By CPA Sam Mwaura
DETECTING AND PREVENTING FRAUD IN PROJECTS AND PROCUREMENT P rocurement means the acquisition by purchase, rental, lease, hire purchase, license, tenancy, franchise, or by any other contractual means of any type of works, assets, services or goods including livestock or any combination and includes advisory, planning and processing in the supply chain system.
On the other hand, “fraudulent practice” includes a misrepresentation of fact in order to influence a procurement or disposal process or the exercise of a contract to the detriment of the procuring organization or the tenderer or the supplier, and includes collusive practices amongst suppliers before or after tender submission designed to fix prices at artificial non-competitive levels and to deny the procuring organization the benefits of a free and fair procurement process.
I now focus on some of the schemes by which procurement or contracting frauds have been perpetrated, preventive actions, and methods to detect these frauds. In giving you insight into procurement frauds I will pay attention to the following:
1. Pre-Award Fraud
This occurs when the procuring organization tailors the specifications to suit a particular preferred supplier.
Preventive Actions: Reviews should be made by managers in order to determine the validity of procurement requirements and specifications and the adequacy of the consideration given to alternate products, features, processes, etc. The contracting officer should carefully review bids, and maintain close coordination with the requesting office to ensure that all bids are properly considered.
Detection: If internal controls were unable to prevent pre-award fraud in the procuring entity, then to detect the same, compare specifications established for a particular procurement with the supplier’s description of its good or service. Identical or almost identical matches would indicate the possibility of rigged specifications.
Other indicators of rigged specifications include:
i.) Receipt of only one bid – this depicts that either the requesting for quotations/ bids was done to only one supplier or was designed to suit one supplier or other received bids were rigged out.
ii.) One bid significantly lower than others – this depicts a possibility of collusion between suppliers where one of them gives the lower bid but afterwards he shares the supply with the other suppliers.
iii.) Sole source procurement – this is single sourcing which most of the times is veiled under “urgent need arose”. This denies the procuring organization the chance of getting better deals.
iv.)Protests filed by bidders – this may indicate that the suppliers are aware of some fraudulent practices which need to NOVEMBER – DECEMBER 2017 17 Business Practice and Development be addressed. This should not be ignored at all as they may be pointing to major procurement fraud.
2. Collusion between Suppliers
Supplier collusion occurs when a group of suppliers who have the capacity to supply the procuring entity with similar goods and services exchange bid information. This allows one of them to submit a slightly lower bid than the others. The suppliers take turns in submitting the lower bid effectively defeating the competitive bidding process.
To prevent supplier collusion, the procuring entity should review the pattern of similar contracts awarded to a group of suppliers. Contracting Officers should also be worried if known suppliers are not responding to calls for bids and to supplier protests. To detect supplier collusion, review the Request for Bids (RFBs) files; bids received and bid analysis results.
3. Unbalanced Bidding
Through collusion, organization bidding for a contract knows that one of several items on an invitation for bid will not be performed under the contract. The bidder includes an unreasonably low unit price for the items that will not be performed on the bid sheet. This results in the bid being the low bidder. After the contract is awarded, the quantity of work that is actually performed on the other items is in excess of what was on the bid. The supplier stands to make more money since his bid price on these items was inflated but not inflated enough to cause his overall bid price to be too high.
To prevent this type of fraud, the work statements and specifications should be reviewed by someone who is thoroughly familiar with the goods or services being procured. In addition, the cost and price analysis work obtained by the contracting officer should be documented, and should include comparisons of individual items. Explanations should be sought for all items with a wide variance.
Detection: Match line items costs per bid to the actual costs per contract performance to identify any variances. In addition, compare the costs of line items per each bidder to identify unrealistic or unreasonably low bids. Look especially for those situations where a supplier has received repeated awards for similar types of goods or services.
4. False Claims and Statements
This involves false information furnished by the supplier, leading to contract award or related to contract performance.
Examples of supplier fraud include:
4.1. Cost proposal data that is incorrect
False information concerning quality of product(s) or ability to perform adequately and on time. Inadequately supported payments to suppliers, including:
• Duplicate or altered invoices used as support for payment.
• Costs charged to the project that should be charged to another project or to overhead. \
• “Direct cost” from a contract charged to overhead, thereby “distributing the loss” to other contracts.
• Double billing, i.e., charging employees full-time to two or more jobs. To prevent supplier fraud the procuring officer and technical personnel of the requesting department should review supplier cost proposals to determine the reasonableness of proposed costs, the quantities of materials and labor proposed, and the supplier’s ability to perform adequately and timely.
The project officer should implement a comprehensive monitoring program to help disclose improprieties. This could include, but is not limited to:
i.) Reviewing the progress of work performed
ii.) Testing the quality of work performed
iii.) Reviewing all billings to ensure that they are for work which has been satisfactorily performed
iv.)Being alert to sudden and unexpected cost growth or over-runs.
Detection: Reviews should be made of supplier proposals and actual contract costs, as well as program office reports and inspection reports. Independent engineering or other technical personnel should be used to provide advice on such matters as supplier qualifications and project status. When performing such reviews, the following indicators should 18 NOVEMBER – DECEMBER 2017 Business Practice and Development be considered:
False claims in regard to contract spillages include:
i.) Modifications to contracts because of supplier inability to perform
ii.) Significant increase in price without corresponding increase in work
iii.) Substantial subcontracting without the knowledge and approval of the contracting officer
iv.)Substantial funds expended on the work by supplier prior to contract award
v.) Sole source procurement with substantial subcontracting
vi.)Prime supplier requiring sub-contractor to utilize prime’s labor and/or equipment
vii.) Inadequately supported charges for consultant fees, equipment rental, and travel
viii.) Use of employees or consultants with skill levels below that proposed
ix.)Inflated unit prices for items from supplier stock.
5. Failure to Meet Specifications
This involves a supplier, in order to increase profits, providing goods and/or services that do not comply with contract specifications in quantity and/ or quality. Such non-compliance is not always evident because materials omitted from the end products are not readily identifiable. For example, a supplier uses one coat of paint rather than two; pours four inches of aggregate on road surfaces instead of six inches: or makes short deliveries of landfill. Qualitative noncompliance with contract specifications includes using inferior or substitute materials such as watered loads of readymix concrete.
Prevention of non-compliance with contract specifications depends on a comprehensive inspection program. Inspection by the project officer of work performed and materials used should be made at various intervals during the performance of the contract. Periodically, an evaluation should be made of the inspection program to ensure that inspections are following established procedures.
Detection: The auditor obtains and reviews inspection reports to determine whether the work performed and materials used in a project were inspected and considered acceptable. A lack of such inspections indicates potential problems in meeting contract specification. Request assistance from independent technical personnel (i.e., engineers, technicians, etc.) to perform after-the-fact testing of quality and quantity of materials used and work performed, to determine compliance with contract specifications.
6. Co-Mingling of Contracts
This involves a company being awarded separate contracts for various efforts, i.e., partition contracts, ceiling contracts, electrical contracts, painting contracts, flooring contracts, etc. Each contract has provisions to allow for items, which are in the other contracts. Through collusion, the supplier can bill for the same work on each of the contracts. The requesting agency writes similar work orders under each contract, thus facilitating duplicate billings.
Preventive Actions: The approving official in the requesting organization should review contracts prior to award to ensure that statements of work to be performed are not duplicated in other procurements. If more than one location is involved, the amount and type of work to be performed at each location must be clearly specified.
The contracting officer should identify suppliers holding more than one contract having the same or nearly similar work statements. Billings on contracts so identified, should be especially monitored by the contracting officer and the project officer to disclose duplicate payment possibilities. Inspection reports should be required to accompany billings to ensure that work is acceptable and conforms to specifications.
Detection: Identify contracts awarded to the same company and determine whether they run concurrently and if each provides for the same efforts. This may be done by sorting suppliers by name, address, telephone contacts etc. Review documentation supporting suppliers’ billings for similar works performed under more than one contract by the same supplier. When auditing suppliers’ records, we check for multi-contract awards.
7. False Invoices
This is where contracts provide for the continued supply of merchandise over a period of time (framework contracts). Invoices may be inflated or may be submitted for goods and services not delivered. This situation is particularly applicable to open-ended purchase agreements.
Preventive Actions: Purchases should be reviewed to ensure that unit prices are not improperly increased by the supplier. Invoices should be matched against official receiving documents (delivery notes and work completion certificates). Payments should not be made without such documentation.
Inventories should be periodically counted by the requesting organization to verify items on-hand against actual purchases.
Detection: The auditor account for purchases through comparison of physical inventory with booked purchases. Check or determine reasonableness of quantities purchased in relation to the particular office or user. Check reasonableness of booked prices to disclose inflated invoices Verify receipt of items by checking receiving documents e.g. delivery notes, stock control cards, goods receipt notes etc.
8. Duplicate Contract Payments
This involves the supplier submitting copies of the same invoice for payment, or submitting more than one original invoice for the same goods or services. This may be accomplished through collusion between the supplier and the procuring organization or by a certifying officer processing a copy of a previously submitted invoice.
Preventive Actions: Payments should be made only against original invoices. Accounting personnel should be trained to detect duplicate or fraudulent documents. In cases where a document is suspect, the payment file should be searched for an identical document previously paid.
The procuring organization should maintain a record of contract amounts approved for payment and periodically reconcile this data to the official financial record of payments made under the applicable contracts. As a minimum, this reconciliation should be made at the completion of each month.
Detection: On fixed-price contracts, verify payments recorded in the accounting records against the project officer’s records of amounts approved for payment, and match percent of physical completion against percent of value completion.
9. Variation/Change Orders Abuse
This involves a supplier bidding on a contract, in collusion with personnel from the procuring organization and submits a low bid to ensure receiving the contract award. However, the supplier has been assured that change/variation orders will be issued during the life of the contract to more than compensate for the low bid. After the contract is awarded, the supplier and the procuring official share the excessive reimbursements resulting from the numerous and/or high price variation/change orders issued against the contract.
Preventive Actions: Responsible officials of the procuring organization should be alert to contracts where numerous and/or high price value variations/change orders are proposed or issued. Such actions are indicators of possible improprieties. The officials should carefully review all proposed variation/change orders involving price increases to ensure that the additional monies are for necessary additions to the work scope of the contract, and not merely to increase the supplier’s profit.
The procurement evaluation team or its equivalent should determine the reasonableness of excessively low bids through analysis of independent market estimates and cost and pricing data.
Detection: Analyze contract variation/ change orders for the addition of new items and for significant increases in scope, quantities, and price of existing contract items. Look for indicators of variation/change order abuse such as: (a) an employee directly involved in both determining requirements and procuring the item, or taking a job with the supplier; (b) high turnover rate among procurement personnel; (c) request for change order signed at a higher level than that of the original procurement request and (d) request(s) for change order coming from a department/organization different from the one requesting the procurement.
CPA Sam Mwaura is an Audit Manager with WIA East Africa. The views expressed herein are personal and do not necessarily represent the views and opinion of WIA East Africa. [email protected]