Management

Management establishes the tone at the top and the standards followed by an entire organization. A good place to begin establishing a constructive tone at the top is by adopting a written code of ethics. For the code to be of any value, it must first be followed by management and then communicated throughout the organization. The code of conduct should be consistently enforced throughout all levels of the organization and transgressors appropriately punished. Newly hired employees should be made aware of the code of conduct and the consequences of failing to comply.

Management should also periodically review policies and procedures that involve internal controls and fraud prevention and make sure those policies and procedures are up-to-date and enforced. Management should consider setting up a process for employees to report potentially fraudulent activities like a hotline, or confidential contact in the legal or human resources department.

Management should be aware of, and come to understand the purpose and operation of, their organization’s controls and should periodically review them for effectiveness.                            

Risks Risks Risks
General Contract/Vendor/Procurement/Bidding Fraud

No segregation between contracting, purchasing, receiving, storing, issuing, inspection, etc.

Continued acceptance of high priced goods or services.

Continued acceptance of substandard goods or services.

Numerous/costly change orders.

Contractor inability to perform.

Multiple purchases under bid limits.

Protests.

Failure to use existing contracts.

Off-contract purchases.

Emergency procurements.

Sole source procurements.

Watch for red flags that point to collusion between the vendor and one of the buyer's employees. Both the vendor and the employee overseeing the letting or the administration of the contract should be scrutinized.

General Guidance

Governments purchase vast amounts of goods and services under contracts of one type or another. Due to the vast sums involved and the difficulty in spotting and controlling it, fraud involving adherence to contracts are not unusual.

General Guidance According to Federal Funds Information for States, the federal government provided state and local governments with nearly $729 billion in federal funds in fiscal year (FY) 2016. Government programs are, to a large extent, carried out by grants—the Federal government to state and local governments, state to local governments, governments to private sector contractors, suppliers and vendors, etc. These programs involve vast sums of money. Some of that money finds its way into the pockets of those not intended to receive it. The link to the right provides a tool to evaluate the internal controls over your grant programs. The cells below contain information to help you spot and deter fraud in grant programs. National Association of State Controllers (NASC) Grant Admin Questionnaire
General Guidance Governments have a lot of taxpayer resources tied up in inventories. From nuclear weapons to paper clips, governments are among the largest purchasers and warehousers of goods. These goods are subject theft and misuse. Some tools for mitigating fraud are offered to the right.

National Association of State Controllers (NASC) Control Questionnaire for Capital Assets

The following links provided courtesy of Accounting, Financial & Tax (AFT):


Theft Prevention and Inventory Management – What’s the Connection?

First-In, First-Out (FIFO)

Detecting and Preventing Accounts Payable Fraud

Ghost Employees

Restricted access to records.

Unexplained unfavorable labor variances.

A ghost employee is the term applied to someone who gets paid, but doesn't exist. In the case of vendor management, a ghost employee is used to increase the cost in cost-plus type of contracts. A check is issued and cashed by another who pockets the money. This type of fraud exists in other contexts where an employee uses a ghost employee to steal from his employer. In the case of vendors, the fraud is perpetrated against the buyer and the vendor pockets the money.

Grant Purposes Not Being Met

No follow up on grant recipients/subrecipients.

Required reports not received.

Complaints from intended clients.

State of Maine Self Assessment: Sub-Recipient Monitoring

Perform oversight of prime/sub/vendor contract requirements to ensure agency gets what it pays for. Use onsite visits, milestones achieved or reports filed to check performance/progress before next allotment of funds; inspect goods/services received; compare invoice and purchase order to prevent overpayment.

Perform spot reviews or audits on vendor time sheets in a random sample to ascertain if hours worked match payroll invoices, or do site inspections. Different types of inspection reports can be designed or are available on the Internet.

Site Inspection Template

Kickback Schemes

Change in employee lifestyle.

Employee declines promotions.

Socialization between employee and contractor/vendor

Kickbacks involve an employee being compensated for in some way favoring a vendor. There are a number of behavioral indicators, like the red flags listed, that may point to an employee's receiving kickbacks.

Life Cycle/Shelf Life

Product Type: Short or long shelf life. Adopt a First in/First out (FIFO) policy. However, if at any time goods come into the warehouse out of expiration date sequence, a FIFO policy will fail to manage the inventory properly.

Product Cost: High cost of a specific inventory.

Lead time: The time from receipt of an order to the time of delivery. When suppliers are overseas, the lead time in inventory increases.

FIFO policy.

A serial number placed on the external packaging and the actual product itself. This number is used to track items through every move into and out of the warehouse.

In libraries, the call number, or, a new electronic code.

Audio-visual equipment.

Signatures from authorized personnel.

Security guards in front of warehouse or, accompanying the movement or transfer.

Helpful Links:

Matching, Level of Effort or Earmarking Requirements Not Being Met

Requirements are not budgeted in the program.

In-kind contributions not documented.

No monitoring reports in place.

State of Maine Self Assessment: Level of Effort, Matching
Misdirected Payments

Payments are misdirected to someone posing as a legitimate vendor. No proper documentation or approval of additions, changes, or deletions to vendor master file.

Vendor addresses do not agree with vendor approval application.

Verify that all changes to vendor records (name, address change, bank account) are submitted by an authorized vendor signatory, and approved by an agency signatory. This is to prevent theft or misappropriation of funds.

Segregate duties between processing of accounts payable invoices and updates to vendor master files.

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