Fraud in Procurement – What Auditors Miss.

The Procurement Fraud Handbook issued by the US General Services Administration (GSA) has a general definition of fraud (emphasis below is mine):

Generally, fraud is defined as a knowing misrepresentation of the truth or concealment of a material fact to induce another to act to his or her detriment, a misrepresentation made recklessly without belief in its truth to induce another person to act, and unconscionable dealing.  A common law act of fraud must contain the following elements:  false representation or concealment of a material fact, knowledge of a statement’s falsity, intent to deceive, reliance by the deceived party, and damage to the deceived party.  The civil False Claims Act modifies this definition to include reckless disregard.

THE FRAUD TRIANGLE
fraud1

According to the Handbook, the above Fraud Triangle was developed by Donald Cressey, a leading expert on the sociology of crime.

I was especially interested in the “Attitude/Rationalization” factor, because the GSA’s Office of the Inspector General states that in an audit,

“rationalization is the element that auditors are least likely to determine… Individuals who commit organizational fraud may have different motives from those who commit fraud for their own individual benefit…  A more subtle motivation relates to increased self-esteem or co-worker/supervisor praise or envy.”

I find that when reading about fraud in procurement, examples usually used are of a contractor’s risk for committing the fraud.  Unfortunately, sometimes the fraud is committed in collusion with government officials.  In my opinion, the latter is the most pernicious type of fraud.

SIGAR’s Advice on Program Implementation.

The Special Inspector General for Afghanistan Reconstruction (SIGAR) produced an audit of a Department of Defense (DOD) $635 million program in Afghanistan -the Task Force for Business and Stability Operations (TFBSO), which yields some self-evident and interesting points:

Taking the following actions might improve such an entity’s ability to implement programming and achieve results:

• Define the entity’s mission, scope, and objectives in clear and measureable terms.
• Authorize the entity for longer than 1-year intervals to reduce uncertainty about its future and allow it time to plan ahead for its projects.
• Direct the entity to:

o Develop contract planning policies that emphasize the importance of understanding host-country or local dynamics and obtaining buy-in from all stakeholders before executing a project;
o Develop and implement action plans to minimize the award of  oncompetitive and sole-source contracts;
o Develop and implement action plans to ensure that its staff has adequate training and experience in developing contract requirements and providing contract oversight;
o Work with a single primary contract administration office when developing performance work statements to ensure consistency in drafting requirements;
o Develop management systems to track project metrics, civilian travel, and government-furnished equipment;
o Develop and implement a document retention policy; and
o Develop monitoring, evaluation, and sustainment plans for all projects so that their economic impacts can be accurately measured and sustained, and if necessary, assets can be transferred to an enduring partner.

SIGAR mentions that DOD was given the opportunity to comment on the audit.  Something that struck me was SIGAR’s comment to DOD’s comment, which -in my experience- is the crux of development aid or foreign assistance (emphasis in bold below is mine):

It is important to understand the difference between projects that met or partially met their contractual deliverables and projects that actually met or partially met their program objectives.  DOD is correct in observing that this report finds the contracts directly supporting 16 TFBSO projects generally met their contract deliverables and that contracts directly supporting 12 projects partially met their contract deliverables (or in one case, met them after significant delay). However, just because some TFBSO contractors met their contract deliverables in whole or in part does not necessarily mean that the projects they supported had successful or sustainable outcomes. For example, there are several documented cases where TFBSO contractors completed construction and equipment of a facility, but TFBSO was unable to locate a private company able to operate and maintain it, leading that facility to fall into a state of disuse or disrepair.  Furthermore, as we note in the report, because TFBSO did not consistently track outcomes data, such as the jobs created and government revenues generated by their projects, TFBSO was generally unable to demonstrate whether its projects met its overall objectives to “reduce violence, enhance stability, and support economic normalcy in Afghanistan.”

At the end of the day, what worries me is that many in government and the private sector voice these concerns; however,  not often are the solutions offered taken into account, or, worse still, they are quickly forgotten.  In my own experience, these concerns and suggestions have been made for decades.  I have a theory -which I will try to articulate later- as to why we seem to reinvent the wheel…

 

Understanding Corruption

I just discovered Sarah Chayes’ long study about corruption and Honduras, which can apply to other countries.  I have not been able to read it all, yet.  From an international development perspective, I don’t think we have made many great inroads.  The problem of “corruption” or “anti-corruption” is that it is not an anomaly.  Nowadays, it is “au courant”.