Detecting & Prosecuting Fraud
2 June 2010
Army Day
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What is Fraud?
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Fraud is defined by Generally Accepted
Government Auditing Standards as a type of
illegal act involving the obtaining of something of
value through willful misrepresentation.
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Common Types of Fraud
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Theft of cash, supplies,
inventory, equipment, and
information
Skimming
Fictitious disbursement
Duplicate billing
Billing for goods not delivered
or services not performed
Inflated employee expense
claims—travel vouchers
Payroll fraud
Fraudulent financial
statements or performance
reports
Bribery and kickbacks
Bid rigging
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Corruption
Conflict of interest
Unauthorized use of
government property
Falsifying information
Overtime fraud
Contractor misrepresenting or
overstating costs
Contractor misrepresenting
self as small/disadvantaged
business
Product substitution
Noncompliance with contract
specifications
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Fraud Characteristics
Most frauds begin small and continue to grow
over time.
 Fraudsters primarily exploit inadequate internal
controls for their own gain.
 Fraudsters usually try to conceal fraud by
making false entries into systems.
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Fraud Characteristics
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Typical fraudster:
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Middle age
Member of management
Employed by the organization for a number of years
In position of trust
Educated
Head of household
Member of community organizations
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Fraud Indicators
Management override of key controls.
 Inadequate or weak internal controls.
 No written policies and procedures.
 Overly complex organizational structure.
 Key employee never taking leave or vacation.
 High turnover rate, reassignment, firing of key
personnel.
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Fraud Indicators
Missing electronic or hard copy documents that
materialize later in the review.
 Lost or destroyed electronic or hard copy records.
 Photocopied documents instead of
originals. Copies are poor quality or illegible.
 “Unofficial” electronic files or records instead of
“archived” or “official” files or records.
 Revisions to electronic or hard copy documents
with no explanation or support.
 Use of means of alteration to data files.
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Fraud Indicators
Computer-generated dates for modifications to
electronic files that do not fit the appropriate time
line for when they were created.
 Missing signatures of approval or discrepancies
in signature/handwriting.
 Computer report totals that are not supported by
source documentation.
 Lengthy unexplained delays in producing
requested documentation.
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How is Fraud Detected?
Audits
 Government Employees
 Hotline Allegations/Tips
 Accident
 Crime Prevention Surveys
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Fraud Detection Statistics
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Certified Fraud Examiners Survey 2008 showed
fraud detection as:
 66% by tips or accidents
 28% by audits
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Auditor’s Responsibilities
In planning an audit, auditors should assess
risks of fraud occurring that is significant within
the context of the audit objectives
(workplace/individual pressures, opportunity,
rationalization).
 Auditors should design procedures to provide
reasonable assurance of detecting fraud if risk
factors indicate that fraud has or is likely to
occur.
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Auditor’s Responsibilities
Auditors should extend audit steps to determine
whether fraud has likely occurred if information
comes to the auditors’ attention indicating that
fraud that is significant within the context of
objectives may have occurred.
 When risk factors are identified, auditors should
document the risk factors identified, the auditors’
response to those risk factors individually or
collectively, and the auditors’ conclusions .
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What is Fraud Risk?
The possibility of asset misappropriation, misuse of
entrusted power, and the intentional
misreporting/concealment of information for private
gain.
 Risk is measured in terms of:
 Impact.
 Likelihood.
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Fraud Risk Assessment
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Determine relevant fraud risks within context of
audit objectives.
Identify potential fraud schemes and prioritize
them based on risk.
Map existing controls to potential fraud
schemes and test controls.
Test for fraud.
Document and report on the fraud risk
assessment.
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Investigative Referral Process
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Contact investigators about potential fraud
whenever audit results show:
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Presence of one or more “red flag” fraud indicators
combined with risk assessment showing heightened
fraud risk and major control weaknesses.
Actual examples or evidence of potentially fraudulent
activity (e.g., falsified documents or misrepresentation,
vendor overbilling, and/or testimonial statements).
Contact your Office of Counsel to discuss fraud
risk and indicators.
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Investigative Referral Process
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Auditor’s role in supporting investigations &
prosecutions:
 Provide analytical support to investigators.
 Assist the activity in correcting internal control
weaknesses that allowed fraud to occur.
 Provide working papers to U.S. Attorney.
 Testify as requested.
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Case Studies
Kuwait Contracting
 Vendor Payments In Southwest Asia
 Active Duty Military Payroll Adjustments
 Role Players At Joint Multinational Training Center
 Job Order Contracting In Europe

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CASE STUDY #1
KUWAIT CONTRACTING
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Identified Fraud Indicators
Contract awarded to highest bidder and KO’s
rationale not reasonable.
 Unreasonably high prices.
 Limited competition.
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Referral to CID
Command could not provide reasonable
explanation concerning fraud indicators.
 CID interested because:
 Fraud indicators significant and involved
multi-million dollar contract.
 Investigators were investigating contractor
based on allegation from Government
employee.
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Investigative Support
Performed analyses on contractors’ current and
past contracts to estimate overpayment.
 Higher unit prices.
 Unreasonable quantities.
 Performed audit at the contracting office to
assess the adequacy of internal controls and to
determine whether significant fraud indicators
existed for other contracts.
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Fixing Internal Controls
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Audit and investigation led to significant changes
to improve contracting operations.
 Kuwait office reorganized and staff increased.
 Task Force established to look at contracting
operations throughout SWA.
 Established the Gansler Commission.
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CASE STUDY #2
VENDOR PAYMENTS IN
SOUTHWEST ASIA
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Identified Fraud Indicators
Hard copy voucher packages didn’t provide
sufficient support to validate vendor payments.
Voucher error rates:
 50% (563 of 1,116) in statistical sample.
 27% (105 of 394) judgmental (on-site) sample.
 Automated data didn’t always match hardcopy
voucher packages or actual operations.
 Limited Depository Accounts (LDAs) not
reconciled.
 Lack of separation of duties.
 Insufficient internal control program – checklist
mentality.
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Referral to CID
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Breakdowns with purchasing, accountability and
payments processes.
 Billing without support – 2,199 purchases
($5.5M) didn’t have proper support for
requisitions.
 Poor recordkeeping – about $640.7M in
unaccounted for property.
 Invalid payments – $47M on 4 invoices
sampled were invalid payments due to lack of
supporting documentation.
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Referral to CID
Developed partnership with CID early in audit
process – continual communication.
 CID interested in audit results due to increased
number of fraud cases related to contracting and
personnel handling cash on the battlefield.
Examples of recent known cases:
 An officer pilfered CERP funds ($690,000).
 An officer falsified currency fluctuation rate
($400,000).
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Investigative Support
Provided names of individuals with access to
cash – used to conduct FinCEN checks.
 Conducted attestation on questionable purchases
in Iraq based on vendor payment information.
 Identified potential duplicate payments as part of
data mining effort – 3,000 potential duplicate
payments.
 Continuing to refer questionable purchases and
improperly supported payments based on audit
results.
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Fixing Internal Controls
Cash off the Battlefield.
 Vendor Pay Summit (April 2010) - members of
fiscal triad collaboratively worked through
contracting and payment issues.
 Finance Management Workshop (May 2010) addressed training and automation challenges.
 Finance Management Command - revising
internal control program (incorporating risk
assessment).

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CASE STUDY #3
Active Duty Military Payroll
Adjustments
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CID Request
Notified by California National Guard CID in Nov
2005.
 AR 15-6 investigation completed.
 Numerous suspicious DFAS transactions.
 Occurred at U.S. Property & Fiscal Office,
California.
 Audit support requested on 15 Dec 2005.
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Investigative Support
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Agreed Upon Procedures:
 Verify accuracy of each Soldier’s pay,
allowances, and adjustments while on Active
Duty.
 Compare each Soldier’s pay, allowances, and
adjustments by month from Jan 2004 through
Dec 2005.
 Identify any unusual payroll transactions.
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Auditor Conclusions
$724,048 paid to 5 individuals over 24 months.
 Transactions included Gross Pay, Basic
Allowance For Housing, Miscellaneous Other
Credits (W7).
 55 transactions—53 from California, 2 from
Kuwait.
 $323,228 in overpayments.
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Investigative Outcomes
Verified money received by 5 suspects.
 Clear instances of kickbacks totaling about
$150K.
 One instance of one soldier’s pay going into
another soldier’s bank account.
 One soldier clearly identified as the leader.
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Followon Referral
Based on CID support, expanded review of highrisk manual payroll adjustments for Reserve
Component soldiers receiving Federal active
duty pay.
 Identified a National Guard soldier who received
high-dollar payments ($220K over 18 months).
 Referred to investigators—Nov 2006.
 DCIS request for audit support—Dec 2006.
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Investigative Support
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Agreed Upon Procedures:
 Explain pay & allowance system used by DFAS
for processing Reserve Component pay.
 Macro analysis of pay & allowances associated
with suspect account/any other pay accounts.
 Onsite analysis of questionable manual
transactions to determine who processed them.
 Determine origination of funds for suspect
transactions.
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Auditor Conclusions
85 unsupported payment transactions resulting
in $728,181 loss.
 Transactions were result of pay account
adjustments made by 2 DFAS employees:
 81 transactions paid to one individual—loss of
$698,181.
 4 transactions paid to another individual—loss
of $30,000.
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Fixing Internal Controls
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Followon Audit of Miscellaneous Credits For
Reserve Component Pay disclosed 4 causative
factors that allowed fraud to occur without detection:
 No tax impact—once processed unlikely to be
reviewed/audited.
 Use varied greatly among pay offices.
 Used routinely for transactions that had legitimate
transaction codes.
 DJMPS-RC lacked controls to track & identify
source of entry for pay transactions.
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Fixing Internal Controls
Inconsistently applied or ineffective controls
were result of pay offices not having established
guidance for processing W7 transactions.
 These controls either weren’t in place or weren’t
consistently followed:
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• Daily reconciliation of processed transactions.
• Supervisory reviews of high-dollar transactions.
• Document maintenance to support transactions.
• Uniform guidance on use of miscellaneous credit
transactions.
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Fixing Internal Controls
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Recommendations:
 Develop uniform guidance for managing
miscellaneous credit transactions:
• Reconciliation of daily transaction logs.
• Appropriate Use Of W7 Transactions.
• 100% review & support for miscellaneous credit
transactions over a predetermined amount.
 Test
& implement system changes to correct
site of entry weakness.
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CASE STUDY #4
ROLE PLAYERS AT JOINT
MULTINATIONAL
READINESS CENTER
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Identified Fraud Indicators
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Poor internal controls for tracking attendance of
contract role-players.
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COR didn’t document contractor deficiencies.
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Contractor’s invoice wasn’t mathematically
accurate.
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Neither COR’s nor contractor’s daily attendance
records supported contractor’s invoice.
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Referral to CID
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Follow-up interviews with COR raised more “red flags”:
 Admitted he was aware the invoice wasn’t accurate.
 Told us he and contractor’s lead employee were close
friends.
 Exhibited an unusually high-level of nervousness.
 Made unusual statements concerning guilt.
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CID interested because:
 Numerous fraud indicators.
 Critical theater contract.
 Vale of contract.
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Investigative Support
Reconstructed invoice using available
documentation.
 Concluded the contractor billed:
 For role-players it didn’t provide.
 Using incorrect rates.
 For contractors who were sick (unavailable).
 Army overpaid the contractor about $807,000
(for a task order valued at about $4.6 million).
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Fixing Internal Controls
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Audit and investigation led to significant changes
in personnel and improvements to controls:
 COR removed and retired (also debarred).
 Contractor’s lead employee was terminated
and debarred.
 Funds recovered (entire amount).
 Command revised its processes and
improved contract oversight (confirmed by
follow-up audit)
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CASE STUDY #5
JOB ORDER CONTRACTING IN
EUROPE
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CID Request
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Local national employee allegedly inflated IGEs to
collude with contractors.
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CID requested audit support for its investigation.
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Audit evaluated whether processes and controls
for preparing IGEs and contracting for work
resulted in best value.
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Investigative Support
Identified high degree of commonality between
IGE and contractor proposal for 30 of 33 task
orders:
 17 with over 30% identical line items.
 9 with over 70% identical line items.
 4 with over 90% identical line items.
 Re-creation of 4 IGEs showed DPW personnel
inflated IGEs:
 Independent estimates significantly lower than
garrison IGEs and contractor proposals.
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Investigative Support
Identified 4 government employees who shared
or falsified IGEs:
 1 got kickbacks (terminated and undergoing
prosecution).
 3 to expedite contracting process.
 Expanded scope to two other garrisons and
found similar results.
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Control Weaknesses
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Process weaknesses:
 Work wasn’t described adequately.
 Revised desk estimates weren’t supported with
justifications.
 SOWs didn’t clearly describe work required.
 IGEs weren’t properly prepared or reviewed.
 Contractor’s proposals weren’t properly controlled
and safeguarded.
 Negotiations not documented sufficiently.
 Inadequate separation of key duties.
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Control Weaknesses
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Guidance weaknesses:
 Regulatory guidance wasn’t followed.
 Regulatory guidance wasn’t incorporated into
garrison SOPs.
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Oversight weaknesses:
 Feasibility studies weren’t performed.
 Results of bi-annual inspection reviews
weren’t reported to appropriate levels.
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Fixing Internal Controls
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Responsibility for Job Order Contracts assigned
to one organization—the Corps of Engineers
(COE):
 SOP prepared.
 Training provided to all DPWs in Europe.
 Biannual reviews performed by COE with
independent engineer evaluations.
 8 personnel terminated with criminal charges
currently pending in the German Courts.
 Recoupment actions initiated.
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Case Studies Summary
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Fraudulent activities occurred because:
 Managers/employees weren’t trained
adequately.
 Insufficient staffing/duties weren’t separated
effectively.
 Appropriate guidance wasn’t established.
 Controls weren’t enforced and complied with.
 Documentation requirements were dismissed.
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Case Studies Summary
Fraudulent activities occurred because (cont’d):
 Required reporting wasn’t done or was
incorrect.
 Oversight activities were ineffective.
 Processes were used as work-around
solutions without control modifications.
 Transactions weren’t reconciled as required.
 Evidence of collusion existed in some cases.
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Managers’ Role
Continually assess and evaluate their internal
control structure to assure it’s well designed and
operating effectively.
 Ensure control structure provides reasonable
assurance that organizational objectives are
being achieved.
 Update controls to meet changing conditions.
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Souce: GAO Internal Control Management and Evaluation Tool
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The Five GAO Standards
Control Environment
 Risk Assessment
 Control Activities
 Information and Communications
 Monitoring
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Souce: GAO Standards for Internal Control in the Federal Government
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Control Environment
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Management and employees should establish
and maintain an environment throughout the
organization that sets a positive and supportive
attitude toward internal control and
conscientious management.
Souce: GAO Standards for Internal Control in the Federal Government
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Risk Assessment
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Internal control should provide for an
assessment of the risks the agency faces from
both external and internal sources.
Souce: GAO Standards for Internal Control in the Federal Government
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Control Activities
Internal control activities help ensure that
management's directives are carried out.
 Control activities should be effective and efficient
in accomplishing the agency's control objectives.
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Souce: GAO Standards for Internal Control in the Federal Government
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Control Activities—Examples
Top level reviews of actual performance.
 Reviews by management at the functional or
activity level.
 Management of human capital.
 Controls over information processing.
 Physical control over vulnerable assets.
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Souce: GAO Standards for Internal Control in the Federal Government
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Control Activities—Examples
Establishment and review of performance
measures and indicators.
 Segregation of duties.
 Proper execution of transactions and events.
 Accurate and timely recording of transactions
and events.
 Access restrictions to and accountability for
resources and records.
 Appropriate documentation of transactions and
internal control.
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Souce: GAO Standards for Internal Control in the Federal Government
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Information & Communications
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Information should be recorded and communicated
to management and others within the entity who
need it and in a form and within a time frame that
enables them to carry out their internal control and
other responsibilities.
Souce: GAO Standards for Internal Control in the Federal Government
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Monitoring
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Internal control monitoring should assess the
quality of performance over time and ensure that
the findings of audits and other reviews are
promptly resolved.
Souce: GAO Standards for Internal Control in the Federal Government
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