• OFFICE OF THE INSPECTOR GENERAL

    OFFICE OF INVESTIGATIONS

    FRAUD INDICATORS

    HOTLINE PHONE

    800-230-6539

    202-712-1023

    USAID Office of Inspector General/Investigations – Fraud Indicators

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    TABLE OF CONTENTS

    INTRODUCTION TO FRAUD INDICATORS…………………………………………..Page 2

    FRAUD IN GOVERNMENT CONTRACTS…..……………………………….………..Page 3

    DETECTING FRAUD IN PROJECTS AND PROCUREMENTS ………..………….Page 18

    FRAUD INDICATORS AND FRAUD SCHEMES………………..……………………Page 30

    WARNING SIGNS OF FRAUD…………………………...…………………..…….….Page 39

    USAID Office of Inspector General/Investigations – Fraud Indicators

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    INTRODUCTION TO FRAUD INDICATORS

    Fraud indicators are best described as clues or hints that a closer look should be made at

    an area or activity. Generally there are two approaches that the person intent on

    committing fraud will consider, choosing one over the other depending on skill, experience,

    inclination and the level of internal controls. Activities may be either completely covert or

    hidden from view, or they may be conducted in the open, completely obvious to all, but

    disguised to appear as if they are part of the normal operations. When the former is

    detected, it may be much easier to determine what is actually going on, while the latter, if

    well done, may be much more difficult to decipher.

    One more element is worth noting in regard to potential indicators of fraudulent activity. The

    manager, auditor, or investigator must know the industry, the system, or the field and must

    establish what are accepted practices. It is hard to spot an aberration when you don't know

    the norm. It is difficult, if not almost impossible, to detect a well designed fraud if you do not

    know what you are looking for. Bear in mind that a fraud indicator may or may not be

    significant, depending on what it is, what other indicators are present and the context of the

    organization's transactions.

    Although poor management decisions or negligence may give rise to possible indications of

    fraud, the difference between fraud and negligence is a fine line called intent. All that fraud

    indicators can do is to point the way for further detailed inquiry.

    Managers, auditors, and investigators can use the attached lists to assist in the monitoring

    of activities or the review of records.

    USAID Office of Inspector General/Investigations – Fraud Indicators

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    FRAUD IN GOVERNMENT CONTRACTS

    The contract award process has been designed to efficiently ensure the delivery of goods

    and services. This section will discuss factors which may indicate the presence of or

    enhanced potential for fraud at various stages in the contract award process. The indicators

    included are not intended, each taken alone, to establish the existence of fraud. Rather, the

    presence of any of these indicators should cause employees to be alert to the possibility of

    impropriety and to take appropriate actions to ensure the integrity of the process.

    The motives and methods for fraud in the contract award process are varied. Fraud may be

    perpetrated to obtain a contract in order to create the opportunity to later engage in such

    activities as theft or embezzlement, product substitution, cost mischarging, fast pay or

    progress payment fraud. In some instances, fraud may be perpetrated to obtain a contract

    at a higher price or with better terms than would have occurred in an award untainted by

    fraud. A company may attempt to obtain a contract through fraud because the business is

    needed to continue operations when private sector activity is low.

    Fraud in the Identification of the Need for Goods or Services

    The potential for fraud is created when the need assessment is not adequately or

    accurately developed. A Government agency which, with or without collusion, continually

    changes its mind about what it wants, will make it possible for a contractor to substantially

    increase the contract price. With respect to fraud in defining requirements and stock levels,

    fraud indicators include:

    1. Requiring excessively high stock levels and inventories in order to justify continuing

    purchasing activity from certain contractors.

    2. Declaring items which are serviceable as excess or selling them as surplus while

    continuing to purchase similar items.

    3. Purchasing items, services, or research projects in response to aggressive marketing

    efforts (and possible favors, bribes or gratuities) by contractors rather than in response to

    valid requirements.

    4. Improperly defining needs in ways that can be met only by specific contractors.

    5. Estimates are not prepared or are prepared after solicitations are requested.

    USAID Office of Inspector General/Investigations – Fraud Indicators

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    6. Failing to develop "second-sources" for items, spare parts, and services being

    continually purchased from a single source.

    Fraud in the Development of Statements of Work and Specifications

    Bid specifications and statements of work are intended to provide both potential bidders

    and the selecting officials with a firm basis for making and accepting bids. A well written

    contract will have specifications, standards and statements of work which make it clear

    what the Government is entitled to. Sloppy or carelessly written specifications make it easy

    for a contractor to overcharge or for it to deliver less than expected.

    Fraud indicators include:

    l. Defining statements of work and specifications to fit the products or capabilities of a single

    contractor. Specifications are made so restrictive that they effectively exclude competing

    firms.

    2. Advance or selective release by Government employees of information concerning

    requirements and pending purchases only to preferred contractors.

    3. Using statements of work, specifications, or sole source justifications developed by or in

    consultation with a preferred contractor (institutional conflict of interest).

    4. Allowing firms participating in project design to obtain those same contracts or to be

    subcontractors to the winning contractors.

    5. Release of information by firms participating in project design to contractors competing

    for the prime contract.

    6. Designing "pre-qualification" standards or specifications to exclude otherwise qualified

    contractors or their products.

    7. Splitting up requirements so contractors each get a "fair share" and can rotate bids.

    8. Splitting up requirements to get under small purchase requirements or to avoid

    prescribed levels of review or approval, e.g., to keep each within the contracting authority of

    a particular person or activity.

    USAID Office of Inspector General/Investigations – Fraud Indicators

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    9. Bid specifications or the statement of work are not consistent with the items included in

    the general requirements.

    10. Specifications that are so vague that reasonable comparisons of estimates would be

    difficult.

    11. Specifications that are not consistent with past similar type procurements.

    12. Specifications that do not include (specific) work site locations.

    Fraud in Pre-Solicitation Phase

    Fraud indicators include:

    1. Unnecessary sole source justifications.

    2. Falsified statements to justify sole source of negotiated procurement.

    3. Justifications for sole source or negotiated procurement signed by officials without

    authority or the deliberate bypassing required levels of review.

    4. Placing any restrictions in the solicitation documents, which would tend to restrict

    competition.

    5. Providing any advance information to contractors or their representatives on a

    preferential basis by technical or contracting personnel.

    Fraud in Solicitation Phase

    Fraud indicators include:

    1. Restricting procurements to exclude or hamper any qualified contractor.

    2. Limiting the time for submission of bids so that only those with advance information have

    adequate time to prepare bids or proposals.

    3. Revealing any information about procurement to one contractor, which is not revealed to

    all (from either technical or contracting personnel).

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    4. Conducting bidders' conference in a way, which invites bid rigging or price fixing or

    permits improper communications between contractors.

    5. Failure to assure that a sufficient number of potential competitors is aware of the

    solicitation.

    6. The bid solicitation is vague as to the time, place, or other requirements for submitting

    acceptable bids.

    7. Little or no control over the number and destination of bid packages sent to interested

    bidders.

    8. Improper communication with contractors at trade or professional meetings or improper

    social contact with contractor representatives.

    9. Government personnel or their families acquiring stock or a financial interest in a

    contractor or subcontractor.

    10. Government personnel discussing possible employment with a contractor or

    subcontractor for themselves or a family member.

    11. Special assistance to any contractor in preparing his bid or proposal.

    12. "Referring" a contractor to a specific subcontractor, expert, or source of supply.

    (Express or imply that if you use the referred business you will be more likely to get the

    contract.)

    13. Failure to amend solicitation to include necessary changes or clarifications. (Telling one

    contractor of changes that can be made after award.)

    Fraud indicators include:

    1. Improper acceptance of a late bid.

    2. Falsification of documents or receipts to get a late bid accepted.

    3. Change in a bid after other bidders' prices are known. This is sometimes done by

    mistakes deliberately "Planted" in a bid

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    4. Withdrawal of the low bidder who may become a subcontractor to the higher bidder who

    gets the contract.

    5. Collusion or bid rigging between bidders.

    6. Revealing one bidder's price to another.

    7. False certifications by contractor.

    a. Small business certification.

    b. Minority business certification.

    c. Information provided to other agencies to support special status.

    d. Certification of independent price determination.

    e. Manufacturer's certificate of warranty

    8. Falsification of information concerning contractor qualifications, financial capability,

    facilities, ownership of equipment and supplies, qualifications of personnel and successful

    performance of previous jobs, etc.

    Fraud in the Evaluation of Bids and Proposals

    Fraud indicators include:

    1. Deliberately discarding or "losing" the bid or proposal of an "outsider" who wants to

    participate. (May be part of a conspiracy between a Government official and a select

    contractor or group of contractors.)

    2. Improperly disqualifying the bid or proposal of a contractor.

    3. Accepting non-responsive bids from preferred contractors.

    4. Seemingly unnecessary contacts with contractor personnel by persons other than the

    contracting officer during the solicitation, evaluation, and negotiation processes.

    5. Any unauthorized release of information to a contractor or other person.

    6. Any exercise of favoritism toward a particular contractor during the evaluation process.

    7. Using biased evaluation criteria or using biased individuals on the evaluation panel.

    USAID Office of Inspector General/Investigations – Fraud Indicators

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    8. Documents from competing firms contain similar or identical:

    a. Company names

    b. Handwriting/signatures

    c. Company stationery

    d. Invoice numbers (in sequence)

    e. Telephone numbers.

    9. An odd company name for a vendor suggests that the firm may not provide the type of

    service or product being solicited.

    Fraud in the Award of the Contract

    Fraud indicators include:

    1. Award of a contract to a contractor who is not the lowest responsible, responsive bidder.

    2. Disqualification of any qualified bidder

    3. Allowing a low bidder to withdraw without justification.

    4. Failure to forfeit bid bonds when a contractor withdraws improperly.

    5. Material changes in the contract shortly after award.

    6. Advance information concerning who is going to win a major competition can give

    advantages to persons trading In the stock of both the winning and losing companies.

    7. Awards made to contractors with an apparent history of poor performance.

    8. Awards made to the lowest of a very few bidders

    without re-advertising considerations or without adequate publicity.

    9. Awards made that include items other than those contained in bid specifications.

    10. Awards made without adequate documentation of all pre-award and post-award actions

    including all understandings or oral agreements.

    USAID Office of Inspector General/Investigations – Fraud Indicators

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    Fraud in the Negotiation of a Contract

    Fraud indicators include:

    1. "Back-dated" or after-the-fact justifications may appear in the contract file or may be

    signed by persons without the authority to approve noncompetitive procurement.

    2. Information given to one contractor which is not given to others which give it a

    competitive advantage.

    3. Improper release of information (e.g., prices in proposals, technical proposals or

    characteristics of proposals, identity or rank of competing proposals, proprietary data or

    trade secrets, and Government price estimates) to unauthorized persons.

    4. Weakening the Government's negotiating position through disclosures to the contractor

    selected for award

    5. Contractor misrepresentation as to costs during negotiations.

    6. Failure of Government personnel to obtain and rely upon a Certificate of Current Cost or

    Pricing Data (if required).

    Fraud in the Post-Award Phase

    1. The receipt of goods and services is certified even though physical inspections have not

    been performed.

    2. Contractors fail to meet the contract terms but nothing is done to force compliance.

    Follow up always needed.

    3. Contractors are not required to return excess materials.

    4. Materials are provided to the contractor even though the contractor is being paid to

    provide them. (Office space, furniture, word processors)

    5. Unsuccessful bidders usually become subcontractors after the contract is awarded.

    6. Contractors are paid twice for the same items/services and there is no attempt to recoup

    the overpayments.

    USAID Office of Inspector General/Investigations – Fraud Indicators

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    7. The labor of Agency employees is used to perform parts of contracted work.

    8. Contract files are either incomplete or missing required documents. (Follow up)

    9. Contract documents are altered, backdated, or modified to cover deficiencies. Demand

    originals.

    10. Accounting reconciliation are not performed regularly relative to:

    a. Contract payments

    b. Daily transactions

    c. Inventory

    11. Government supplies and equipment are being shipped to non-Government

    addresses. (Diversion or substitution)

    12. Fictitious or inordinate time frames and dates are entered on contractor records (e.g.

    gasoline, vehicle, maintenance, inspection, or receiving reports)

    13. Contract deviations by means of changes requested and granted immediately after

    contract award.

    14. Used or inferior products are substituted for the product actually ordered.

    Defective Pricing

    Contractors who inflate consultant salary histories and the pyramiding of commodity costs

    by inflating supplier prices through associated "middle men."

    Fraud Indicators include:

    1. Persistent defective pricing.

    2. Repeated defective pricing involving similar patterns or conditions.

    3. Failure to correct known system deficiencies.

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    4. Failure to update cost or pricing data with knowledge that past activity showed that prices

    have decreased

    5. Specific knowledge, that is not disclosed, regarding significant cost issues that will

    reduce proposal costs. This may be reflected in revisions in the price of a major

    subcontract, settlement of union negotiations that result in lower increases on labor rates.

    etc.

    6. Denial by responsible contractor employees of the existence of historical records that are

    subsequently found.

    7. Utilization of unqualified personnel to develop cost or pricing data used in estimating

    process.

    8. Indications of falsification or alteration of supporting data.

    9. Distortion of the overhead accounts or base information by the transfer of charges or

    accounts that have a material impact on Government contracts.

    10. Failure to make complete disclosure of data known to responsible contractor personnel.

    11. Protracted delay in release of data to the Government to preclude possible price

    reductions.

    12. The employment of people known to have previously perpetrated fraud against the

    Government.

    13. Unusual or unnecessary use of NVOCC shippers or obscure suppliers.

    14. Inflated or unusual ocean freight or insurance charges.

    15. Excessive or prohibited commodity transport and/or storage charges.

    16. Identical or nearly identical high salary history data on employees or consultants.

    USAID Office of Inspector General/Investigations – Fraud Indicators

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    Collusive Bidding and Price Fixing

    Collusive bidding, price fixing or bid rigging, are commonly used interchangeable terms

    which describe many forms of in illegal anti-competitive activity. The common thread

    throughout all of these activities is that they involve any agreements or informal

    arrangements among independent competitors, which limit competition. Agreements

    among competitors which violate the law include but are not limited to:

    1) Agreements to adhere to published price lists.

    2) Agreements to raise prices by a specified increment.

    3) Agreements to establish, adhere to, or eliminate discounts.

    4) Agreements not to advertise prices.

    5) Agreements to maintain specified price differentials based on quantity, type or size of

    product.

    The following list of indicators is intended to facilitate recognition of those situations which

    may involve collusive bidding or price fixing. In and of themselves these indicators will not

    prove that illegal anti-competitive activity is occurring. They are, however, sufficient to

    warrant referral to appropriate authorities for investigation. Use of indicators such as these

    to identify possible anti-competitive activity is important because schemes to restrict

    competition are by their very nature secret and their exact nature is not readily visible.

    Practices or events that may evidence collusive bidding or price fixing are:

    1. Bidders who are qualified and capable of performing but who fail to bid, with no apparent

    reason. A situation where fewer competitors than normal submit-bids typifies this situation.

    (This could indicate a deliberate scheme to withhold bids.)

    2. Certain contractors always bid against each other or conversely certain contractors do

    not bid against one another.

    3. The successful bidder repeatedly subcontracts work to companies that submitted higher

    bids or to companies that picked up bid packages and could have bid as prime contractors

    but did not.

    USAID Office of Inspector General/Investigations – Fraud Indicators

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    4. There is an apparent pattern of low bids regularly recurring, such as corporation "x"

    always being the low bidder in a certain geographical area or in a fixed rotation with other

    bidders.

    5. Failure of original bidders to re-bid, or an identical ranking of the same bidders upon rebidding,

    when original bids were rejected as being too far over the Government estimate.

    6. A certain company appears to be bidding substantially higher on some bids than on

    other bids with no logical cost differences to account for the increase, i.e., a local company

    is bidding higher prices for an item to be delivered locally than for delivery to points farther

    away.

    7. Bidders that ship their product a short distance bid more than those who must incur

    greater expense by shipping their product long distances.

    8. Identical bid amounts on a contract line item by two or more contractors. Some instances

    of identical line item bids are explainable, as suppliers often quote the same prices to

    several bidders. But a large number of identical bids on any service-related item should be

    viewed critically.

    9. Bidders frequently change prices at about the same time and to the same extent

    10. Joint venture bids where either contractor could have bid individually as a prime. (Both

    had technical capability and production capacity.)

    11. Any incidents suggesting direct collusion among competitors, such as the appearance

    of identical calculation or spelling errors in two or more competitive bids or the submission

    by one firm of bids for other firms.

    12. Competitors regularly socialize or appear to hold meetings, or otherwise get together in

    the vicinity of procurement offices shortly before bid filing deadlines.

    13. Assertions by employees, former employees, or competitors that an agreement to fix

    bids and prices or otherwise restrain trade exists.

    14. Bid prices appear to drop whenever a new or infrequent bidder submits a bid.

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    15. Competitors exchange any form of price information among themselves. This may result

    from the existence of an "industry price list" or "price agreement" to which contractors refer

    in formulating their bids or it may take other subtler forms such as discussions of the "right

    price."

    16. Any reference by bidders to "association price schedules," "industry price schedules,:

    "industry suggested prices," "industry-wide prices" or "market-wide prices."

    17. A bidder's justification for a bid price or terms offered because they follow the industry

    or industry leader's pricing or terms. This may include a reference to following a named

    competitor's pricing or terms.

    18. Any statements by a representative of a contractor that his company "does not sell in a

    particular area" or that "only a particular firm sells in that area."

    19. Statements by a bidder that it is not their turn to receive a job or conversely that it is

    another bidder's turn.

    Cost Mischarging

    Cost mischarging occurs whenever the contractor charges the Government for costs which

    are not allowable, not reasonable, or which cannot be directly or indirectly allocated to the

    contract. The fraud most frequently encountered is called an "'accounting mischarge." An

    accounting mischarge involves knowingly charging unallowable costs to the Government,

    concealing or misrepresenting them as allowable costs, or hiding them in accounts (such as

    office supplies) which are not audited closely. Another common variation involves charging

    types of costs, which have their limits such as bid and proposal costs, or independent

    research and development costs) to other cost categories. Labor costs are more

    susceptible to mischarging than material costs because the employees’ labor can readily

    be charged to any contract. When a labor cost is mischarged, so are the associated

    overhead expenses. Overhead costs are allocated to labor costs based upon an overhead

    rate or percentage. Overhead costs usually exceed 100 percent of the labor cost.

    Therefore, any mischarging on labor rates also impacts upon overhead charges, which

    ultimately results in a greater than double loss to the Government

    Fraud indicators include:

    1. Excessive or unusual labor charges by home office personnel.

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    2. Abrupt changes in labor charge levels for no apparent reason.

    3. Labor time and charges inconsistent with project progress.

    4. Inability of contractor to immediately supply time cards upon demand.

    5. Time and/or charge cards that show consistent erasures or alterations.

    6. Time cards made out by the supervisor and not by the individual employee.

    7. Low level work charged to high level wage earners.

    Product Substitution

    The term product substitution generally refers to attempts by contractors to deliver to the

    Government goods or services which do not conform to contract requirements, without

    informing the Government of the deficiency, while seeking reimbursement based upon

    alleged delivery of conforming products or services.

    Fraud Indicators include:

    1. The non-delivery of supplies paid for pursuant to fast pay procedures.

    2. The delivery of look-alike goods made from non-specification materials.

    3. Materials that have not been tested as required by the contract specifications.

    4. Providing foreign made products where domestic were

    required.

    5. Boxes with part of the label consistently obliterated. ("Made in Hong Kong" marked out.)

    6. Commodities which are consistently defaced in the same area (metal wood files or tools

    with grind marks or wooden hammer handles with sanding marks).

    7. Machines with l.D. or specification plates removed.

    8. Any commodity which appears used when new was ordered.

    9. Multiple commodities where some appear different from others (2 dozen hacksaw blades

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    with the first and last blade in package made in the U.S. and the remainder made in India).

    11. Any commodity purchased domestically, but originally shipped from a foreign port.

    12. Missing source origin documentation.

    Progress Payment Fraud

    Progress payments are payments made as work progresses under a contract based upon

    the costs incurred, the percentage or work accomplished, or the attainment of a particular

    state of completion. Fraud in progress payments occurs when a contractor submits a

    progress payment request based on falsified direct labor charges, on material costs for

    items not actually purchased, or on falsified-certification of a stage of completion attained or

    of work accomplished.

    Fraud Indicators include:

    1. Firms with cash flow problems are the most likely to request funds in advance of being

    entitled to them. Progress payments which do not appear to coincide with the contractor's

    plan and capability to perform the contract are suspicious. This could indicate the

    contractor is claiming payment for work not yet done.

    2. Another type of contractor fraud in this area is to submit a progress payment claim for

    materials which have not been purchased. The contractor may be issuing a check to the

    supplier, then holding it until the Government progress payment arrives. One way to

    confirm this irregularity is to check the cancellation dates on the contractor's checks. If the

    bank received the check about the same time or later than the contractor received the

    progress payment, the check was probably held.

    USAID Office of Inspector General/Investigations – Fraud Indicators

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    Criminal and Regulatory Violations by Employees

    Fraud indicators include:

    1. Employees, including contractors and foreign nationals, who continually circumvent

    established procedures.

    2. Employees who initiate actions without proper prior approval.

    3. Sloppy handling of cash or commodities should always be an area of concern.

    4. The awarding of a contract in any fashion outside of the letter and spirit of established

    procedures.

    5. Improper access to computer terminals or data.

    6. Unusual or extravagant behavior or spending.

    7. Unusual patterns of taking leave.

    8. Unusual or extravagant amount of mail sent to particular employees.

    9. Cash not turned in properly.

    10. Actions that tend to obstruct an audit trail.

    11. Unusual or unauthorized interaction between an employee and bidder or contractor.

    12. Frequent or unusual and/or unexplained travel.

    13. Unusual and/or unexplained possession of large amounts.

    14. Abrupt change in living style.

    15. In short, actions that are contrary to regulation, good business practice, or common

    sense can be indicators that something may be wrong.

    USAID Office of Inspector General/Investigations – Fraud Indicators

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    DETECTING FRAUD IN PROJECTS AND PROCUREMENTS

    The following section describes some schemes by which procurement or contracting frauds

    have been perpetrated, preventive actions, and methods to detect these schemes to

    defraud.

    Pre-Award Fraud

    1. Rigged Specifications

    Scheme: The requesting organization, in developing specifications, tailors them to meet

    the qualifications of one particular company, supplier, or product. This applies mostly to

    procurement of special equipment and fixtures.

    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.

    Reviews of bid protests (formal and informal) by the contracting officer would also provide

    possible indications of problems.

    Detection: Compare specifications established for a particular procurement with the

    contractor's description of its product or service. Nearly identical matches would indicate

    the possibility of rigged specifications.

    Other indicators of rigged specifications include:

    a. Receipt of only one bid

    b. One bid significantly lower than others

    c. Sole source procurement

    d. Protests filed by bidders

    2. Collusive Bidding

    Scheme: A group of companies with the capability of providing the same goods or services

    conspire to exchange bid information on contract solicitations, and to take turns at

    submitting the low bid. Such action, which may or may not be carried out in collusion with

    procuring officials, effectively defeats competitive bidding.

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    Preventive Actions: Heads of procurement offices should periodically review procurement

    records for patterns of similar contracts awarded alternately to a small group of contractors.

    Bid tally sheets would be a good source for these analyses.

    Contracting officers should be alert to situations where known companies in the area rarely

    bid on contracts for which they appear to be qualified. Inquiries (telephonic or otherwise)

    might be appropriate to ascertain why these companies are not bidding.

    Contracting officers should pay particular attention to bid protests (formal and informal) as

    indicators of existing problems.

    Detection: Examine contract solicitation files for:

    a. Small number of companies doing similar work on what appears to be a rotating basis

    b. Awards to companies that reflect a geographic pattern indicating collusive division of

    territory

    c. Fairly wide disparity between the winning and losing bids

    d. Unsuccessful bidders who become subcontractors after contract award.

    One or more of these situations indicate the possibility of collusive bidding.

    3. Unbalanced Bidding

    Scheme: Through collusion. a company bidding on a contract (bidder) knows that one of

    several items on an invitation for bid will not be performed (called for) under the contract.

    Therefore, the bidder includes an unreasonably low unit price for this item on the bid sheet.

    This results in his 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

    contractor 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.)

    Preventive Actions: Work statements and specifications should be reviewed by someone

    who is thoroughly familiar with the goods or services being procured.

    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.

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    In administering contracts, both the contracting officer and the responsible project officer

    should ensure that modifications and change orders are for work that was not known or

    contemplated at the time the contract was awarded.

    Detection: Match line items on invitations for bid with actual contract performance to

    disclose any excessive variances.

    Compare amounts bid on individual line items by each bidder to disclose any unreasonably

    low bids, particularly those items which were not subsequently performed under the

    contract. Look especially for those situations where a contractor has received repeated

    awards for similar types of goods or services.

    Contractor Fraud

    1. False Claims and Statements

    Scheme: This would cover any false information furnished by the contractor, either leading

    to contract award or related to contract performance. Examples include:

    a. Cost proposal data that is incorrect or less than current or complete.

    b. False representations concerning quality of product being offered or ability to perform

    adequately and timely.

    c. Billings (including progress payments) not adequately supported by project status or

    reliable cost data, including:

    1) Duplicate or altered invoices used as support for payment.

    2) Costs charged to the project that should be charged to another project or to

    overhead.

    3) "Direct cost" from a contract charged to overhead, thereby "distributing the

    loss" to other contracts.

    4) Double billing, i.e., charging employees full-time to two or more jobs.

    In one case, a former contractor employee alleged that certain managers directed the

    mischarging of employees' time from a fixed-price contract to a cost-plus contract.

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    Preliminary investigation revealed over $100,000 was mischarged in one corporate

    department alone. The contractor acknowledged that there was some mischarging. An

    investigation revealed substantial mischarging of several million dollars.

    Preventive Actions: The contracting officer and technical personnel of the requesting

    agency should review contractor cost proposals to determine the reasonableness of

    proposed costs, the necessity for the kinds and quantities of materials and labor proposed,

    and the contractor'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:

    a. Reviewing the progress of work performed

    b. Testing the quality of work performed

    c. Reviewing all billings to ensure that they are for work which has been satisfactorily

    performed

    d. Being alert to sudden and unexpected cost growth or over-runs.

    Audit services, should be utilized to determine the accuracy and validity of contractor

    claims.

    Detection: Reviews should be made of contractor 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 contractor

    qualifications and project status. When performing such reviews, the following indicators

    should be considered:

    a. Contract slippage

    b. Modifications to contracts because of contractor inability to perform

    c. Significant increase in price without corresponding increase in work

    d. Substantial subcontracting without the knowledge and approval of the contracting officer

    e. Substantial funds expended on the work by contractor prior to contract award

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    f. Sole source procurement with substantial subcontracting

    g. Prime contractor requiring subcontractor to utilize prime's labor and/or equipment

    h. Inadequately supported charges for consultant fees, equipment rental, and travel

    i. Use of employees or consultants with skill levels below that proposed

    j. Inflated unit prices for items from contractor stock

    2. Failure to Meet Specifications

    Scheme: A contractor, in order to increase profits, provided 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 contractor 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 non-compliance with contract specifications includes using inferior or

    substitute materials such as watered loads of ready-mix concrete.

    Preventive Actions: 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.

    After-the-fact testing can also be useful to discover shortages or inferior quality of materials

    used (core borings, chemical and stress analysis, etc.). Such testing can be performed by

    technically-qualified personnel of the requesting organization i.e., engineers, technicians,

    etc.).

    Detection: Obtain and review 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.

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    3. Falsification of Government-Furnished Property Records

    Scheme: The contractor falsifies its records showing non-use of Government-furnished

    property when, in fact, the property is being used on non-Government work. One

    investigation revealed that a contractor, with a contract to maintain copying equipment for

    the Government, falsified records to show use of Government-furnished parts and repairs

    made, when the repairs actually were not being made. The parts were subsequently used

    to repair private machines or were sold. The contractor also claimed that the needed parts

    were not in the Government-furnished inventory when, in fact, they were. He then

    purchased the parts, adding overhead and profit to the item.

    Preventive Actions: The contracting officer should ensure that contractors provided with

    Government-furnished property utilize adequate property management controls.

    The project officer should monitor the contractor's use of Government-furnished property

    through periodic on-site inspection of the contractor's operation.

    Detection: With the assistance of independent technical Government personnel (i.e.,

    engineers, machinists, etc.) inspect the contractor's plant to determine whether the

    contractor's non-Government work requires the use of any of the Government-furnished

    property provided. If Government property is furnished, review the contractor's records to

    see if the use of the property is recorded.

    4. Co-Mingling of Contracts

    Scheme: A company is 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 contractor can bill for the same work on each of the contracts. The requesting

    agency writes similar work orders under each contract, thus facilitating the duplicate

    billings.

    Preventive Actions: The approving official in the requesting agency should review contracts

    prior to award to ensure that statements of work to be performed are not duplicated in other

    procurement. 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 contractors 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

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    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.

    Review documentation supporting contractors' billings for similar efforts performed under

    more than one contract by the same contractor.

    When auditing contractors' records, check for multi-contract awards.

    5. False Invoices

    Scheme: Where contracts provide for the continued supply of merchandise over a period of

    time, invoices may be inflated or may be submitted for goods 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. Payments should not be

    made without such documentation.

    Inventories should be periodically made by the requesting agency to verify items on-hand

    against actual purchases.

    Detection: Account for purchases through comparison of physical inventory with booked

    purchases.

    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.

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    6. Duplicate Contract Payments

    Scheme: The contractor submits copies of the same invoice for payment, or submits more

    than one original invoice for the same goods or services. This may be accomplished

    through collusion between the contractor and the requesting agency 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 controller's office 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 contract.

    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 dollar completion.

    7. Change Orders Abuse

    Scheme: A company bidding on a contract, in collusion with personnel from the requesting

    organization submits a low bid to ensure receiving the contract award. However, the

    company has been assured that change orders will be issued during the life of the contract

    to more than compensate for the low bid. After the contract is awarded, the contractor and

    the procuring official share in the excessive reimbursements resulting from the numerous

    and/or high dollar value change orders issued against the contract.

    Preventive Actions: Managers of requesting agencies and heads of procurement offices

    (management officials) should be alert to contracts where numerous and/or high dollar

    value change orders are proposed or issued. Such actions are indicators of possible

    improprieties.

    The management officials should carefully review all proposed 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 contractor's profit.

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    The contracting officer should determine the reasonableness of excessively low bids

    through analysis of independent Government estimates and cost and pricing data.

    Detection: Analyze contract 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 change order abuse such as: (1) an employee directly involved in

    both determining requirements and procuring the item, or taking a job with the contractor;

    (2) high turnover rate among procurement personnel; (3) request for change order signed

    at a higher level than that of the original procurement request and (4) request(s) for change

    order coming from an organization different from the one requesting the procurement.

    Procurement Fraud by Government Personnel

    1. Excessive Small Purchases of Tools, Supplies, etc.

    Scheme: Items are purchased and subsequently diverted for personal use. This includes

    items which are not required or quantities purchased in excess of requirements. It also

    includes items which are required but taken for personal use and need replacement.

    Preventive Actions: Require after-the-fact reviews of small purchases by the manager of the

    agency making the Purchases to validate their reasonableness.

    A program should be established to monitor central supply withdrawals and procurement by

    on-site contractors.

    Once or twice a year, the manager should have prepared a list of items purchased

    throughout the period for comparison to the number of people using the supplies, tools, or

    small equipment. Any excessive purchases identified for which the actual items purchased

    cannot be located, would indicate possible diversion of the items for personal use.

    Detection: Obtain a listing of small purchases made over a specified period of time and

    re-arrange the list by name of purchaser and/or organizational unit.

    Analyze the information obtained above to determine whether quantities of items purchased

    are reasonable considering the size of the organization and the length of time between

    purchases of individual items.

    2. Split Purchases

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    Scheme: A procurement is split into two or more purchase orders to circumvent the agency

    procurement regulations which permit negotiation without formal advertising if the

    aggregate amount does not exceed a specified amount. This could be perpetrated by a

    contracting officer or the requesting agency.

    Preventive Actions: Managers of the requesting agency and the procurement office should

    make periodic reviews of purchase orders, grouped by contracting officers who issued them

    and for specific periods of time, to ascertain whether:

    (1) identical items were purchased in different quantities, either simultaneously or within

    short periods of time, or

    (2) a project was split by type of work (i.e., one purchase order for material and another for

    labor).

    Contracting officers should be especially alert to consecutive procurement requests for

    identical items from the same contractor, each for the amount requiring competitive

    procurement.

    Utilize computer resources to group the payments by vendor, and manually check invoices

    for split purchases.

    3. Phantom Contractors

    Scheme: An invoice(s) from a non-existent company is submitted for payment by either

    accounting or project personnel. This fraud could be perpetrated by accounting personnel

    or someone responsible for administration of the project.

    Preventive Actions: Prior to making payments, accounting personnel should verify the

    authenticity of contractors by comparing unknown names to the agency listing of approved

    contractors.

    4. Altered Receipts/Vouchers for Cash Fund Reimbursement

    Scheme: Cashier alters a voucher after making payment against it by adding another

    number to the amount paid (i.e., $40 can be changed to $140). The cashier then submits

    the altered voucher, together with others, to accounting for replenishment of the cash fund

    and pockets the excess replenishment ($100). Although the Accounting Office

    maintains a copy of such vouchers separately from the cashier, the two copies are only

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    occasionally matched because of the large volume of individual transactions involved.

    A payee could "rip-off" the system by submitting a voucher with falsified information, and

    altering receipts and other documentation to support the false claims.

    Preventive Actions: Accounting personnel should be sensitized to the possibility of and be

    trained to detect altered documents.

    Accounting personnel should routinely match vouchers, which they maintain, with

    supporting cash fund replenishment vouchers to ascertain that no improper alterations

    have been made.

    Detection: Scrutinize vouchers and supporting documentation for evidence of changed

    figures. This would include differences in pens used or thickness of marks on paper,

    consistency in pressure marks on reverse side of invoice, and reasonableness of total

    invoice to individual items purchased.

    On a sample basis, make comparisons of accounting's copy of vouchers with the cashier's

    copy.

    5. Duplicate Payments from Both Voucher and Cash Fund

    Scheme: A vendor submits the original of an invoice to accounting for payment while the

    purchaser, either on his own or through collusion with the vendor, collects for the same item

    from the cash fund. A cash register tape, vendor invoice or other document may be used for

    reimbursement from the cash fund.

    Another technique would be for the purchaser, through collusion with the vendor, to issue

    two invoices for item(s).

    Preventive Actions. Management should monitor purchases by periodic after-the-fact

    management or supervisory review.

    All documents should be pre-numbered and properly accounted for.

    Detection: Compare payments of Vouchers against payments made through cash funds

    using for comparison the names of purchasers, vendors, and items purchased. This can be

    done manually or by computer if the information is keypunched for this specific purpose.

    Comparisons can also be made within cash fund disbursements for duplicate payments.

    Arrange vouchers (manually or by computer) in numerical or chronological order and look

    for duplications. In those cases where duplicate payments appear to exist, verify the

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    physical existence of the items purchased.

    6. Duplicate Payments from Cash Fund

    Scheme: More than one original invoice, or an invoice and a shipping/receiving ticket for

    the same goods (small purchases), are submitted for reimbursement by the cash fund.

    Preventive Actions: Emphasize to cashiers the importance of honoring only original

    invoices as payment documents. They should also be alerted to the potential for

    submission of more than one original invoice for the same item.

    Cash fund transactions should periodically be reviewed to identify payments for identical

    items, quantities and amounts.

    Managers of program or operations offices should periodically review cash fund

    transactions involving their activities for reasonableness of quantities of individual items

    paid for through the cash fund. Unusually large quantities of a single item might indicate the

    possibility of duplicate payments.

    Detection: Review payment documents for a specific time period, checking for same payee,

    amounts paid, and items purchased. Be especially alert to payments supported by copies

    (carbon or Xerox) of invoices rather than originals.

    Unusually large quantities of a single item purchased over a short period of time may

    indicate the possibility of duplicate payments.

    Bribery and Illegal Gratuities

    Any of the above examples involving collusion could also involve bribery or illegal

    gratuities.

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    FRAUD INDICATORS AND FRAUD SCHEMES

    The following paragraphs outline situations that may indicate that a fraud is or has been

    committed against your agency and provide examples of particular schemes. The

    information is intended to sensitize managers to the potential for fraud in day-to-day

    situations. The indicators may also help identify systemic weaknesses at operational units.

    1. Co-mingling of Contracts:

    A company is awarded separate contracts for various efforts, e.g., electrical contracts,

    painting contracts, flooring contracts, etc. Each contract allows charges for services or

    items used in the other contracts as well. Through collusion, the contractor can bill for the

    same work or supplies on each of the contracts.

    2. Rigged Specifications:

    The requesting organization tailors specifications to meet the qualifications of one particular

    company, supplier, or product.

    3. Collusive Bidding:

    A group of companies with the capability of providing the same goods or services conspire

    to exchange bid information on contract solicitations and then take turns at submitting the

    low bid, effectively defeating competition. Such action may be carried out in collusion with

    procuring officials. Following are some indicators of bid rigging:

    a. Identical bids are received.

    b. A number of bids are received that are much higher than published costs of previous

    contracts of the same type, or of previous bids by the same firms for similar contracts.

    c. Fewer firms bid than would normally be expected from that industry:

    d. There is an inexplicably large gap between the winning bid and all other bids.

    e. Apparent recurring patterns of low bids, such as a corporation always winning a bid in a

    certain geographical area, or in a particular rotational sequence vis-a-vis other bidders.

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    f. The successful bidder subcontracts work to companies that submitted higher bids on the

    same project.

    g. Bids are very close on nonstandard items with no suggested retail price.

    h. There is a correlation between the contractors that win the bids and the size of the

    contracts.

    i. Competing contractors regularly socialize, or contractors and Government procurement

    personnel socialize.

    4. Companies Conducting Business under Several Names:

    Company officials may attempt to conceal a reputation of poor contract performance by

    conducting business under several different names simultaneously. Such companies may

    also submit more than one bid or offer in response to a solicitation, thus restricting

    competition.

    5. Conflict of Interest Situations:

    A contract is awarded to a company owned or controlled by a government employee.

    An employee's conduct creates or gives the appearance of a conflict. For example: The

    employee (or a family member) has business dealings or a close social relationship with a

    contractor or potential contractor; or the employee or family member receives gifts,

    entertainment, favors, or offers of employment from an actual or potential contractor.

    6. Failure to Properly Monitor Contract Performance:

    Without adequate inspection or through collusion, contractors providing goods and

    services have an opportunity to be paid for more work or supplies than actually delivered.

    For example, work orders for the removal and installation of partitions, electrical outlets,

    telephones, plumbing, etc., can be compromised by inflating the quantities of items

    removed or installed.

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    7. Failure to Meet Specifications:

    A contractor increases profits by providing goods or services that do not meet contract

    specifications. Such action is often difficult to detect because materials omitted from end

    products are not readily identifiable. For example, a contractor uses one coat of paint

    instead of two; uses watered loads of concrete installs inferior memory chips in computers;

    or uses inferior automobile replacement parts.

    8. Same Individual Authorized to Order and Receive for Goods and Services:

    Persons controlling both the ordering and receiving functions can arrange for diversion of

    supplies or services for their own benefit or sign for "phantom", incomplete, or technically

    inferior shipments in exchange for money or favors from the contractor.

    9. Unvarying Patterns in Small Purchases:

    Unvarying patterns in small purchases may indicate that a buyer is awarding contracts to

    favored vendors without soliciting competitive offers from additional firms. The buyer may

    also be entering fictitious competitive quotations and consistently awarding a favored

    vendor at inflated prices.

    10. Frequent Complaints by Users of Supplies or Services:

    Frequent user complaints of poor quality or level of performance of supplies or services

    provided under a contract may indicate that contractors are delivering something less than

    you are paying for. The cause may be a poorly written contract, weak contract

    administration, or fraud involving contractors and employees.

    11. Service Contract Specifications Include Bid Schedule Items for which there is little or No

    Requirement:

    The government may be paying more than necessary for contract services when bid items

    for which there is little or no demand are included in annual requirement contracts.

    Individuals working in requirements or contracting activities may be in collusion with

    incumbent contractors by including such items in bid solicitations. As a result, incumbent

    contractors gain an unfair advantage by bidding "no charge" or "token" prices for the items,

    thereby restricting competition.

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    For example, on a solicitation, which has 30 bona fide separate line items on the schedule,

    procurement activity personnel in collusion with an incumbent may add 5 line items for

    which they know there will be no demand. Competing contractors, unaware of the collusive

    situation, will bid each of the items based upon their estimate of actually providing the

    service. The incumbent contractor will bid little or nothing, thereby giving that firm the low

    aggregate bid. This unfair advantage restricts competition and enables the incumbent to

    overcharge for the bona fide items

    12. Splitting Large Requirements:

    Contracting or requiring activity personnel may be splitting requirements into small

    purchase orders to avoid the scrutiny required for larger dollar value contracts. Splitting the

    requirement may waste funds by losing the economic advantage of volume purchasing.

    Favoritism or other forms of fraud are easier to conceal when small purchase methods are

    used.

    13. Government Estimates and Contract Award Prices are Consistently Very Close:

    Employees may be releasing advance purchasing information to favored contractors, in

    violation of conflict of interest, bribery, or other statutes. Additionally, the unauthorized

    release of advance information may be indicated when the same contractor receives a

    preponderance of contract awards for a particular requirement, even when competition

    exists.

    14 Contractor Complaints of Late Payment by the Agency:

    Complaints by contractors or suppliers that they are not being paid in a timely manner may

    indicate fraudulent manipulations and diversion of Government resources through supply or

    finance operations.

    15. Mischarging Costs Among Contracts:

    A contractor shifts costs, usually labor charges, from an unprofitable contract (either fixed

    price or cost reimbursement type) to one or more other cost reimbursement contracts.

    Typically, the employee time cards are fraudulently made out to show the false cost

    reimbursement contract accounting code.

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    16. Duplicate Payment:

    A vendor submits the original voucher for payment, while the purchaser, acting alone or in

    collusion with the vendor, collects for the same item from the cash fund.

    17. Downgrading Serviceable Property to Scrap:

    With intent to defraud the Government, property in serviceable condition may be

    downgraded to scrap. When the property is written off as scrap, it loses its identity as an

    item, simplifying the theft of the item.

    18. Abnormal Increase in Consumption of Fuel or Supply Items:

    Abnormally high consumption of fuel or common supply items such as automotive parts,

    tools, and individual equipment indicates the items could have been diverted for personal

    use or resale.

    19. Poor Physical Security:

    Conditions such as poor warehouse lighting, insecure storage areas, and private vehicles

    permitted to park adjacent to storage areas are examples of weaknesses that encourage or

    contribute to diversion of Government property.

    20. Receipt of Items that cannot be traced to a Valid Requisition:

    Items received that cannot be traced to a valid requisition could have been ordered for

    personal use or resale and the resulting paperwork destroyed.

    21. Failure to De-obligate Canceled Purchase Orders:

    This situation usually indicates that employees are attempting to transfer funds from one

    fiscal year to another or that employees are receiving a refund for canceled items and are

    not depositing the refund with the Government.

    22. Overstatement of Shipment Weights:

    Carriers may be defrauding the Government by artificially inflating the weight of a shipment.

    Carriers use the following methods to "bump" or increase the true weight of a shipment:

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    a. Body Bumping: A lightweight driver sits in the van when getting the tare weight and a

    heavier driver gets the gross weight of the van. The net gain could be as much as 100

    pounds.

    b. Fuel Bumping: Getting the tare weight with less than a full tank of gas and the gross

    weight with a full tank. If the tank was 1/4 full for tare and full for gross, a net increase of

    450 to 500 pounds could result.

    c. Packing/Equipment Bumping: Getting the tare weight without the required

    packing/equipment (blankets, dollies, ladders, snow chains, etc.) and getting the gross

    weight with the equipment included could result in a net increase of several hundred

    pounds.

    d. Double Billing on Small Shipments (500 to 3,000 pounds): Getting two tare weight tickets

    for the truck, picking up the two small shipments, getting two gross weight tickets for the

    combined weight of both shipments, then submitting both tickets for payment. The increase

    in weight would be equivalent to one of the shipments.

    e. Weight Bumping: Adding pallets, lead ingots, etc. to the shipment to equal the weight

    allowance of the employee. The net increase can range from several hundred to several

    thousand pounds.

    f. False Tickets: Paying the weight master to provide a false weight ticket or having a

    supply of blank or false weight tickets. If blank tickets are used, the weight will usually be

    handwritten rather than printed.

    g. Switching Trucks: Switching from a light truck/tractor to a heavier one after obtaining the

    tare weight.

    h. Excluding Crating Materials: Crating materials used to protect fragile or high value items

    are not included when obtaining the tare weight. This crating material, usually lumber, could

    weigh several hundred pounds if a shipment includes several items requiring protection.

    23. Failure to Conduct Inventories or Alteration of Inventory Records:

    Employees may be mismanaging the equipment/supply inventory system to permit the

    systematic theft of Government property.

    24. Excessive Parts Replacement in Vehicle Maintenance:

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    Maintenance personnel may charge unnecessary parts to vehicle maintenance and divert

    these parts for personal use or gain. In one example, vehicle maintenance records

    identified 14 tire replacements in 8,148 miles, five new batteries in 100 miles, and seven

    tune-ups in 8,000 miles.

    25. Government Funds Used for Replacement Parts in New Vehicles:

    New vehicle warranties usually provide for replacement of many failed parts at no cost to

    the Government. If vehicle records show that parts procured with Government funds are

    being used in new vehicles, there is a possibility that the parts are being spent

    unnecessarily.

    26. Cashiers Fail to Return a Copy of Paid Travel Vouchers to Employees:

    Cashiers may be embezzling funds by shortchanging employees if the cashiers do not

    return a copy of paid travel vouchers to the payee. Cashiers have attempted such

    embezzlement when making payments by folding under the "Amount Paid" corner of the

    voucher so the payee does not see it and by later disposing of the member's copy of the

    voucher.

    27. Disbursement not Processed into the Accounting System on a Timely Basis:

    Employees could be making unauthorized disbursements and trying to hide or delay

    detection of the disbursements by not processing transactions in a timely manner.

    28. Excessive Numbers of Travel Claims for Expenses that Can Be Accepted without a

    Supporting Receipt:

    Employees may be submitting fraudulent travel vouchers by including fictitious expenses

    which do not have to be supported with a receipt (e.g., taxi fares). Excessive numbers of

    such expenses in vouchers may indicate fraudulent claims.

    29. Repeated Changes to Timecards/Excessive Overtime:

    Repeated erasures or changes on an individual's card, amended timecards, repeated

    instances of prior periods of overtime claimed, excessive amounts of overtime earned, or

    little or no use of annual leave may indicate possible timecard manipulation by an

    employee in a timekeeper position.

    30. Employee Refuses Promotion, Leave, or Job Changes:

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    The employee may oppose promotion or reassignment to another position because the

    change might remove the opportunity to obtain illegal gains. The employee may also fear

    discovery of the illegal activity in the current position.

    31. A Single Individual Controls More Than one Key Resource Management Function:

    An individual who controls more than one of the key functions and responsibilities

    associated with any resource management activity is in a better position to exploit the

    system than one whose responsibilities are limited to a single key area. Most resource

    management directives stipulate separation of functions as a safeguard against fraud.

    Violation of such directives by apathetic supervisors or overzealous employees have

    resulted in numerous instances of fraudulent exploitation of resources.

    32. Purchase Orders Being Used for Personal Orders:

    Employees may be using Government purchase orders for personal purchases to qualify

    for the Government discount.

    33. Large Year-end Purchases for Nonspecific Items:

    Employees may obligate all year-end funds to a local vendor to establish a credit balance

    account. Future purchases are then made against this account.

    34. Inventories Are Mixed to Prevent Identification of Purchase with Special Funds:

    Paint purchased for Government-owned quarters may be used for painting leased quarters.

    Items purchased with office supply funds may be used for quarters.

    35. Journal Vouchers Being Used to Transfer "Over-Obligated" Purchase:

    Employees in the accounting function may use journal vouchers to transfer small portions of

    over-obligated balances into purchase orders that were not fully expended.

    37. Submission of Copies of Paid Receipts to Collect Reimbursement:

    An employee may retain the original and submit multiple copies of the same receipts,

    thereby receiving numerous reimbursements for the same expenditure.

    38. Supervisory Reviews or Computer Edits Are Bypassed:

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    Large workload backlogs or collusion may cause management personnel to skip

    supervisory reviews of data to be entered in a computer data base, or special codes may

    be entered to disable computer edits. Most instances of computer fraud are facilitated by

    such procedural bypasses.

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    WARNING SIGNS OF FRAUD

    The intent in a financial fraud is to divert or misdirect assets or information, while preventing

    the disclosure of fraud. These two requirements often cause a trail of irregularities to be left

    behind. These irregularities may serve to alert the astute, determined accountant,

    investigator, or manager.

    The following are potential fraud indicators:

    1) Excessive changes in accounting principles or disregard for Generally Accepted

    Accounting Principles (GAAP).

    2) Excessive or unjustified changes in accounting personnel may be an attempt to prevent

    employees from learning too much.

    3) The refusal/failure to allow an independent audit or subtle attempts to direct the audit or

    investigation may indicate an attempt to hide problems.

    4) The excessive destruction of controlled documents should not occur, although error is

    often given as the excuse. Be alert for out of sequence invoices in files or unnumbered

    invoices where serial numbering is the rule. Possibilities include stolen or counterfeited

    documents.

    5) An excessive number of photocopies of invoices in files should lead to further inquiry. It

    is a simple matter to alter approved invoices with 'white-out' or similar correction fluid and

    copy the invoice, destroying the original. The attempt may be to manipulate the audit trail or

    commit the fraud via the alteration. Secure external and internal copies for comparison.

    Duplicate copies of supplier invoices could also indicate the possibility of multiple payments

    of the same invoice with the checks diverted.

    6) Excessive business checks to cash or individuals. Although some checks to cash and

    individuals may be necessary for convenience, an excessive percentage is questionable,

    since businesses do business with one another, and checks made directly payable to the

    intended party are a better receipt. When such checks show second endorsements they

    are highly suspect.

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    7) A pattern of second endorsements on payroll checks may indicate the normal practice of

    a business cashing its employees' salary checks, etc. However, it may also indicate cash

    schemes or other illicit activity.

    A typical second endorsement scheme involves endorsing a fictitious employee's paycheck

    and issuing cash. Another variation involves paying a check in a certain amount, e.g., $500,

    for the purchase of material that will cost less, e.g., $200 The recipient endorses the check

    and returns it to the issuer, who gives the recipient the agreed upon lesser sum, e.g., $200.

    The canceled check will be for the larger amount, and the cash voucher or disbursements

    book will show the larger amount going out, e.g., $500. The net result is evidence of paying

    a certain amount, while allowing the businessman or employee to pocket $300.

    8) Periodic or excessive conversion of cash for exchange items may be part of a scheme to

    divert assets and hide trails. (Exchange items include cashier's checks, money orders, etc.

    9) Excessive cash transactions are a poor business practice. Like item 6, the question is

    why?

    10) If assets are sold or transferred for what appears to be less than adequate

    consideration this may indicate a sham transaction with no economic reality. Businesses

    exist to make a profit and anything in contravention of this goal should be questioned.

    11) Assets are sold but possession is maintained. A real sale or a sham transaction? More

    than a buyer seller relationship?

    12) Post-dated checks are a possible indication of cash flow problems, or a check fraud.

    13) Lack of sufficient vouchers and supporting documents indicate that purchases may not

    have actually occurred or that merchandise may have been stolen.

    14) Excessive bad debt write-offs may indicate a scheme for an employee to split kickbacks

    with a co-conspirator on the outside.

    15) Excessive spoilage/damaged goods may indicate a scheme between certain

    employees and purchasers/shippers similar to the bad debt write-off.

    16) Excessive or unpaid loans to non-critical employees should be very carefully

    examined, for they may not be loans. Documents attesting the character of the payments

    as a loan, even to officers, are inadequate where fraud is suspected. All the documentation

    should be there. Look for the history of repayment.

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    17) Encumbrances and liens shortly before bankruptcy could indicate the possibility of liens

    by related companies or sham transactions using shell corporations to protect assets and

    cloud ownership claims; possibility of a planned or fraudulent bankruptcy.

    18) Excessive or insufficient freight expense relative to inventory purchased or to sales may

    indicate that purchases have been paid through means not reflected on the books or

    inventory purchased or sales made for unrecorded cash. This may also indicate the

    possibility of diverted assets and/or a hidden operation by management or employees.

    19) Where inventory is a material income-producing item, concern should arise when

    component ratios are out of acceptable limits.

    e.g. Assume one item X is purchased for each item Y to make product Z. Records reflecting

    the purchase of lOOOX and 500Y should require further examination.

    e.g. Significant increase in power consumption in a manufacturing facility without a

    corresponding increase in production or revenue. This type of observation would apply to

    other ratios that are out of line with past history or industry norms (gross profit ratio, etc.).

    20) Failure to reconcile bank statements or a conflict of the duties on the part of the person

    performing the reconciliation (manages cash and performs reconciliation, etc.).

    21) An excessive number of checking accounts without a true business purpose could

    possibly indicate good local and/or out-of-town cash management techniques of paying

    from a distant bank, or it may indicate a check-kiting scheme. For the latter, cash

    reconciliation is a must.

    22) An excessive number of employees relative to production or a change in employees

    without a corresponding need/revenue increase is possibly indicative of a ghost payroll

    scheme for generating cash. It may be a fraud against a customer or government where

    contract terms call for "cost plus."

    23) Business dealings with no apparent economic purpose are out of the ordinary, since

    businesses exist to make a profit. Deals with companies with little or no economic viability

    fall in the suspect category.

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    24) Excessive/questionable dealings with subsidiaries should alert the auditor or

    investigator to the possibility of questionable expenses being passed along and/or the use

    of payables to free up cash, etc. It also may be an attempt to generate the appearance of

    revenue.

    25) Use of management fronts, such as interlocking directorates, alter-egos, etc., to

    conceal true ownership control and thus conceal organizational conflicts of interest.

    26) Inappropriate trends in relation to other events, such as a decline in the number of

    quality control inspectors when a large contract is received should be questioned.

    27) A significant lack of internal controls may indicate that a questionable practice is being

    hidden. Remember that one of the basic rules is that businesses exist to earn a profit. Look

    for actions counter to this goal.

    28) The lack of competitive bidding may hide kickbacks or conflict of interest situations.

    29) Questionable and significant changes in key financial ratios indicate potential problems.

    Review of Checks and Other Financial Records

    Listed below are a few fraud indicators that can be looked for when reviewing contractor or

    consultant financial records. Certain transactions may indicate "Ghost Payrolls",

    unauthorized expenses, or other situations which require additional investigation.

    1. Compare check numbers against date issued. Checks should be issued in sequence by

    check number and date.

    2. See if more than one check in sequence was issued to the same vendor. It would be an

    unusual situation for this to occur.

    3. Compare computer-generated checks with manually issued checks. This is usually

    indicated by a different series of check numbers. The method by which the checks were

    generated to a specific vendor should be consistent.

    4. Check for differences in addresses, such as slightly different post office numbers,

    incorrect post office numbers or different zip codes for the same address different street

    numbers or alternating addresses.

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    5. Look for checks to different vendors going to the same mailing address.

    6. Look for checks to different vendors deposited in the same bank account.

    7. Deposits of checks made by each vendor should be consistent with the same account

    8. Look for checks that are prepared by different typing machines than those before and

    after the checks in question.

    9. Be observant for checks issued in "round" amounts.

    10. Checks may normally include the payee's mailing address for use in a "window"

    envelope. If a check is found where the address is missing or incomplete, it may be an

    indication that the check was delivered by other than normal means.

    11. Hand-written endorsements on the back of business checks should be noted. Most

    businesses use a stamp indicating "For Deposit Only" or "Deposit to the Account of" etc.

    12. Erasures or white-outs should always be suspect.

    13. Folded or "long-held" checks should also raise suspicion.

    Compare information from checks with addresses and expenditures shown on the vendor

    list. If time permits, select a three-month period and review every check issued. Document

    and analyze as discussed above. In addition, verify that all checks are accounted for and

    that they were issued in sequence. Also, check all payees shown on checks to see if they

    are shown on the vendor list. If any checks are missing or any payees are not on the

    vendor list, this should be a suspicious indicator. If a certain check is identified as being

    fraudulent, look for checks issued immediately before and after for additional indications of

    fraud. While surveying the checks, be alert to any other checks that might be suspect.

    When reviewing the accounts payable file, look for detailed information regarding individual

    disbursements to vendors. There should be a file for each vendor and a receipt or bill with

    the same expense item for each check issued.

    Invoices should contain pre-printed, company letterheads with street addresses and

    telephone numbers. Universal type invoices (easily purchased from a business office

    supply firm) should be suspect. Legitimate companies generally will have their own

    letterheads. Be suspicious when post office boxes and street addresses for several vendors

    are the same or are located in the same general area. Invoices to the same

    vendor with sequential serial numbers should be regarded as suspect. Missing files or

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    vague explanations for expenditures often indicate irregular activity.

    Review of Assumed Names, Records of Incorporation, etc.

    1. Determine names of major corporate executives, staff members, members of the financial

    accounting departments.

    2. Check these names against appropriate register of assumed names, incorporation

    records, business tax rolls, etc. to identify any businesses these individuals may be

    associated with.

    3. If any businesses are discovered, document the names, addresses, dates of

    incorporation, and persons signing the records

    4. If possible, obtain a complete list of the vendors the company uses with addresses and

    expenditures for the last several years.

    5. Compare the names of businesses identified through checks of assumed names and

    corporation records, etc. with the vendors on the list. If there are any matches, this would

    be an indication there is a questionable relationship between the vendor and the other

    companies.

    Situations to look for would include:

    a. Vendors used as a front to launder embezzled funds.

    b. Vendors used to provide legitimate services but at highly inflated prices.

    c. Vendors used to direct business to a member of a family or close associate.