construction audit fraud presented by: denise cicchella, director altran control solutions november...
TRANSCRIPT
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Construction Audit Fraud
Presented by: Denise Cicchella, Director
Altran Control Solutions
November 3, 2009
ACFE - Charlotte, NC
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Director, Altran Control Solutions International - Construction Audit Practice
Author:
• IIA Handbook Series: Construction Audit Guide: Overview, Monitoring and Auditing
• Essentials of Construction Management (co-author)
IIA Speaker/Instructor
(201) 835-4069
Denise Cicchella, MBA, CIA, CFE, CCA
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© Altran Control Solutions', October 2009
Construction Life Cycle
CO
Finishing
Site Work
Foundation
Site Preparation
Demolition
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Types of Contracts
Lump SumGMAX
(Guaranteed Max)
Design-Build
Cost Plus Percentage of Completion
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Lump Sum
One price (by trade) to encompass all costs and to complete the project as specified.
Great in theory but there are frequently too many unknowns. Contractors’ protection = change orders, owner’s protection = change management controls
Other names
Stipulated Sum
Fixed Price
May or may not include “General Conditions’
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Cost Plus
Similar to having work done with a mechanic.
Parts = Material Equipment and Labor
Percentage for other costs – called “Overhead and Profit” or general and administrative (G&A).
Also called Time and Material
No incentive to reduce cost – more costs means more G&A.
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More Cost=More G&A
Project Cost 2 Million with 4% G&A
• $2,000,000 * .04 = $80,000
Project Cost 3 Million with 4% G&A
• $3,000,000 * .04 = $120,000
Is the difference really labor and other costs or is it overinflated buying?
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GMAX
Cost plus with a limit on spending.
Cost is capped at a MAX called an upset price or price cap.
May be capped by individual trade or total project cost.
Creates a use it or lose it scenario, charge costs to Max.
Savings Incentive may be included in contract. (False control). [Only known to be have done once at WSU]
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Savings Incentive ClausePromise to share in any amounts “under budget”
• 60% Owner
• 40% Construction Manager
Assume under budget by $1,000,000
• Which would you rather?
• $1,000,000 or $400,000
• Contractors choose to “try” the fraud and if they get caught claim it was nothing more then an error.
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Design – Build
Also called turnkey
Less bidding as the contractor and builder are one in the same.
Maximum acceptance cost is given at bidding.
Builder is the designer and the owner has little say in what goes in.
Reduces the number of cooks stirring the pot, but do you have the right chef?
Gated community homes usually are design-build.
Franchises are generally design-build.
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Percentage of Completion
Payment is made based on lump sum ibut apportioned based on “amount completed”.
Difficult to define percentage of completion
Even more difficult to calculate.
Is it by trade or by entire project?
Includes an estimate of included materials.
True Up full completed projects.
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The Fraud Triangle
Motive
OpportunityRationalizationHow Can I?How Can I?Why Should I?Why Should I?
Why Me?Why Me?
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Rationalization
Why would the contractor thinks he deserves to commit fraud?
He lowered prices as a “favor”.
With all the money going out no one would miss it anyway.
Payment on invoices has been slow so – this is payback.
He knows that the project is so time sensitive that even if he gets caught he will not lose the project.
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Opportunity
Why can the contractor conceal his fraud?
No one reviews invoices.
Rubber stamping (Radar O’Reilly principle).
Too much paperwork.
Reviewer does not understand construction like the contractor does. (Mechanic’s theory).
Everything is done with an air of haste.
Bills are not audited.
He has gotten away with it before.
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Motivation
What would motivate a contractor to commit fraud?
Need it to meet capital demands.
Declining trends in construction.
Low balling original bid to win job.
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When to conduct a Construction Audit
During After
Time
Fix ongoing problems
Implement controls
Not getting in the way
Safety – location
Get to the contractor before he is gone
More effective
Memory recall
Right to Audit Clause may expire
Concentrate risks when you can see the overall picture
Quicker
More efficient
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When to conduct a Construction Audit
NOW!!!
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Benefits of Early Intervention
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MULTI DISCIPLINED APPROACH
Conventional Audit Skills
Knowledge of Construction and
Construction Terms
Ability to read and understand contract
languageData Analytics
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SOME THOUGHTS
During the Big Dig in Boston claims had to be forfeited when it was discovered because no one tested to ensure that insurance policies paid for were actually inactive. Amount lost $80 million.
A recent audit revealed that equipment rates were off by nominal amounts, amortized over the whole project this amounted to $800,000.00
A project was recently reported to the press, a loss of $27,000 was incurred because no one ensured that prevailing wages were being paid.
In a recent audit we tested conversion rates between the GC in Japan and the Client in the US. An agreed upon rate was contracted for and not used. It took us 40 minutes to recover $1.8 million.
DC
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Performing a Site Walk Through
Supervised - Are workers properly supervised.
Idle – Are workers or equipment sitting there with nothing to do.
Recognize – do you recognize workers from the last walk-through.
Check for obvious safety violations.
Look for risks to your client.
Organized – Does the site and the workers appear to be flowing.
Count the number of employees to use later when verifying payroll for the period of your visit.
Kept – Is the site kept clean and broom swept?
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Audit Costs Summary
RADIO TestR – REIMBURSABLEA – ACCURATED – DOCUMENTEDI – INCURREDO - ORDER
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Auditing Lump Sum
Change Orders
Substitution
Permitting
Insurance
Correct Price
Everything New?
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Auditing Cost Plus
Hours
Overtime
Rates
Supervision
Employees
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Cost Plus
Rates for blueprints / copies
Travel Expenses
Audit charges from subs
Audit payroll taxes
Audit applied rates for G&A or profit.
Audit labor burden
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Auditing GMAX
Costs
Rebates
Allocations
Max
Scrap
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Contract Incentives
If the contract has incentives or damages consider these in your audit:
Cost Incentive (coming in less then GMP)
Quality Incentive
Delivery Incentive
Time Incentive
Safety Incentive
Target Price
These same incentives may also be damages.
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30
About 10% of all project costs are fraudulent. The National Audit Office in the UK states that this can climb as high as 20%!
FRAUD!
Project Costs Wasted on Fraud
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5–10 % of all Time & Material project costs are due to fraud, error, or mistakes.
The 2008 Association of Certified Fraud Examiners (ACFE) “Report to the Nation on Occupational Fraud & Abuse” says that construction ranks as the fifth highest industry in median losses per scheme, with a median loss per scheme of $330,000.
Think About This……
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Cost of Fraud
$$+
Safety
Rep
Employees
Punitive
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Common Areas of Fraud and Abuse
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Pre –Bid Schemes
Corruption
Kickbacks
Bribes
Conflicts of Interest
Fraudulent Bonds
Post-Bid Schemes
Collusion
Signature Fraud
Unbalanced Bidding
Exclusion of Qualified Bidders
Leaking Bid Data
Unjustified Sole Source Awards
Change Order Abuse
Co-Mingling Contracts
Unpaid or Fraudulent Insurance
Contract Fraud
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What is a contract?
Five Elements
1. Competent Parties
2. Lawful Subject Matter
3. Legal Consideration
4. Mutual Promises
5. Mutual Obligations
Other Considerations
• Legally Enfoceable
• Oral or Written
• Certain and Definite Terms
• Revocable
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Corruption
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Do Vendors pay to play?
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Vendor Due Diligence
How long have they been in business?
How many other jobs are they currently involved in?
Do references believe that they can provide a quality service or material?
Have they worked with you before?
Were they successful in the work they did for you?
What does Dunn and Bradstreet, Hoover’s, or Kroll say?
Are they subject to any pending litigation?
When was the last time they were asked to bid for your services? How did their prices vary after the last bid?
Are they related to anyone in your company!
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Bribes and Kickbacks
The giving or receiving of a “thing of value” to influence a business decision or official act.
Takes Multiple Forms
• Refunds after the fact
• “Facility Tours”
• Gifts
• Service Favors
• Loans
Conflicts of Interest
A person with procurement decision making ability has an undisclosed (financial) relationship in the recipient of the contract or bid.
• Title or ownership of acquired property.
• Stock Ownership
• Employment offers or prior employer – Are they still “on the payroll?”
Bribes, Kickbacks and Conflicts of Interest
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Unusually high prices
Price Increases
Purchases above and beyond
Repeated use of the same supplier
Acceptance of poor performance
Close relationships with vendors
High commissions
Reputation or debarrment
Procurement official living beyond means
Use of liaisons or middleman
Change orders unusually high or for “normal reasons”
Failure to disclose key information about key stakeholers
Public Records search shows financial interest with high level or procurement. personnel
Red Flags
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Fraudulent Bonds
Surety bonds have consecutive numbers.
Surety bond outdated
Surety bond offered by same sureties
Sureties of unknown or poor reputation
Collusion
Bid Rotation
Purpose submission of high bids to allow a lower bidder to win, at inflated price – share in profits.
Pay off of “new” bidders
Hiring losing bidders as subcontractors
Similar bids
Fraudulent Bonds and Collusion,
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Labor Fraud
Unlicensed Workers
Ghosts on the Payroll
Unauthorized Workers
Time Miscalculations
Unauthorized Rate Changes
Up-billing
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Undocumented
Not on site
Worked less time
Wrong Rate
Ghosts
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PAYROLL ISSUES - A GHOST STORY
Employees working 32 hours a day
100 hours @125 per hour = $12,500
Father and Son had birth years 3 years apart, led to discovery of people on payroll not paid
65 hours @ $60 per hour = $3,900
So many people, so little space = $120,000
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GHOST STORY II
150 workers working on a day the site was closed. Because site was closed they were paid overtime.
$27,000
Workers working multiple projects simultaneously
$320,000
Employee paid more on paper then on paychecks
$190,000
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EVEN MORE GHOSTS
Everyone’s marital status on Payroll registers were “single’s” despite their age category
Unwillingness to open their books for Audit
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Up-billing
• Charging a journey as a foreman.• Charging full cost for an apprentice.• May not necessarily just be construction workers:
• Project Managers• Should be done by clerical • Clerical Costs covered in G&A
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Evidence of Up-billing
• Unusual overtime charges.• Tasks that seem to take too
long to complete.• Workers working more then
usual shifts.• Workers whose “titles”
keep changing.• Workers on certified payroll
twice with different titles.• Workers paid multiple
rates.• Incorrect math on payroll.
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Testing for Up-billing
• Obtain a copy of certified payroll report.• Categorize payroll by employee and include:
• Employee name• Social Security Number• Rate of Pay• Time Card
• Verify information to personnel records on file with the general contractor.
• Interview personnel:• Obtain title• Obtain Job description
• Compare to registered job records.• Compare payroll to actual time cards.
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Equipment Fraud
Personal Use
Free Parking Pilfer Piece by
Piece
No operator
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Material Fraud
Unauthorized Material
Substitute Material
New vs. Like New
Invoicing
Price Extensions
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Replacement Material
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Three Screwson a square!
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Replacements
Contract Invoice
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Behind the Wall Shortcuts
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Invoicing
Invoicing for material not used
Invoicing/Ordering material for other projects
Back Dated Invoices
Invoicing for material that was returned
Reporting theft of material when no such loss incurred.
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Time Schemes
Unauthorized Delay
Phantom Weather
Change order to escape liquidated damages
Intentional Failure to recover on liquidated damages
Charging for work performed on Holidays or Unauthorized OT
Ordering OT for work that should be completed in normal course of business
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Change Order Management
Work then approve
Rate Changes
Site Conditions
Time Quotes
Work then Approve
Log and Monitor
Trends by Contractor/Subcontractor
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Fake
Over
RepeatOut OfScope
Stated
Billing Fraud
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Duplicate Billings
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Investigating Duplicate Billings
• Obtain copies of invoices and cancelled check showing proof of payment.
• Contact vendor and request copy of accounts receivable ledger for contractor.
• Interview personnel responsible for preparing monthly invoice.
• Interview project manager or general contractor who certified or did initial due diligence on the invoice.
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Evidence of Duplicate Billings
• Invoice Numbers out of sequence
• Date of invoice out of order for construction done
• Invoice date inconsistent with the rest of the invoices.
• The invoice seems familiar
• An analysis of invoice numbers indicates that duplicate numbers.
• Invoice numbers are “backwards”
Invoices Out of Order:
During an audit of a construction project, I was presented with a slew of invoices for painting, amounting to almost 75% of the cost of painting indicated during billing. According to the monthly invoice only 20% of masonry (walls) had been completed.
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Evidence of Fictitious Vendors/Bills
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Testing for Fictitious Vendors/Bills
• Testing EIN• Verify again consumer databases• Run against Hoover’s, Dunn and Bradstreet, or Accurint or other vendor databases
available.• Interview Accounts Payable Clerk at General Contractor• Send certification letter to vendor on address given on invoice.
• Testing Website• Visit website and verify that they sell goods and services indicated on the invoices.• Search for company using Bing, Google, and Ask. Note any “headlines” found during
your searches.• Check local yellow pages to ensure existence of company.• Call company using number supplied on the invoice.
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Operator Fraud
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A little boy was attending his first wedding. After the service, his cousin asked him, "How many women can a man marry?" "Sixteen," the boy responded. His cousin was amazed that he had an answer so quickly. "How do you know that?“"Easy," the little boy said. "All you have to do is add it up, like the Bishop said: 4 better, 4 worse, 4 richer, 4 poorer"
It’s all in the Math….
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Time and Expense Fraud
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Expense Not justified for work performed.
Excessive/Elaborate expenses
Meals with Owners
Invoices not consistent with expenses submitted.
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Contractors know the cost of Fraud!
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www.altrancontrolsolutions.com