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• Report done every 2 years, initially done in 1996.
• Based on surveys of CFE’s on cases investigated and resolved.
• 2008 report based on 959 cases across the country.
• Most authoritative survey of its type

Association of Certified Fraud Examiners – 2006 Report on Occupational Fraud and Abuse

• Occupational fraud schemes frequently continue for years before they are detected.
• Corruption is most common form of occupational fraud (27%), fraudulent billing schemes (24%) second.
• Data shows that fraud is more likely to be detected by a tip than by audits, controls, or any other means.
• Implementing major controls appears to reduce the median loss.
• Industries most vulnerable - Banking and Financial Services (15%), government (12%) and healthcare (8%).
• Small businesses are especially vulnerable to occupational fraud. Same for 2006 survey. Check tampering and fraudulent billing were the most common small business fraud schemes.
• Lack of adequate internal controls was most commonly cited
• Most victim companies modified their internal controls AFTER discovering they have been defrauded.
• Occupational frauds were most often committed by the accounting department or upper management.
• Fraudsters are generally first-time offenders. Triangle of Opportunity, Incentive, Rationalization.

• TIP or COMPLAINT - Nearly half of cases in 2008 study were uncovered by a tip or a complaint from an employee, customer, vendor, or other source.
• INTERNAL CONTROLS AND INTERNAL AUDITS
• Most helpful in government and public companies
• DISCOVERY BY ACCIDENT
• Most common in private companies
• EXTERNAL AUDIT
• Most helpful for private companies

• Employees should be trained to understand fraud and how it harms the organization
• Encourage employees to report illegal or suspicious behavior
• Reassure employees that reports may be made confidentially and the organization prohibits retaliation against whistleblowers

• Business with less than 100 employees generally have fewer or weaker controls in place, primarily due to lack of personnel
• Small business frauds are more likely to be detected by tip or accident
• Room for improvement in their proactive detection efforts.

• Clerks
• Managers
• Executives
• Owners/Principals

• Misappropriating assets
• Corruption
• Falsifying financial statements

• Clandestine
• Fiduciary violation
• Committed to obtain financial benefit
• Costs company assets, revenues, or reserves

Opportunity

1. Ability to commit fraud
2. Get away with it

Incentive

1. Greed/desir
2. Pressure/need

Rationalization

1. Crucial element
2. Justifies act

• Opportunity – Area where the employer has the most control
• Incentive – Employer cannot control but may be observable
• Rationalization – Grayest area; hardest for employer to discern

• Misappropriating assets
• Corruption
• Falsifying financial statements

• Bribes
• Economic extortion
• Illegal gratuities
• Conflict of interest

• Differs from traditional bribery only in relation to what is being influenced.

• Kickbacks – Undisclosed payments made by vendors to employees of purchasing companies
• Bid rigging – Employee fraudulently assists a vendor in winning a contract

• Involve collusion between an employee and an outside party (vendor)
• Normally attack the purchasing function
• Consequently, purchasing employees are usually involved

• Market pricing (where’s the harm?)
• No market incentive re: price and quality
• Incentive to recoup kickback
• Usually turn into overbilling scheme

• Vendor submits inflated invoice
• Higher than market pricing
• Shipped less product or lower quality product
• Fictitious invoice
• Employee may or may not have approval authority

• Always a two-sided transaction
• Cash for kickbacks usually diverted to "slush fund"
• Non-company account
• Company checks to fictitious entity
• Paying false invoices
• Payments often charged as “fees” for consulting or other services

• Employee fraudulently assists a vendor in winning a contract
• Subverts the bidding process
• Victim company’s employee tends to have influence in or access to bidding process
• High stakes in construction market (particularly in bad economic times)

• Needs recognition schemes
• Specification schemes
• Tailoring/narrowing
• Prequalification requirements
• Vague specifications
• Bid splitting
• Advance look

• Bid rotation
• Fictitious suppliers
• Restricted bid period

• Abuse of sealed bid process
• Advance or inside information

• Flip side of bribery scheme
• Employee demands payment to select vendor
• Pay up or else
• Transactionally the same as a bribe

• Similar to bribe, but usually occurs after decision
• Often morph into bribery schemes
• May be a way to determine openness to a bribe

• Gifts, travel & entertainment
• Construction work, new windows, finished basement
• Cash
• Checks/financial instruments
• Hidden interests
• Loans
• Asset leases/sales below market
• Promises of favorable treatment

• May violate employee’s fiduciary duty owed to employer
• May violate terms of partnership, ownership or joint venture agreement terms
• Not all conflicts are economic
• Conflict vs bribery
• Approving fraudulent invoice for:
• Kickback, then its is bribery
• Fraudster’s company, then conflict of interest
• Transaction mechanics are the same

• Purchase schemes
• Inflated prices
• Rig bids
• False invoices
• Sales schemes
• Under-market pricing
• Write-off A/R
• Compete with employer
• Divert employer’s clients to employee’s company
• Unique assets transactions
• Usually involves land, buildings or large equipment
• Fraudster owns an interest in the asset
• Fraudster impacts negotiations in his favor
• Land flips
• Resource diversions
• Fraudster uses employer’s materials, equipment, or labor to assist his own company

• Tips from honest employees
• Tips from disgruntled co-workers
• Tips from disgruntled outsiders
• Tips from disgruntled co-conspirators

• People
• Transactions

• Bribe takers/embezzlers
• Big spender
• Gift taker
• Odd couple
• Rule breaker
• Complainer
• Genuine need
• Bribe givers
• Gift bearer
• Sleaze factor
• Too-successful bidder
• Poor products or services
• One person operation

• Material reorder points routinely missed
• Use of same vendor(s)
• Purchasing policies not followed or consistently bent
• Analytics
• Pricing trends year to year or project to project
• Trends relative to market pricing

• False statements in bid docs
• Sign-offs by unauthorized individuals
• Shortcutting or bypassing review proceduresv
• Bidders involved in developing bid docs
• Unusual variations in specification or contracts
• Short bid periods
• Vague terms in solicitation package
• Improper contact (business or social) with a bidder
• Acceptance of late bids/back dating of bids
• Changes to bid after all bids received (intentional errors)
• Patterns in bid awards

• Develop a body of historical data
• For each bid received
• For each bid awarded
• Actual costs for each contract
• By CIS number
• Cost/SQFT (installed)
• Unit prices
• Material prices by purchase unit
• Trend and compare historic data
• Year to year
• Project to project
• By sub/vendor
• By market
• By work (new, rehab, repair)
• By purchasing person
• Against competitors or industry metric
• Versus market pricing
• Look for departures from trends and anomalies

• Very difficult to uncover
• Discovery methods
• Tips
• Observation
• Analysis

• Other vendor complaints
• Employee complaints re: service or quality

• Lifestyles
• Financial problems
• Personal problems (divorce, addictions, relationships)
• Work habits (it takes time to run a side business)
• Involvement in areas of company outside of job duties

• Periodic comparison of:
• Vendor and employee addresses
• Vendor TIN’s and employee SSN’s (including listed relatives
• Vendor phone numbers to all employee phone numbers
• Full investigation of vendor ownership done and filed with periodic reviews/updates
• Periodically interview purchasing employees to identify vendors receiving favorable treatment
• Credit and background checks
• Must have signed employee permission form on hand
• State laws vary, so review with counsel

• Applies FAR to Stimulus projects
• Applies other Federal requirements to Stimulus projects
• NEPA compliance
• Buy American
• Whistleblower
• Federal fraud and false claims
• Contractor reporting
• Federal oversight

• National Environmental Policy Act
• Required even if project has completed an environmental review
• NEPA compliance issues could create delays to construction start
• Adjust your schedules, budgets and/or estimates
• ARRA requires reviews to be "completed on an expeditious basis"
• Fed will likely use a streamlined process
• Even so, delay impacts should be planned for

• Generally:
• All steel, iron and manufactured goods produced or manufactured in U.S.
• "Unmanufactured" construction material must be domestic (e.g. sand)
• All components or subcomponents of manufactured construction materials can be foreign
• Normally 50% must be domestic
• Contracting Officer must mark-up non-compliant bids by 25%
• Any waiver should (must) be obtained prior to submitting offer

• Applies to all "non-Federal" employees
• State & local governments, contractors and subs
• Offenses expanded from fraud to also include:
• Mismanagement, waste, abuse, substantial danger to public health, or violation of law or regulation
• Whistleblower must have only "reasonable belief"
• Employee has low burden to prove reprisal
• Employer must show “clear and convincing evidence” that action against employee would have occurred regardless of whistleblower status
• Economic times may cause employees blow whistle to avoid firing or layoff

• Legislation
• Passed into law
• Fraud Enforcement and Recovery Act (5/09) ("FERA")
• Pending
• H.R. 1788 False Claims Correction Act
• S. 458 False Claims Clarification Act
• vH.R. 1667 War Profiteering Prevention Act
• FERA
• Protects TARP and other stimulus monies
• Authorizes funding to hire fraud prosecutors and investigators
• Extends False Claims Act to any false or fraudulent claim for government money or property whether or not:
1. Claim is presented to government employee
2. Government has physical custody of money
3. Claimant intended to defraud the government
• Pending House and Senate bills
• Essentially apply FERA expansion of the FCA to all federal contracting
• War Profiteering Prevention Act
• Bill is still in Committee
• Aimed at U.S. companies with government contracts to provide goods and services overseas
• Establish criminal penalties for bid rigging, fraud, gross overcharging, delivery of faulty military parts, and environmental damage

• Stimulus contracts in general require more extensive reporting and extend reporting to subs and material suppliers
• New FAR rule 52.204-11
• Applicable to any contract fully or partially ARRA funded
• Requires quarterly public on-line reporting of ARRA expenditures
• If prime or 1st tier sub, disclose names and total compensation of five highest-paid officers
• Reporting likely to be covered by FCA provisions
• Allows competitors access to ongoing projects’ cost and status

• Allows GAO access to prime and sub records
• Permits GAO to interview officers and employees of prime and subs
• IG powers expanded only to the prime contractor
• Contractors should:
• Increase internal and document controls
• Follow FAR to the letter
• Assure that consultants (CPA’s, attorneys and claims consultants) aware of changes to laws and regulations
• These new powers combined with new reporting means project performance issues need to be dealt with proactively