PUBLIC SECTOR FRAUD

Question 1

False Claims and Statements can be

Answer 1

oral, written, sworn or unsworn, signed or unsigned

Question 2

The person must make the false statement

Answer 2

knowingly and wilfully

Question 3

statement must be made to

Answer 3

a government agency or a government contractor or fiscal intermediary

Question 4

The false statement must be

Answer 4

a material fact that influences the outcome of the agency action

Question 5

Some examples of false claims and statements include:

Answer 5

• Falsified contractor qualifications
• False certifications or assurances
• False records or invoices
• Invoices from non-existent companies
• Claims made in duplicate or altered invoices
• Billing for fictitious employees
• Billing for goods and services not provided
• Inflated costs or substitution of cheaper goods

Other examples of false claims and statements might include false statements about
employees, fictitious transactions, and falsified documents.

Question 6

The ultimate detection method for false statements is

Answer 6

the examination of source documents

Question 7

auditor might be alerted to the possibility of false statements if any of the following red flags are present:

Answer 7

• Failure to produce documents in a timely manner
• Failure to respond to inquiries in a timely manner • Inadequacies in reporting requirements (for example, untimely reports, incomplete
reports, and others)
• Failure to have an adequate information gathering and retrieval system
• Altered or missing documents
• Photocopied or duplicate documents
• Failure to have adequate supporting documentation for reports and summary data

Question 8

Failure to Produce Documents in a Timely Manner

Answer 8

This might be an indication that there are no source documents to substantiate the summary data.

Question 9

Failure to Respond to Inquiries in a Timely Manner

Answer 9

This might also be an indication that there is no source documentation. It can also be an
indication that the information is not readily retrievable. This area should, however, be
approached with caution. If new and different information is requested, the contractor or
agency might have to redesign its system in order to retrieve the requested information,
causing an unanticipated time delay. It is important the requests for proposals include
adequate specifications for responding to data requests.

Question 10

Inadequacies in Reporting Requirements

Answer 10

If the required reports are consistently late, incomplete, or unsatisfactory, this might be an
indication that the source data is either unavailable, non-existent, or it cannot be retrieved.

Question 11

Failure to Have Adequate Information Gathering and Retrieval Systems

Answer 11

This, along with the red flags concerning the source documents, assists the auditor in determining whether or not the scope of the audit should be increased, and if so, in what areas

Question 12

Altered or Missing Documents

Answer 12

Frauds are often concealed by altering or misplacing supporting documentation

Question 13

Photocopied or Duplicate Documents

Answer 13

Transactions should be authorised and recorded based on original documentation, not
duplicates. Duplicates or photocopied documentation is subject to alteration and
manipulation

Question 14

Failure to Have Adequate Supporting Documentation for Reports and Summary
Data

Answer 14

In order for supporting documentation to be adequate, it must be sufficient, competent, and
relevant. In addition, the auditor must apply common sense to the source document. For
example, are the amounts too high or too low, do they include odd times, places, and/or
people?

Question 15

some reported cases typifying Beneficiary Fraud are:

Answer 15

• Social insurance frauds
• False claims for benefits
• Fraudulent ID numbers
• Improper billing procedures
• Kickbacks

Question 16

he best detection methods for beneficiary fraud will require

Answer 16

the examination of source documents or developing computer programs to identify fraudulent patterns

Question 17

DETERMINING NEEDS

Answer 17

The typical fraud in this phase is collusion between the buyer and contractor, where the
buying organisation’s employee receives a gratuity, bribe, or backhander for recognising the
need for a particular product or service.

Question 18

TAILORED SPECIFICATIONS

Answer 18

One fraudulent scheme that occurs in this process is the tailoring of the specifications to a
particular supplier for no obvious technical reason.

Question 19

POORLY WRITTEN SPECIFICATIONS

Answer 19

In some instances, the fraud is committed solely by the contractor based on poorly written
specifications. In the instance of poorly written specifications, it is easy for the contractor to
deliver a product or service that is priced higher than what was ordered.

Question 20

VAGUE SPECIFICATIONS

Answer 20

In other instances, vague specifications are deliberately written by the buyer in collusion with
the contractor, so that more money can be claimed later.

Question 21

AGREEMENT TO AMEND CONTRACTS

Answer 21

In situations where there is collusion between the buyer and supplier, there is sometimes an
agreement to award the contract based on skimpy specifications, and then increase the price
later once the contract has been awarded through amendments to the contract.

Question 22

The following is a list of potential red flags for frauds involving specifications:

Answer 22

• Providing the contractor with information or advice on a preferential basis
• Using statements of work, specification, or sole source justifications developed by, or in
consultation with, a contractor who will be permitted to bid
• Permitting consultants who assisted in the preparation of the statements of work,
specifications, or design to perform on the contract as subcontractors or consultants
• Splitting costs into separate categories to avoid review
• Writing specifications not consistent with past similar procurement

Question 23

Examples of bid submission schemes are:

Answer 23

• Premature opening of bids
• Altering bids
• Unjustifiable extension of bid opening dates
• Controlled bid opening
• Falsifying bid logs and documents

Question 24

To detect bid submission schemes the fraud examiner should be aware of:

Answer 24

• Acceptance of late bid
• Falsification of documents or receipts to get a late bid accepted
• Change in bid after other bidders’ prices are known
• Change in bid dates
• Receipt of late bids
• Last bid usually receives the bid

Question 25

Most bid-rigging fraud schemes involve

Answer 25

a collusion between contractors of competing

companies during the bidding process.

Question 26

BID ROTATION

Answer 26

Collusive bidding occurs when a group of prospective vendors exchange information on
contract solicitations, taking turns at submitting the low bid.

Question 27

BID SUPPRESSION

Answer 27

In this type of scheme, one or more competitors agrees with at least one other competitor to
refrain from bidding or agrees to withdraw a previously submitted bid so that a contractor’s
bid will be accepted. Other forms of this activity involve agreements by competitors to fabricate bid protests or to coerce suppliers and subcontractors not to deal with non- conspirators who submit bids.

A variation of bid suppression occurs when competitors make arrangements to refrain from
competing in a designated portion of a market. This might be accomplished based on customer or geographic area. The result of such a division is that competing firms will not bid or will submit only complementary bids (discussed below) when requests for bids are issued in the competitor’s unassigned area.

Question 28

COMPLEMENTARY BIDS

Answer 28

also known as “protective” or “shadow” bidding, occurs when competitors submit token bids that are too high to be accepted (or if competitive in price, then on special terms that will not be acceptable). Such bids are not intended to secure the buyer’s acceptance, but are merely designed to give the appearance of genuine bidding.

Question 29

PHANTOM BIDS

Answer 29

creating dummy companies to submit a variety of bids on a single contract

Question 30

To detect BID-RIGGING SCHEMES, the fraud examiner must be alert for:

Answer 30

• “Unsuccessful” bidders who later become subcontractors.
• Wide disparity in bid prices.
• Same contractors who bid on all projects with rotating low bidders.
• Other qualified vendors who fail to submit bids.
• Bid protests from losing, qualified bidders.
• Splitting up requirements so contractors can each get a “fair share,” and can rotate bids.
• A rotational pattern to winning bidders.
• A geographical pattern to winning bidders.
• Joint venture bids by firms who could have bid individually.

Question 31

Defective pricing occurs during the negotiated contracting process when

Answer 31

contractors fail to disclose accurate cost or pricing data in their price proposals, resulting in an increased contract price

Question 32

Examples of defective pricing schemes generally involve the submission of inflated labour
costs and inflated material/parts costs. Other schemes involve:

Answer 32

• The use of vendors other than the one proposed.
• Not disclosing documents on vendor discounts.
• Changing make or buy decisions.
• Not disclosing residual material inventory.
• Inflating costs by channelling work under contract through a dummy company.
• Withholding information on batch purchases.

Question 33

To detect defective pricing schemes, the fraud examiner should be alert for the following:

Answer 33

• Failure to update cost or pricing data even though it is known that past activity showed that costs or prices have decreased.
• Failure to correct known system deficiencies that can lead to defective pricing.
• Repeated denial by the contractor of the existence of historical records.
• Delay in the release of data to the buyer to preclude possible price reductions.
• Altered supporting data.

Question 34

n order to increase profits, the contractor might employ a product substitution scheme, failing to meet the contract specifications in the areas of either quantity or quality of products. Examples of schemes involving product substitutions include:

Answer 34

• Delivery of inferior/substandard material.
• Delivery of materials that have not been tested.
• Falsification of test results.
• Delivery of used, surplus, or reworked parts.
• Delivery of counterfeit products.
• Submission of false certifications (certifications are statements that parts or materials are
new, domestically manufactured, and meet the contract specifications concerning quality
and quantity).
• Delivery of commercial equivalents hardware.
• Passing off or specially creating samples for inspection.
• Surreptitious movement of inspection tags to uninspected goods.
• Substitution of look-alike goods.

Question 35

The following is a list of potential red flags for product substitution schemes:

Answer 35

• High percentage of product returns to vendor for non-compliance with specifications. • Product compliance certificate missing.
• Compliance certificates signed by low-level employee with no quality assurance
responsibilities.
• Materials testing done by supplier, using his own personnel and facilities.
• Laboratory test reports are identical as to sample descriptions and test results, varying
only as to date and lot number tested.
• Highest profit product lines have the highest number of material return authorisations or
reshipments.

Question 36

In order to detect PRODUCT SUBSTITUTION , the fraud examiner should consider the following
audit procedures:

Answer 36

• Conduct both routine and unannounced inspections and testing.
• Carefully review the inspection and testing reports.
• Request assistance from outside technical personnel to conduct after-the-fact tests.
• Interview personnel and others for indications of non-compliance.
• Review correspondence and contract files for indications of non-compliance.

Question 37

Accounting mischarges are defined as

Answer 37

knowingly charging unallowable costs to the buyer,
concealing or misrepresenting them as allowable costs, or hiding them in accounts (such as
office supplies) that are not usually audited closely. Another common variation involves
charging types of costs or independent research and development to other cost categories.

Question 38

Material mischarges are usually limited to

Answer 38

raw materials which can be used on many different

contract products or diverted for personal use.

Question 39

Material mischarges can be detected by examining material cost transfers. These might
include transfers:

Answer 39

• From government contracts to commercial.
• Via any type of suspense or holding account. • From ongoing jobs to jobs not scheduled for delivery until far into the future.
• From prior lot work orders to current or future work orders.
• To inventory write-off accounts.
• To scrap accounts.
• Of materials ordered and charged in excess of contract requirements.
• Of seemingly unrelated materials charged on routing slips.
• In which material standards are not updated over periods of time when the contractor
recognises improvements in manufacturing technology or product design.
• In which a significant variance exists between proposed versus negotiated vendor prices.

Question 40

Labour costs are perhaps more ___ than are material costs

Answer 40

susceptible to mischarging

Question 41

There are several schemes involving mischarged labour costs. Some of the more prominent
ones are:

Answer 41

• Transfer of labour costs
• Time and charges do not agree with contractor billing
• Fictitious time cards
• Changes made to individual time cards
• Time card charges by supervisors

Question 42

Labour mischarges can sometimes be detected by examining the following:

Answer 42

• Distinctive labour-charging patterns on research and development.
• Significant increases in charging to overhead accounts (for example, idle time, down
time, and non-applied time).
• Reclassification or reorganisation of employees from indirect to direct charges.
• Changes in the labour-charging relationships between certain tasks or types of labour.
• Decrease in indirect expense pools.
• Increased labour hours with no corresponding increases in materials used or units
shipped.
• Actual hours and dollars consistently at or near budgeted amounts.

Question 43

Computer programs can be written to identify

the following:

Answer 43

• Vendors with post office box addresses.
• Vendors with addresses in common with employee addresses.
• Contractors who were unsuccessful bidders who are now subcontractors.
• Payments to a particular vendor over a specified period of time.
• Vendor payments that were initiated or paid outside the normal system (for example,
hand carried or approved).
• Employees who are assigned to more than one contract on any given day.

Question 44

Common Problems of Investigators

Answer 44

Lack of Familiarity with Terminology
Wide Variety of Case Assignments
Case Loads

Question 45

The typical investigator will ask:

Answer 45

• What is the evidence? Is it clear and convincing?
• Who are the witnesses? Are they credible?
• What is the amount of the loss? Can it be proven?
• What is the intent of the perpetrator? Can it be demonstrated that there was malice
aforethought?
• How difficult is the case to investigate? Is it necessary to review reams of documents
looking for evidence?

Question 46

The auditor can best overcome reluctance of the investigator to work a case by using good
salesmanship. In this regard, the following suggestions are helpful:

Answer 46

• Present your case in person, not over the telephone.
• Spend a little time establishing a relationship with the investigator if you do not know him.
• Summarise your case in one sentence. If you cannot, there is little realistic hope of prosecution.
• After summarising the case, fill in the details. Do not overwhelm the investigator with minutia.
• Pledge the resources of your agency in helping provide backup.
• Follow up periodically with the investigator after the case has been referred, but be careful of making a pest of yourself.
• Offer an expert witness, if necessary. Remember, though, if you testify in a criminal case, you might be excluded from sitting in on your own case due to rules concerning witnesses.