fraud in capital projects and construction denise ... › uploadedfiles › ... · fraud in capital...
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© 2015 Association of Certified Fraud Examiners, Inc.
Fraud in Capital Projects and Construction
Denise Cicchella, CFE, CIA, CCA, PMP
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Fraud in Capital
Projects and
Construction
2015 ACFE
Annual
Conference
Denise Cicchella, CFE, CIA, CCA, PMP
Auspicium, CEO
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Agenda
• Phases of Projects
• Risks at each phase
• Opportunities to commit fraud
• Fraud Prevention Controls – Need for
Governance
• Investigation Strategies and Tips
(c) 2015 Auspicium
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Capital Projects Defined
• Delivers specific objective
• Often specialized in nature (may not be a
core competency)
• Long-term consequences and impact
• Material investment of capital
• Often high risk
– Impact
– Likelihood
(c) 2015 Auspicium
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Examples
• New IT System
– ERP
– Customer Fulfillment
• Development of New Product or Service
• M&A
• New Building or Facility
– Corporate HQ
– Warehouse / shipping facility
– Data Center (c) 2015 Auspicium
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Risky Business
• Project Risk
– $$$$$$
– Probability of Failure
– Reputational
• Vendor Risk
• Technology Risk
• Sabotage Risk
• Fraud Risk
(c) 2015 Auspicium
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Risk Mitigation
(c) 2015 Auspicium
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Phases of a Project
(c) 2015 Auspicium
Decide Design Vendor
Selection Project
Execution Done
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Project Life Cycle Activities
• The least is known about the project near its beginning
– Plans to be developed
– Concept that has to develop
• The level of uncertainty and risk is highest at the beginning of the project
– Feasibility
© Auspicium 2015
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Decisions…
• New activity (service / product) • New system • New building • New market • Replacement system / building • Acquisition / Merger • Divestiture / Closure
ANY one of which could result in multiple
projects!
© Auspicium 2015
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Decide
• Business decision to go ahead with a
project:
– Aligned with corporate strategy?
• Project approval process followed
– Are risks acceptable?
• Is there a trend to how projects are
approved?
– Bias
– Motive (c) 2015 Auspicium
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Bias in Decision Making
• Projects chosen not in organization’s best
interest
• Promote self interest
• Poor tone at the top
• Incompetence or fraud?
• Loss of employee morale
• Reputational damage
(c) 2015 Auspicium
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Decision Techniques
SWOT
Payback
NPV
IRR
Pros/Cons
(c) 2015 Auspicium
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…besides Techniques • Is decision based on:
– Accurate information
– Information from reliable source
– Detailed information
• Are constraints realistic?
– Time
– Cost
– Technical feasibility
• Transparency of decision making
(c) 2015 Auspicium
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Identifying Bias & Favoritism
• One: • Project manager always picked
• Type of project always chosen
• Vendor always selected
• Projects chosen against corporate strategy
• Failure to comply with policy
• Decisions overridden
• “Pet Projects” — even if not prime focus of
business
(c) 2015 Auspicium
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Actionable Findings
• Failure to comply with policy
– Disciplinary Action
• Trends may trigger further investigations
– COI
– Kickbacks
• Enhance processes
(c) 2015 Auspicium
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Project Sabotage
• Purposely harming a project to make it fail:
– Vandalism
– Theft
– Picketing
– Withholding information
– Misleading information
– Friend in front, knife wielder in back
• Proving the wrong project was picked
(c) 2015 Auspicium
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Sabotage Happens
• Damaging IT equipment to prevent a new
system from going live
• Planting endangered species on a
proposed site
• Leaking proprietary project information
– To public
– To competitor
• Likelihood increases for sensitive projects
(c) 2015 Auspicium
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Sabotage Motives
• Fear of Change
– Unemployment
• Conscience
– Environment
– Government or Corporate Policy
• Financial
– Steer toward alternative action
(c) 2015 Auspicium
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Decision-Making Red Flags
COI, Bribes, Kickbacks, and Corruption:
• Costs / Revenue Assumptions • Unsupported
• Skewed
• Ignoring good projects and selecting bad
projects
• Project selection and approval policies not
followed
• Risks understated (c) 2015 Auspicium
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Opportunity
• Decisions taken by single individual:
– Site Identification
– Site Selection
– Vendor Identification
– Vendor Selection
• Executive override
• “Bully”
• Trusted Advisor
(c) 2015 Auspicium
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Hidden Personal Agendas
• Is it Rose Colored Glasses or Personal
Gain?
• Miscalculations (error or intentional
“mistake”)
• Motive
– Personal gain
• Kickback
• Contracts to related parties
• Future employment
• Property owner
(c) 2015 Auspicium
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Design
(c) 2015 Auspicium
What Who
When How
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What
• What will the project:
– Cost
– Do
– Be used for
• Expectations
• Key deliverables
• Expertise will be needed
(c) 2015 Auspicium
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Who
• Will run the project
– Internal
– External
– Executive Sponsor
• Will govern the project
• Will fund the project
(c) 2015 Auspicium
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When
• Will the project finish?
• Are the milestones? • SMART
• Will progress reports be issued?
Dates may be calendar and/or event driven
(c) 2015 Auspicium
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How
• Do you see it getting done?
• Does the organization plan on using it?
– Initial purpose
– Re-purposes
– Expansion
• Can we maximize stakeholder
expectations?
(c) 2015 Auspicium
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Fraud in Design
• Overly restrictive criteria
• Overstating the probability that a design
will work
• Ignoring risks and barriers to success
• Designing more than is needed
– Gold plating
– Personal agenda
– Expanding project scope
(c) 2015 Auspicium
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Key Players
• Design often involves specialists
– Architects
– Lawyer (should be but often done by in-house
counsel)
– Project Manager
– Programmers/Systems Analysts
– Strategic Consultants
(c) 2015 Auspicium
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Issues
• “Up Sell” services
– “Extras”
• Inflate work
– >24 hours in day!
• Extreme promises
– “We can install a new system bug free in
three hours”
• Recommending Related Parties
(c) 2015 Auspicium
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Vendor Selection Phase • Know expertise of vendors – don’t assume
– Creative Resume Writing
– Bid to find out strategies
– Unqualified but bid anyway
• Results in errors in execution
• Results in change orders
• Identify if vendors are related
• Ensure scope is clear
– If not – here come the change orders
• Do not over rely on contractor (c) 2015 Auspicium
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Considerations
• What information/assets does vendor have access to: – What records is the vendor keeping?
– Where is the vendor storing records?
– How are the records being destroyed?
• How is the vendor accessing the site or system?
• How is site/system access monitored and controlled – consider: – New employees?
– Terminated employees?
– Impaired employees?
© Auspicium 2015
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Vendor Bidding Frauds
• Collusion
• Bid Rigging
• Price Fixing
• Bidding to Unqualified Vendors
– Under-specializing the specialists
• Overspecializing the Specialists
• Bait and Switch
(c) 2015 Auspicium
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Corruption
© Auspicium 2015
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Bid Rigging
• Cover pricing: submit a higher price or unacceptable terms, possibly for sub contract
• Bid suppression: agree not to bid or withdraw
• Bid rotation: taking it in turns to win
• Splitting the market: carve out segments of the market or geographic locations
© Auspicium 2015
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Preventing Bid Rigging
• Level Playing Field – Defined selection criteria – More then one set of eyes – No single voice – No conflicts of interest
• Approved Contractor’s List – Review – Refresh
• Banned Lists – www.epls.gov
• May be a banned site
© Auspicium 2015
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Loose Lips Sink Ships
– Don’t allow the bidding process to be compromised by disclosing bids or insider information
– Policy not to disclose rival bids before opening
– All communication to bidders should be done SIMULTANEOUSLY
– Use of NDAs for internal and external stakeholders
© Auspicium 2015
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Know Your Vendor
• Pending Litigation
• Bankruptcies
• Citations – Health
– Safety
– Labor
• Past Performance – Delays?
– Cost Overruns?
© Auspicium 2015
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Up-Billing
• “Bait and Switch” personnel
• Promise the President deliver an intern
• Qualifications
• Licensing
• Rates (?)
© Auspicium 2015
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Digging up the Dirt
• The Internet has made it easier to uncover background information about people and companies
– Pay to Access Databases
• D&B
• Lexis / Nexis
– Accurent/Relavent
• Hoover’s
• Kroll’s
© Auspicium 2015
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More Dirt
• Government Records – Licenses
– Complaints
• Blogs – Current and former employees
– Advocacy groups
• Social Media
• Traditional Media – Newspapers
© Auspicium 2015
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Detecting Vendor Problems
• Bid analysis
• Patterns of bidding
• Trends
• Price comparisons
– Benchmarking
– Independent appraisals
• Quick response
© Auspicium 2015
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Contract as a Control
• Who writes the contract has the advantage • Don’t accept vendor contracts without challenge
• Make sure contract works for you
• Terms and conditions are added or edited
• Contract matches proposal
• Reviewed by expert
• Keep relationship but stand ground
• Make sure contract terms don’t contradict
(c) 2015 Auspicium
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Requirements Not
(Clearly) Defined
• The BIGGEST pitfall
• If the requirement isn’t clearly articulated:
– Undue reliance on vendor to “understand”
– Contract difficult to enforce
– Escalated costs
– Monitoring not possible or difficult
– “Objectives” not met
© Auspicium 2015
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Legal Advice
• Internal counsel may not have expertise in
the contract subject matter
– IT
– Construction
• Contract may contain domain-specific
terminology (Lingo/Jargon)
– Hard / soft costs
© Auspicium 2015
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Right to Audit
• What records will owners have the right to review
• When does audit right expire
• Where will audit be done
• Who pays for the audit
• Does the right to audit pass to subcontractors
• What will happen in the event of overcharges
• Can you audit records not directly related to the project
– Personnel files
– Administrative records
• OFTEN MISSING!!!!!
© Auspicium 2015
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Specific Costs or Calculations
• Labor
• Material
• Equipment (rental)
• Indirect costs
• Unit costs
• Specific calculations
• Profit margins
• Payment to inter-related companies
• Change orders
• Exchange rates © Auspicium 2015
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Other Cost Considerations
• Pre-assignment of supplier
• Owner reimbursed items
• Industry inflation
• Trade discounts
• Discount prices
• Hard vs. Soft !!
© Auspicium 2015
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Liabilities
• Right of refusal to allow employee / vendor on project
• Confidentiality – IT Security
• Expected behavior protocols & consequences
• Premise rules
• Drug/Alcohol Policy – Testing
– Monitoring
– Screening
– Suspicions
© Auspicium 2015
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Substitution Clauses
• “The contractor shall have the right to substitute any materials with a substitute of equal value and quality” – Define value
– Define quality
– Define grade
• Material is not available
• Material is more costly
• Construction requirements
• Changes to building code
• Pricing differentials
© Auspicium 2015
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Salvage
• Who owns money collected on sale?
• Who will it be sold to?
• Who does it belong to?
• Disposal (especially IT)
• Retainage of scrap
– Same criteria apply
– What does owner get for routine maintenance
– The more intricate the design, the more scrap
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Early Termination
• For Cause
– Disciplinary
– Performance
• Financial reasons
• Destruction beyond a certain
point
• Sale to another party
• “Just Because”
• Force majeure
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Breach of Contract
• Damages
– Performance
– Team
– Liquidated
• Can contractor cancel?
– With or without cause
• Vendor dismissal
• Finance charge reimbursement
– Delayed start or finish
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Guarantees
• Performance
• Quality of work
• Material
• Equipment
• Extended warranties
• Who pays
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Dispute-Resolution Agreements
• Arbitration
• Litigation
• Mediation
– Who mediates
– Jurisdiction
– Binding versus Non-Binding
– Pre-assigned mediator
• Resolution Protocol © Auspicium 2015
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Project Execution
• Most project time
• Most project expenditure
• Anything can go wrong
• MUST BE MONITORED
– Deliverables
– Performance
– Changes
– Key Performance Indicators
– Security (c) 2015 Auspicium
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Important Deliverables
• Cost/Budget
• Time
• Scope
• Quality
• Safety
• Other
• Defined and monitored
(c) 2015 Auspicium
Other
Cost
Time
Scope Safe
Quality
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Professional Service Frauds
• Working more then 24 hours a day
• “Raises”
• Raises with underpayments
• Everyone appointed as lead
• Highest paid employee does clerical work
• Working without license
– “Borrowing” of licenses
(c) 2015 Auspicium
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Inflated Labor
• Overstated hours
• Ghost Employees
– Not there
– On other sites
– Undocumented
• Overtime “mis”calculations
• Equipment operators without equipment
• Pay for training or vacation
(c) 2015 Auspicium
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Material & Equipment Fraud
• Ordering for other projects
• Material never shipped to site
• “Nice to have” material
– iPads
– Otter boxes
– Tablets
• Obtaining excess materials
• “Stolen” from site
(c) 2015 Auspicium
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Overpayments on Equipment
• Equipment that is idle more then it is used
• Equipment used without operator
• Charging piece by piece
• Charging at wrong rate
• Charging same equipment multiple times
• No credit for returns
(c) 2015 Auspicium
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Change Order Abuse
• Execute change and then get approval
– Sometimes OK
• Foundation work
• Stop catastrophe
• Split change orders
• Change order for work in scope
• Fraudulent site conditions
• Price inconsistent with normal work
(c) 2015 Auspicium
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The Investigation
• Investigation triggers
– Budget
– Executive Concerns
– Tip
– Observation
– Audit
• Document concerns about the project
• Map key players and relationships
(c) 2015 Auspicium
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Investigative Team
• Subject matter expertise
• Determine if experts need to be called in
– What capacity will they serve?
• Investigate and negotiate
• Investigate and litigate
• Investigate only
• Quality (e.g. materials used)
• Legal
– Attorney Client Privilege
(c) 2015 Auspicium
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Establish Facts
• Obtain contracts and project charter
• Obtain original investment decision
– Highlight any objectives
– Highlight constraints
• Time
• Money
• Scope
– Compare to actual
– Calculate/ID deviations from constraints
(c) 2015 Auspicium
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Interview Key Players
• Executive Sponsor
• Project Manager and Team
• End Users (if at that stage)
• Key Vendors and Subcontractors
– (Should have the right to do so in your
contracts)
• Depending on suspicion, interview most
“innocent” first
(c) 2015 Auspicium
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Follow the Money
• Obtain project financials from project
manager and accounting!
• Graph data to identify unusual trends
• Look for money spent “out of order”
– Painting before masonry
• Obtain change order log
• Trends in change orders
• Inappropriate vendors or charges
(c) 2015 Auspicium
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Useful Graphs
• Budget to actual
• Timing of expenses
• Expense by:
– Vendor
– Trade / Specialty
– Clusters (Location / Employee / Phases)
• Change Orders
– Root Causes
(c) 2015 Auspicium
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Determine Progress…
• What stage of the project life cycle are you
at?
• If work is completed – does it work?
– Quality of deliverables
• Progress to date
– Project Management reports
– Incident reports
– Minute meetings (if kept)
– Test reports and other assessments (c) 2015 Auspicium
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Suspects • For vendor(s): similar issues elsewhere?
– May need to assess vendor vetting
– Re-perform (Kroll)
• For employee(s): employment history
• Has organization had similar issues on
other projects?
– Commonalities
• Are there related issues?
(c) 2015 Auspicium
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Cost & Invoicing Issues
• Trace invoices:
– Is amount invoiced reimbursable per
contract?
– Is amount invoiced accurate per documented
backup?
– Are invoices submitted in a logical order?
– For reimbursable, is there proof money has
been paid?
– Are invoices submitted timely?
– Do invoices flow one to the other (c) 2015 Auspicium
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Investigation Results
• Is it fraud?
– Incompetence
– Errors
– Rush
• Cost Recovery
• Litigation / Disciplinary Action
• Were policies/methodologies followed?
– Possible Improvements
(c) 2015 Auspicium
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Questions/Comments
(c) 2015 Auspicium
Denise Cicchella
1-877-550-6802
(201) 835 – 4069
Linked in
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© 2015 Association of Certified Fraud Examiners, Inc.
Fraud in Capital Projects and Construction
Denise Cicchella, CFE, CIA, CCA, PMP