Friday, December 26, 2014

Forged Documents Lead to Conviction

Back in 1993, the President of a Pennsylvania machine company was convicted of paying bribes to secure Government contracts and paying hush money to the company controller in an attempt to cover it up. It was a felony conviction and he was fined $20 thousand and sentenced to four months of house arrest, 400 hours of community service, and three years probation.

A few years later, this person with a felony conviction on his record was at it again. He bought a defunct division from his old company and soon began winning millions of dollars in Government contracts to produce critical hardware components used in military helicopters and other aircraft. These contracts allowed the company to receive progress payments based on cost incurred.

In 2011, the Defense Contract Audit Agency (DCAA) performed an audit of a progress payment submitted by the company. During the audit, the owner directed two employees to present a copy of a altered cancelled check to a subcontractor in the amount of $69,000. The the true amount of the check was $25,000. The auditor accepted the falsified documentation as authentic, obviously failing to observe actual documentation or otherwise corroborating the information, wrote up a clean report, and the contractor went on to receive additional progress payments.

One of the employees who was asked to provide falsified documentation to the auditor subsequently blew the whistle and the Justice Department opened a criminal investigation. Ultimately, the investigation revealed that the contractor had diverted $1.2 million of progress payments to other uses. Subcontractors were not getting paid so they stopped work. This caused delivery delays under the contracts and quality concerns. Some of the items paid for by the Government were never delivered.

On December 17, 2014, a federal judge entered a $3.6 million civil judgment against the company and its owner. The owner agreed to the orders and did not dispute his liability.

There are a couple of obvious points that arise from this incident. First, the Government's system for dealing only with reputable contractors is broken. A man with a felony conviction was able to get right back into Government contracting and win millions in Government contracts. Second, the DCAA auditors were easily duped.  They relied on forged documentation to support their audit objectives. This embarrassment ultimately led to changes in the way that DCAA looks at supporting data. Auditors are now more likely to insist on viewing "original", rather than copies of documentation - invoices, purchase orders, cancelled checks, etc. - when performing their audits.

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