Wednesday, August 10, 2016

Fraud Indicators Related to Professional and Consulting Services

We have discussed on these pages several times about the importance of compiling and maintaining documentation to support professional and consultant service costs. This is one of the FAR cost principles where auditors often find "low hanging fruit" because the principle requires three forms of documentation; an agreement, an invoice, and evidence of work performed. Although auditors have been told recently to lighten up a bit with respect to "evidence of work performed", consulting costs continue to be a "high risk" area for potential audit findings and cost recoveries.

Professional and consultant services are those services rendered by persons who are members of a particular profession or possess a special skill and who are not officers or employees of the contractor. Contractors hire consultants for a multitude of services (such as legal, economic, financial, or technical).

But did you know that the Department of Defense Office of Inspector General (OIG) considers it to be a high risk for contract fraud? It is one of the few cost principles that has its own listing of fraud indicators - conditions that if existing will require the contract auditor to dig deeper or expand its audit coverage and make referrals for investigation, if warranted. Contract auditors are, in turn, required to "consider" these fraud indicators when planning their audit procedures.

According to the OIG, contractors may be hiding payments for illegal activities by charging them as consultant fees and maintaining no or only minimal supporting documentation. The contractor's possible objective in not maintaining adequate support is to encourage the auditor to question the cost rather than spend the time identifying the true nature of the payments.

These seven fraud indicators include the following:

  1. No formal signed agreements or contracts; however, large sums paid for "services rendered" based on invoices with few specifics.
  2. Formal agreements or contracts exist but are vague as to the services to be rendered, and no other documented support, such as detailed invoices, trip reports, or studies, exists to justify the expenses.
  3. Services paid for were used to improperly obtain, distribute, or use information or data protected by law or regulation.
  4. Services paid for were intended to improperly influence the content of a solicitation, the evaluation of a proposal or quotation, the selection of sources for contract award or the negotiation of a contract, modification or claim. It does not matter whether the award is from the Government, a prime contractor, or any tier subcontractor.
  5. Services paid for were obtained or performed in some way that violated a statute or ergulation prohibiting improper business practices or conflict of interest.
  6. Services paid for violated a Federal, state, or local statute or regulation.
  7. Services paid were recorded in unusual accounts or cost objectives.

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