Contract and Procurement Fraud Flashcards
Which of the following is NOT one of the key phases of procurement processes that employ competitive bidding mechanisms?
A. The purchase and procurement phase
B. The presolicitation phase
C. The solicitation phase
D. The post-award and administration phase
A. The purchase and procurement phase
For the purpose of fraud detection, procurement processes that employ competitive bidding mechanisms can be reduced to four basic stages:
• The presolicitation phase
• The solicitation phase
• The bid evaluation and award phase
• The post-award and administration phase
Which of the following is a method in which contractors can inflate material costs in negotiated contracts with the U.S. government?
A. Estimating costs based on valid cost allocation methods
B. Obtaining materials at stated prices from third parties
C. Failing to disclose discounts and credits
D. Disclosing residual materials inventory
C. Failing to disclose discounts and credits
Defective pricing arises when U.S. government contractors intentionally use inaccurate cost or pricing data to inflate costs. A government contractor can use various defective pricing schemes to increase the cost of the contract and thereby its profits, but generally, defective pricing schemes involve inflated labor costs or inflated material costs. A government contractor can inflate material costs by:
• Failing to disclose discounts and credits
• Using outdated standard costs
• Using small-quantity costs to price large-quantity purchases
• Subcontracting to or purchasing from affiliated companies at inflated prices
• Failing to disclose residual materials inventory
• Using phantom suppliers to inflate costs
• Failing to disclose changes in “make or buy” decisions
• Estimating costs based on invalid cost allocation methods
• Using unsupported cost escalation factors
Which of the following activities are included in the solicitation phase of procurements involving open and free competition?
A. The procuring entity determines the method for acquiring the goods or services.
B. The prospective contractors prepare and submit their bids.
C. The procuring entity performs its contractual obligations.
D. The procuring entity identifies its needs and develops the criteria used to award the contract.
The solicitation phase involves the bid solicitation, bid preparation, and bid submission. During this phase, the procuring entity prepares the solicitation document, provides notices of solicitation, and issues the solicitation document. After the procuring entity issues the solicitation document, the bidders prepare and submit their bids or proposals.
Which of the following activities are included in the bid evaluation and award phase of procurements involving open and free competition?
A. The procuring personnel assess the bids or proposals.
B. The procuring personnel issue the solicitation document.
C. The procuring personnel perform their contractual obligations.
D. The procuring personnel develop the bid specifications.
In the bid evaluation and award phase, the procuring personnel evaluate the bids or proposals, conduct discussions and negotiations, and give the bidders an opportunity to revise their proposals. Purchasing personnel then select the winning bid or proposal.
Labor costs are more susceptible to mischarging in a contract scheme than are material costs. T/F
A. True CORRECT
Labor costs are perhaps more susceptible to mischarging than material costs because, unlike other items of cost, labor is not supported by external documentation or physical evidence to provide an independent check or balance, and employee labor can readily be charged to any contract. Moreover, the only way to ensure that labor costs are charged to the correct account is to actually observe the work of each employee (to determine which contract he is working), and then review the accounting records to verify that the employee’s cost is charged to the proper contract
Which of the following practices is a potential indicator of a bid splitting scheme?
A. Sequential purchases under the competitive bidding limits that are followed by change orders
B. Low employee turnover in the procurement department of an organization
C. Two or more purchases from the same supplier in amounts just above competitive bidding limits
D. Frequent use of sole-source procurement contracts
A. Sequential purchases under the competitive bidding limits that are followed by change orders
In general, procuring entities must use competitive methods for projects over a certain dollar amount. To skirt this requirement, a dishonest employee might break up a large project into several small projects that fall below the mandatory bidding level and award some or all of the component jobs to a contractor with whom he is conspiring.
Some common red flags of bid splitting schemes include:
• Two or more similar or identical procurements from the same supplier in amounts just under upper-level review or competitive-bidding limits
• Two or more consecutive related procurements from the same contractor that fall just below the competitive-bidding or upper-level review limits
• Unjustified split purchases that fall under the competitive-bidding or upper-level review limits
• Sequential purchases just under the upper-level review or competitive-bidding limits
• Sequential purchases under the upper-level review or competitive-bidding limits that are followed by change orders
Which of the following is NOT a common red flag of procurement fraud schemes involving collusion among contractors?
A. More competitors than normal submit bids on a project or product.
B. Bid prices begin to fall when a new competitor enters the competition.
C. There is limited competition within the industry.
D. The same contractors bid on each project or product.
Common red flags of procurement fraud schemes involving collusion among contractors include:
• The industry has limited competition.
• The same contractors bid on each project or product.
• The winning bid appears too high.
• All contractors submit consistently high bids.
• Qualified contractors do not submit bids.
• The winning bidder subcontracts work to one or more losing bidders or to non-bidders.
• Bids appear to be complementary bids by companies unqualified to perform the work.
• Some bids fail to conform to the essential requirements of the solicitation documents (i.e., some bids do not comply with bid specifications).
• Some losing bids were poorly prepared.
• Fewer competitors than normal submit bids on a project or product.
• When a new contractor enters the competition, the bid prices begin to fall.
• There is a rotational pattern to winning bidders (e.g., geographical, customer, job, or type of work).
• There is evidence of collusion in the bids (e.g., bidders make the same mathematical or spelling errors; bids are prepared using the same typeface, handwriting, stationery, or envelope; or competitors submit identical bids).
• There is a pattern where the last party to bid wins the contract.
• There are patterns of conduct by bidders or their employees that suggest the possibility of collusion (e.g., competitors regularly socialize, hold meetings, visit each other’s offices, subcontract with each other, and so on).
Which of the following is NOT an appropriate technique for detecting a non-conforming goods or services scheme?
A. Interview procurement personnel about the presence of any red flags.
B. Review the inspection and testing reports of questioned goods or materials.
C. Determine if contract costs have exceeded or are expected to exceed the contract value.
D. Conduct unannounced inspections of questioned goods or materials.
C. Determine if contract costs have exceeded or are expected to exceed the contract value.
Non-conforming goods or services fraud, also known as product substitution or failure to meet contract specifications, refers to attempts by contractors to deliver goods or services to the procuring entity that do not conform to the underlying contract specifications. Once the contractor delivers goods that do not conform to the contract, he bills and receives payment for conforming goods or services without informing the purchaser of the deficiency.
To detect non-conforming schemes, the fraud examiner should, at a minimum, examine the following for red flags:
• Contract or purchase order specifications
• Contractor’s statements, claims, invoices, and supporting documents
• Received product
• Test and inspection results for the relevant period, searching for discrepancies between tests and inspection results and contract specifications
Additionally, to detect non-conforming schemes, the fraud examiner should:
• Review correspondence and contract files for indications of noncompliance.
• Request assistance from outside technical personnel to conduct after-the-fact tests.
• Inspect or test questioned goods or materials by examining packaging, appearance, and description to determine if the items are appropriate.
• Segregate and identify the source of the suspect goods or materials.
• Review inspection reports to determine whether the work performed and materials used in a project were inspected and considered acceptable.
• Review the contractor’s books, payroll, and expense records to see if they incurred necessary costs to comply with contract specifications.
• Review the inspection and testing reports of questioned goods or materials.
• Conduct routine and unannounced inspections and tests of questioned goods or materials.
• Examine the contractor’s books and manufacturing or purchase records for additional evidence, looking for discrepancies between claimed and actual costs, contractors, etc.
• Interview procurement personnel about the presence of any red flags or other indications of noncompliance.
• Search and review external records (e.g., court records, prior complaints, audit reports, investigative reports, media sources) to determine if there is any history of misconduct.
