The Importance of Basic Internal Control Systems

One deeply ingrained myth concerning contractors with all or most of their work performed under Government cost type contracts is the lack of or scarcity of internal control systems designed to prevent fraud, waste, and abuse. Auditors and contracting officers often hold to the notion that cost-type contractors really don't care if someone walks off with the kitchen sink (figuratively speaking of course) because those losses just get passed on to the Government. It could be labor mischarging or buying things for personal use or any number of schemes that misappropriate company assets.

Whether true or not, those attitudes are repeatedly reinforced in the media. Take for example the press release issued yesterday by the Department of Justice:

In a statement of facts filed with the plea agreement, Spangler admitted that from 2007 to 2012, he defrauded two government contractors out of approximately $635,000 to $735,000 by using his position as an information technology (“IT”) manager for those contractors to funnel funds intended for IT supplies to a shell company run by Spangler.  Over the course of the scheme, Spangler created fraudulent documentation for 19 purported purchases of IT supplies from the shell company that he owned.  In reality, however, Spangler did not provide the supplies at the agreed-upon prices and instead used the funds for personal expenses.  Spangler has agreed to forfeiture and restitution of between $635,843.06 and $735,843.06.

This employee didn't just defraud two Government contractors, he defrauded the Government as those costs for items never delivered were passed on to the Government through billings.

The contractors are partly to blame because simple, basic internal controls could have prevented this from happening in the first place. Baring collusion (and there was nothing in the press release that hinted at collusion) the documentation requirements we discussed last Tuesday, would have prevented this kind of fraud: a purchase request approved by a supervisor, a purchase order approved by a supervisor, receiving documents signed off by a someone unrelated to the purchaser, disbursements made after a three-way match is performed. 

Most basic internal controls systems don't cost much - perhaps a little more paperwork and a little more time added to the process. All companies, not just Government contractors with cost-type contracts, must be willing to make that minimal investment.