Fraud Indicators

Did you know that every time an auditor conducts an audit at your facility, he or she is also looking for evidence of fraud? Even for the most benign or perfunctory audit, the auditor is assessing the risk of fraud.

Government auditors are required by professional auditing standards (Generally Accepted Government Auditing Standards or GAGAS) to design the engagement to detect instances of fraud and noncompliance with provisions of laws, regulations, and contracts that may have a material effect on the subject matter under review. Auditors are required to assess the risk of fraud and, when risk factors are identified, to perform audit tests to determine the existence and, if applicable, the impact.

To meet this standard, DCAA (Defense Contract Audit Agency) has included steps in each of its standard audit programs to require a planning meeting among the audit team to discuss the risks including prior audit experience, the contractor's environment (e.g. the extent of incentives, pressures and opportunities to commit fraud and the propensity to rationalize misstatements) and other known risk factors.

The results of the planning meeting is documented and included in the audit working papers. If necessary, specific tests are designed into the audit to provide reasonable assurance that nothing is or was amiss. Communication among team members throughout the audit is also a requirement.

Questions have arisen as to what specifically the auditor is looking for as possible fraud indicators. The possibilities vary depending upon the type of audit being performed. As a general rule, the auditor is looking for the possibility of:

• Falsification of documents such as time cards or purchase orders
• Charging personal expenses to Government contracts.
• Submission of false claims, such as invoices for services not performed or materials not chargeable to the contract.
• Intentional mischarging or misallocation of costs.
• Deceit by suppression of the truth.
• Acts, such as bribery, corrupt payments, which violate the Foreign Corrupt Practices Act, theft  graft, gratuities, and kickbacks.
• Any unlawful or fraudulent acts resulting from accounting classification practices that are designed to conceal the true nature of the expenses, such as unallowable costs for advertising  entertainment, etc., being classified as office supplies to avoid detection or the concealment of accounting data comprising a proposed estimating factor, such as a material decrement factor used to reduce proposed material costs
• Any attempt or conspiracy to engage in or use, the above devices.

For additional reading on this subject, refer to the DoD Inspector General's Handbook of Fraud Indicators for Contract Auditors.