numbers/labels.
- Requests for payments inconsistent with prior cost data.
- Frequent invoice/voucher errors.
- Poor cost documentation.
- Claims for unallowable costs.
- Little physical progress on contracts when significant costs have been billed.
- Material mischarging – price, quantity, or quality.
- Labor mischarging – time or rate.
- Systematic mischarging – extension.
- Double counting costs as both direct and indirect.
- Professional fees for “services rendered” with few details.
- Altered/missing/late test reports.
- Unexpected/premature part failures.
- Restricted access to storage/production facilities.
- Restricted/delayed access to records.
- Inadequate segregation of duties between contracting, purchasing, receiving, storing, etc.
- Socialization between employee and contractor/vendor.
- Vendor/contractor and employee address/phone match.
- Multiple purchases just under bid limits.
- Failure to take advantage of existing contracts/off-contract purchases.
|
- A physical inspection should be made of all large or expensive goods that are provided to look for red flags.
- All contracts should allow for audit of the provider, and for unannounced audits to be conducted.
|
| Vendor has Committed Fraud in the Past or Performed Less than Satisfactory |
- Vendor is not authorized to do business in your jurisdiction, or is behind on taxes.
|
- Check new vendors for Certificates of Good Standing or Status. These documents are usually located at a state’s secretary of state’s office, or department/division of taxation, assessments, corporations.
- Establish process to check all bidders/vendors/contractors for state/local debarment or exclusion from federal awards, suspended licenses, complaints from prior customers, etc.
- There are databases available to check for vendor debarment: “SAM.gov“, “Excluded from Federally funded healthcare programs“, or the vendor debarment list in your state.
|
| Vendor is not Qualified to Perform the Work or Provide Product or Service |
- Vendor suddenly bid on work far beyond previous scope or cost.
|
- Perform background/reference/credit checks on vendors to determine financial capacity to perform work.
- Perform oversight of prime/sub/vendor contract requirements to ensure agency gets what it pays for.
|
Internal controls are the foundation every government needs to ensure fraud can be detected and prevented, internally and externally. Previously in this series, we wrote that the war on government fraud starts with the five components of internal control known as the Committee of Sponsoring Organizations (COSO) framework. This article continues the discussion of highlighting critical areas in which every government should apply this framework. Read the first edition of the government contract fraud series here.