Fraud Risk Indicators under Government Contracts

Every time DCAA performs an audit, it is required, as a matter of policy and adherence to GAGAS (Generally Accepted Government Auditing Standards) to review fraud risk indicators specific to the type of audit being performed. The primary source for these fraud risk indicators is the DoD-IG's "Handbook of Fraud Indicators for Contract Auditors". This 47 page manual was last updated in 1993 and can be downloaded here.

Auditors are not responsible for proving fraud. The responsibility for proving fraud rests with an investigative service like DCIS, Army CID, NCIS, or AFOSI). However, finding and reporting fraud indicators are an auditor's responsibility. The DoD-IG (Inspector General) states that the auditor should "think fraud" when performing a review or an audit.

The fraud indicator handbook is divided into three sections, incurred cost, forward pricing, and defective pricing. Each section has several subsections dealing with specific cost elements. For example, the listed fraud indicators for incurred labor costs are:

• Distinctive charging patterns.
• Sudden, significant shifts in charging.
• Decrease in charges to projects/contracts in overrun or near ceilings.
• A disproportionate percentage of employees charging indirect.
• Large number of employees reclassified from direct to indirect or vice versa.
• Same employees constantly reclassified from direct to indirect or vice versa.
• Weak internal controls over labor charging, such as employee time cards signed in advance, employee time cards filled in by the supervisor, time cards filled in pencil, or time cards filled in at the end of the pay period.
• Actual hours and dollars consistently at or near budgeted amounts.
• Use of adjusting journal entries to shift costs between contracts, IR&D, B&P, commercial work.
• Significant increases or decreases in charging to sensitive accounts.
• Employee’s time charged differently than associated travel costs.

Note the 7th bullet concerning weak internal controls over labor charging. Many Government contractors fail to institute strong internal controls over timekeeping. If you're one of those, you do so at your own peril.