Ch 10 - Corruption Flashcards
Corruption
conflicts of interest, bribery, illegal gratuities, economic extortion
Illegal payment to public officials or private corporation insiders for preferential treatment
bribery
offering, giving, receiving, or soliciting any thing of value to influence an official act buys influence of the recipient commercial bribery kickbacks bid-rigging schemes
kickback schemes
involve submission of invoices for goods and services that are either overpriced or completely fictitious
involve collusion between employees and vendors
almost always attack the purchasing function of the victim company
diverting business to vendors
-vendor pays the kickbacks to ensure a steady stream of business from the purchasing company
-no incentive to provide quality merch or low price
-almost always leads to overpaying for goods or services
overbilling schemes: employees with approval authority
- vendor submits inflated invoices to the victim company
- overstates the cost of actual goods or services or reflects fictitious sales
- ability to authorize purchases is key to the scheme
overbilling schemes: employees lacking approval authority
- circumvent purchasing controls
- may prepare false vouchers to make it appear that the invoice is legit
- may forge an approval signature or have access to a restricted password in a computerized system
- difficult to detect since the victim company is being attacked from 2 directions
other kickback schemes
discounts are given in exchange for bribes
slush funds
slush funds
funds can be paid from other accounts or paid as “consulting fees”
other side of the transactions
detecting kickbacks
normal controls may not detect kickback schemes
look for price inflation
monitor trends in COGs and services purchased - often start small but increase over time
look for excessive quantities purchased
investigate inventory shortages
look for inferior goods purchased
compare actual to budgeted
preventing kickbacks
assign an employee independent of purchasing to routinely review buying patterns
make sure all contracts have a “right to audit” clause
establish written policies prohibiting employees from soliciting or accepting fits
expressly forbid employees from engaging in an undisclosed personal interest
implement ethics policy
bid-rigging schemes
all bidders are expected to be on an even playing field - bidding on the same specifications
the more power a person has over the bidding process, the more influence he or she can exert over the selection of the winning bid
potential targets include: buyers, contracting officials, engineers and tech reps, quality of produce assurance reps, subcontractor liaison emplyoes
pre-solicitation phase
need recognition schemes-employee of purchasing company convinces the company that a particular project is necessary, has the specifications tailored to the strengths of a particular supplier
trends indicating a need recognition scheme is occurring
higher requirements for stock and inventory levels, writing off large numbers of surplus items to scrap, defining a need that can only be met by a certain supplier, failure to develop a satisfactory list of backup suppliers
specification schemes
specs include: list of elements, materials, dimensions, and other relevant requirements
set the specs to a particular vendor’s capabilities
use “prequalification” procedures to eliminate certain vendors
give a vendor the right to see the specs before his competitors get the specs
the solicitation phase
restricting the pool of vendors frm which to choose
bid pooling
fictitious suppliers
restricting the time for submitting bids
soliciting bids in obscure publications
publicizing the bid during holiday periods
the submission phase
fraud in the sealed bid process
-last bid was submitted is the one that is awarded the contract
-winning bidder finds out what the other competitors are bidding
-winning bidder may see the other competitors’ bids before submitting his bid
gets help on preparing the bid
the phases of bid-rigging
pre-solicitation phase, solicitation phase, submission phase
detection of bid-rigging schemes
look for
unusual bidding patterns, low bids followed by change orders, a very large unexplained price difference among bidders, contractors who big last and repeatedly receive the contract, a predictable rotation of bidders, losing bidders who become subcontractors, vendors with the same address and phone number, fewer bidders than expected for the project, projects that have been split into smaller ones
something of value
cash, promises of future employment, promise of ownership in the supplier’s firm, gifts, payment of credit card bills, loans on very favorable terms, transfers of property
illegal gratuities
given to reward a decision rather than influence it, decision made to benefit a person or company but is not influenced by any sort of payment, may influence future decisions
economic extortion
“pay up or else”
employee demands payment from a vendor in order to make a decision in the vendor’s favor
conflicts of interest
employee, manager, or executive has an undisclosed economic or personal interest in a transaction that adversely affects the company
victim organization is unaware of the employee’s divided loyalties
purchasing & sales schemes
difference between conflict of interest and bribery
in conflict of interest, the fraudster approves the invoice because of his own hidden interest in the vendor
purchasing schemes
overbilling schemes and turnaround schemes
overbilling schemes
bill originates from a real company in which the fraudster has an undisclosed economic or personal interest
fraudster uses influence to ensure the victim company does business with this particular vendor
does not negotiate in good faith or attempt to get the best price for the employer
turnaround sales
the employee knows that the company is seeking to purchase a particular asset and purchases it himself then turns around and sells it to the company at an inflated price
sales schemes
under billings and writing off sales
underbillings
goods are sold below FMV to a customer in which the perpetrator has a hidden interest
writing of sales
purchases are made from the victim company and credit memos are later issued
other conflict of interest schemes
business diversions, resource diversions, financial disclosures
business diversions
siphoning off clients of the victim company to the employee’s own business
resource diversions
diverting funds and other resources for the development of the employee’s own company
financial disclosures
inadequate disclosures of related-party transactions to the company
prevention/detection of conflict of interest
implement, communicate, and enforce an ethics policy that addresses conflict of interest offenses
require employees to complete an annual disclosure statement
establish an anonymous reporting mechanism to receive tips and complaints
compare vendor address and telephone files to employee address and telephone files for matches
Define corruption
An act in which a person uses his position to gain some personal advantage at the expense of the organization he represents
Illegal payment to public officials or private corporation insiders for preferential treatment
Identify the four categories of corruption
Conflicts of Interest
Bribery
Illegal Gratuities
Economic Extortion
Define bribery
Offering, giving, receiving, or soliciting anything of value to influence an official act Buys influence of the recipient Commercial bribery Kickbacks Bid-rigging schemes
Compare and contrast bribery, extortion, and illegal gratuities
Whereas bribery schemes involve an offer of payment intended to influence a business decision, economic extortion schemes are committed when one person demands payment from another.
Bribery, illegal gratuities, and economic extortion cases all bear a great deal of similarity in that they all involve an illicit payment from one party to another, either to influence a decision or as a reward for a decision already made.
A conflict of interest occurs when an employee, manager, or executive has an undisclosed economic or personal interest in a transaction that adversely affects the organization.
But whereas in bribery schemes a fraudster is paid to exercise his influence on behalf of a third party, in a conflict of interest scheme the perpetrator engages in self-dealing
Identify the two categories of bribery schemes
Kickbacks and bid-rigging schemes
Understand kickback schemes and how they are committed
Involve submission of invoices for goods and services that are either overpriced or completely fictitious
Involve collusion between employees and vendors
Almost always attack the purchasing function of the victim company
Diverting business to vendors
Vendor pays the kickbacks to ensure a steady stream of business from the purchasing company
No incentive to provide quality merchandise or low price
Almost always leads to overpaying for goods or services
Understand bid-rigging schemes and explain how they are categorized
All bidders are expected to be on an even playing field - bidding on the same specifications
The more power a person has over the bidding process, the more influence he or she can exert over the selection of the winning bid
Potential targets include:
Buyers
Contracting officials
Engineers and technical representatives
Quality or produce assurance representatives
Subcontractor liaison employees
Describe the types of abuses that are committed at each stage of the competitive bidding process
Pre-Solicitation Phase
• Need recognition schemes
- Employee of the purchasing company convinces the company that a particular project is necessary
- Has the specifications tailored to the strengths of a particular supplier
• Trends indicating a need recognition scheme is occurring
- Higher requirements for stock and inventory levels
- Writing off large numbers of surplus items to scrap
- Defining a need that can only be met by a certain supplier
- Failure to develop a satisfactory list of backup suppliers
The Solicitation Phase
• Restricting the pool of vendors from which to choose
• Bid pooling (Pg 252)
• Fictitious suppliers (Pg 253)
• Restricting the time for submitting bids
• Soliciting bids in obscure publications
• Publicizing the bid during holiday periods
The Submission Phase
• Fraud in the sealed bid process
- Last bid submitted is the one that is awarded the contract
- Winning bidder finds out what the other competitors are bidding
- Winning bidder may see the other competitors’ bids before submitting his bid
• Gets help on preparing the bid
Be familiar with the controls and techniques that can be used to prevent and detect bribery
Detecting Kickbacks
• Normal controls may not detect kickback schemes
• Look for price inflation
• Monitor trends in cost of goods sold and services purchased
- Often start small but increase over time
• Look for excessive quantities purchased
• Investigate inventory shortages
• Look for inferior goods purchased
• Compare actual amounts to budgeted amounts
Preventing Kickbacks
• Assign an employee independent of the purchasing department to routinely review buying patterns
• Make sure that all contracts have a “right to audit” clause
• Establish written policies prohibiting employees from soliciting or accepting any gift or favor from a customer or supplier
• Expressly forbid any employee from engaging in any transaction, on behalf of the company, in which he or she has an undisclosed personal interest
• Implement an ethics policy that clearly explains what improper behavior is and provides grounds for termination if an employee accepts a bribe or kickback
Detecting Bid-Rigging Schemes
• Look for:
- Unusual bidding patterns
- Low bids followed by change orders
- A very large unexplained price difference among bidders
- Contractors who bid last and repeatedly receive the contract
- A predictable rotation of bidders
- Losing bidders who become subcontractors
- Vendors with the same address and phone number
- Fewer bidders than expected for the project
- Projects that have been split into smaller ones
Define conflicts of interest
- Employee, manager, or executive has an undisclosed economic or personal interest in a transaction that adversely affects the company
- Victim organization is unaware of the employee’s divided loyalties
- Distinguished from bribery-in conflicts of interest, the fraudster approves the invoice because of his own hidden interest in the vendor
- Purchasing schemes
- Sales schemes
Differentiate conflicts of interest from bribery schemes and billing schemes
- In the bribery case, the fraudster approves the invoice in return for a kickback, whereas in a conflict of interest case he approves the invoice because of his own hidden interest in the vendor.
- Look at the nature of the fraud. Why does the fraudster overbill her employer? If she engages in the scheme only for the cash, the scheme is a fraudulent disbursement billing scheme. If, on the other hand, she seeks to better the financial condition of her business at the expense of her employer, this is a conflict of interest
List and understand the two major categories of conflicts of interest
Purchasing Schemes
• Overbilling schemes (Pg 257)
- Bill originates from a real company in which the fraudster has an undisclosed economic or personal interest
- Fraudster uses influence to ensure the victim company does business with this particular vendor
- Does not negotiate in good faith or attempt to get the best price for the employer
• Turnaround sales
- The employee knows that the company is seeking to purchase a particular asset and purchases it himself
- Turns around and sells it to the company at an inflated price
Sales Schemes
• Under-billings
- Goods are sold below fair market value to a customer in which the perpetrator has a hidden interest
• Writing off sales
- Purchases are made from the victim company and credit memos are later issued
Be familiar with proactive audit tests that can be used to detect corruption schemes
- Implement, communicate, and enforce an ethics policy that addresses conflicts of interest offenses
- Require employees to complete an annual disclosure statement
- Establish an anonymous reporting mechanism to receive tips and complaints
- Compare vendor address and telephone files to employee address and telephone files for matches
CASE STUDY
General Services Administration (GSA); Art Metal U.S.A.; Art Metal management was paying off GSA inspectors
Black’s Law Dictionary defines corrupt as
“spoiled; tainted; vitiated; depraved; debased; morally degenerate. as a verb, to change one’s morals and principles from good to bad.”;
“an act done with an intent to give some advantage inconsistent with official duty and the rights of others. The act of an official or fiduciary person who unlawfully and wrongfully uses his station or character to procure some benefit for himself or for another person, contrary to duty and the rights of others.”;
an act in which a person uses his position to gain some personal advantage at the expense of the organization he represents
