Monday, April 1, 2013

Fraud Indicators

Government auditors are required, prion to commencing an audit, to sit down and discuss with their team member, supervisors, and managers, the risk of fraud and other noncompliances with applicable laws and regulations that could have a material effect on whatever it is they are auditing.

Although this requirement has been in place for many years, the 2011 revision of the GAO Yellow Book (a.k.a. Generally Accepted Government Auditing Standards or GAGAS) renewed its emphasis and now requires better documentation that the discussion took place.

DCAA has been quietly revising its audit programs to ensure compliance with the new Yellow Book, defining what should be discussed, the sources for fraud indicators and documentation requirements. The IG Handbook of Fraud Indicators is one source that auditors refer to when discussing the risks associated with fraudulent activity. This handbook is available as a download on the DoD Inspector General's  website  although it hasn't been updated in some time (the last update was twenty years ago).

Note: the Handbook is no longer available. DoD-IG removed it as being too "dated".

DCAA also lists examples of characteristics and types of activities associated with fraud. These can be found in the Agency's contract audit manual, Figure 4-7-5. These indicators include:

  • Unexplained changes to timecards transferring hours from commercial firm-fixed-price contracts to Government cost-type contracts.
  • Employee time charged differently from associated travel costs.
  • Diverting labor from firm-fixed-price contract by reclassifying employees as indirect who provide direct labor to firm-fixed-price contracts.
  • Significant material requirements charged to Government cost-type contracts where follow-up work shows that the material was not needed.
  • Using inferior material on Government contracts that does not meet contract specifications.
  • False certification of inspection test results.
  • Intercompany profit claimed and billed for an intercompany affiliate that the contractor represented to the Government was an unrelated subcontractor.
  • Cost Overrun contract costs charged to indirect expenses for allocation to other contracts.
  • Expressly unallowable costs recorded in accounts that are generally allowable such as small tools and supplies.
  • Improper transfers, or recording, of costs to indirect accounts for direct contract costs that are not allowed to be charged under the terms of the contract.
  • Alterations to documents that would result in improper costs claimed for Government contracts.
  • Evidence showing that payments were not actually made for the amounts shown on the document.

After an audit is completed, auditors hold another meeting to discuss the audit results and measure the impact of any findings on other past, current, and future audits. On occasion, auditors have had to rescind prior audit reports because of information that became available subsequent to that report's issuance that rendered the previous audit opinion indefensible.

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