Friday, September 17, 2010

Contractor Employee Goes to Jail - What Can We Learn?

A manager working for a contractor providing facilities management at a Government facility, set up three fictitious companies and then conspired with a Government employee working there to use his Government credit card to place orders with the bogus companies. Over a period of four years, the two conspirators made about $1 million in bogus purchases and then split the proceeds. Yesterday, September 16th, the judge sentenced the contractor employee to 15 months in jail and ordered him to repay the $1 million. The Government employee previously plead guilty. There was no indication in the Department of Justice's press release on this case that the contractor was implicated in any way. Neither was there any indication of how the fraud was exposed.

When we read of these cases, we are immediately drawn to consider how something like this could have been prevented in the first place. Conspiracies, according to the Association of Certified Fraud Examiners (ACFE) are usually the most difficult of fraudulent activity to discover. Two or more persons acting in concert can easily override the internal controls that companies have established to prevent fraud from happening.

In this case, there seems to have been a significant purchasing system internal control weakness. The contractor employee was responsible for the repair and upkeep of the facilities. When he needed supplies and services to accomplish the mission, he would prevail upon the Government card-hold to order the items and pay for them with the card. That procedure was probably not sufficient to prevernt the fruad. An adequate purchasing system would have the following minimum requirements.
  • Someone initiates a purchase order - the purchase order must include justification for the purchase.
  • Someone else reviews and approves the purchase order.
  • The order is placed by someone independent of the initiator and approver. The purchasing department is responsible for finding sources and establishing best prices.
  • A fourth independent person verifies that materials were received or services rendered.
  • Accounts payable makes payment after matching purchase order, invoice, and receiving document.

Note that there are five people involved in the process, not two. It is much more difficult to sustain a conspiracy with five player than it would be with two.

This would be a good time to consider the strength of your own purchasing policies and procedures.

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