£EPA
United States Office of
Environmental Protection Inspector General
Agency Washington, DC 20460
Office of the Inspector
General
DETECTING AND
PREVENTING FRAUD
An Awareness Course
Printed on Recycled Paper
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Seminar for EPA PIG and IPA Auditors
on Detection and Prevention of Fraud
Seminar Objective and Description
This seninar 1s designed to develop and enhance auditor awareness to the
nature and characteristics of fraud and abuss in EPA funded projects and
contracts. This seminar will review the professional standards concerning
the auditors' role and responsibility for detecting fraud, identify types of
fraud, their indicators, and describe specific audit steps to detect potential
fraud. In addition, the seminar will examine several successfully prosecuted
cases of fraud, showing how the fraud was detected and describe when and how
auditors should refer suspected instances of fraud to the OIG Office of
Investigations.
Fraud or abuse situations tend to be unique and any one method of detec-
tion will not be applicable to all situations that arise,, This course is
intended to develop an awareness that fraud and abuse may be present in EPA
funded projects and contracts and that there are Methods for detecting such
fraud or abuse.
Some of the methodology involved in fraud or abuse, detection will be
discussed, but it is not the intent of this course to supply all the answers--
on "how to" detect fraud or abuse.
Fraud Indicators: An Overview
The Government auditor must be alert for possible .instances of fraud.
The best method of accomplishing this is to-*t?st for and identify fraud
indicator*;.
A fraud indicator only means that a give^ situation is susceptible to
fraudulent practices. It does not mean that fraud- exist.;. The auditor's
role is not to provde fraud (the intent to deceive the Government) but to
refer potential instances of fraudulent practices to the appropriate inves-
tigative organization, if he or she believes that significant evidence
indicating fraud has been found.
The review of EPA projects and contracts must be approached with an
attitude of professional skepticism. Ther
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Schedule and Agenda for Two-Day Course
9:00 — 9:30
9:30 - 10:00
10:00 - 10:15
10:15 — 10:45
10:45 — 11:15
11:15 — 11:45
11:45 - 1:00
1:00 — 2:00
2:00 — 2:30
2:30 - 2:45
2:45 — 3:45
Day Two
8:30 - 9:00
9:00 — 10:00
Day One
8:30 — 9:00
Introduction, Administrative Details, and Overall
Course Objectives
Pretest
Fraud: Definition, Characteristics, Motivation
Break
Auditors’ Responsibilities : The Standards, GAO, AICPA, hA
Documenting Indicators of Fraud
Making Referrals to the Office of Investigations
Lunch
General Indicators of Fraud and Assessing the Environment
for Fraud
Bid Rigging Videotape
Break
Case Studies : Successful Prosecutions from EPA, How Fraud
Was Detected
Civil and Administrative Actions
Answers to pre-test
Specific Types of Fraud in EPA Projects and their
mdi cat ors
Break
Case Scenarios and Presentations of Referrals
Evaluation
3:45 - 4:15
10:00
10:15
11:45
— 10:15
— 11:45
— 12:00
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FRAUD PREVENTION AND DETECTION PRETEST
Mul tipi e—Choice
1. As a monitor of the organization’s control system, auditors should
a. Accept responsibility for the prevention and detection of fraud.
b. Identify all reasonably foreseeable risk areas in the organization
and schedule reviews of those areas.
c. Re held responsible, as a professional, for extraordinary care
rather than ordinary care.
d. Investigate any suspected fraud by Interrogating suspects and
witnesses.
e. All of the above.
2. The auditor has reason to believe a fraud is being committed in the
bill paying unit of the controller’s department, Which of the following
actions best describes the way the auditor should proceed’
a. Immediately start an audit and interrogate suspected employees.
b. Inform the controller of suspicions and schedule an audit within
30 days.
c. Consider the present work load of the controller’s department
before scheduling an audit.
c i. Inform the supervisor of the bill paying unit that an audit is
being scheduled Inmiediately.
e. None of the above.
3. The responsibilities f an internal audit department with respect to
fraud include:
a. Detecting irregularities which would be disclosed by the
application of appropriate auditing procedures.
b. Providing an entity with its primary defense against fraud.
c. Detecting irregularities that affect the financial statements.
d. Discovering irregularities that result from undetected weaknesses
in the system of internal control.
e. Roth (b) and (d) above.
4. The auditor’s responsibility for fraud detection is to:
a. Conduct the audit with due professional care and skill.
b. Develop each audit program with the objective of fraud
detection.
c, Assure that EDP controls will detect fraud.
d. Provide periodic assurance to management that fraud will be
promptly detected.
e. Provide a report to management Indicating the extent that fraud
has occurred.
5. On the ba5is of the preliminary review, the auditors for a Federal
agency have reason to believe that irregularities exist in the cash
disbursement function. The auditors should proceed by:
a. Performing an extensive investigation to determine the .ex lstence
and extent of the suspected irregularities.
b. Notifying the appropriate law enforcement agency.
C. informing the appropriate authorities within the agency.
d. Strengthening Internal controls within the cash disbursement
function.
6. The auditor’s usual approach to fraud minimization Is to recorimend that.
a. Employees who handle liquid assets be bonded,
b. Strong internal controls be implemented and are operative.
c. Competent employees be hired.
ci. Employees not be given access to physical assets.
7. You have just received an anonymous letter containing allegations that
certain employees are diverting readily repairable items to the scrap
yard and later purchasing these materials at scrap prices. What is
the first action you should take?
a. Advise the Office of investigations.
b. Review scrap sales records.
c, Review material disposition records.
ci. Interview employees performing the material review and
disposition function.
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8. The cashier of Brown Company covered a shortage in the cash working
f j d th ca3h obtained on December 31 fruii d iu a ba u L,y L iui ny
an unrecorded check drawn on the companys New York bank. The auditor
would discover this manipulation by:
a. Preparing Independent bank reconciltations as of December 31.
b. Investigating items returned with the December 31 cutoff bank
statements.
c. Preparing an intracompany bank transfer schedule for several
days preceding and following December 31.
d. Comparing the authenticated deposit ticket details with entries
in the cash receipt books.
9. Auditors would consider embezzlement a likely possibility when:
a. Fmployees In the finance department are working overti’e
regularly.
b. Production reports are found to contain inaccurate descriptions
of work completed.
c. Vacations are not taken by employees in the accounting and
cashiering functions.
d. Allowances for doubtful accounts are found to be Inadequate.
10. An employee In the accounts payable department has been authorizing
duplicate payments on some invoices and then intercepting the second
check for personal use. A control to deter such duplicate payments
would be to:
a. Have the person who maintains the cash disbursements records
issue the check.
b. Have the authorized check signer ucancelu supporting documen-
tation when the check is signed.
c. Keep blank checks under lock and key.
d. Maintain a segregation of duties between the cash payments
function and the cash receipts function.
11. Gray and Green are engaged In perpetrating a fraud against their
employer. Gray diverts a customer’s check to the bank account of a
company that is controlled by Gray, and Green writes off the customer’s
account receivable as uncollectible. What control technique would
tend to deter such a practice?
a. Periodic confirmation of customer accounts by internal auditors.
b. Adoption of a procedures manual specifying adequate documenta-
tion and records.
c. Hiring only competent personnel.
d. Reconciliation of accounts receivable details to accounts
receivable control account.
17. What is the auditor’s responsibility with respect to fraud’
a. To give management absolute assurance that irregularities
do not exist.
b. To evaluate adequacy and effectiveness of controls designed to
prevent fraud.
c. To report suspected frauds to regulatory agencies.
d, To prepare written policies concerning conflicts of interest,
hiring practices, and prosecution of wrongdoers.
13. WhIch of the following is most likely to alert an auditor to the
possibility of fraud’
a. The same person normally delivers the bank deposit.
b. An accounts receivable clerk took only 2 weeks of a 3-week
vacation and was compensated for the third week.
c. Many noncash credits to receivables have been posted.
d. The responsibility for preparing bank reconciliations is not
rotated among different employees.
14. An auditor found that a purchasing agent, in collusion with a vendor,
had defrauded the company by purchasing excessive quantities and
unnecessary items. Which of the following control measures would be
most effective In preventing such fraud?
a. Requiring purchases from the approved vendor list.
h. Maintaining multiple vendor sources.
c. Specifying that all purchases be based on requisitions approved
by responsible persons.
d. using priced purchase orders.
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iS. Which of the following controls over the issuance of inventory from a
warehouse would most likely oetect tnett or frauo
a. Using prenumbered forms for issuance of merchandise from the
warehouse.
b. Requiring two authorized signatures on all forms for issuance
of merchandise from the warehouse.
Comparing counts of assets at the warehouse with externally
maintained records.
d. Cancefling material requisitions subsequent to the issuance of
merchandise.
16. After auditors have concluded their audit in which a fraud is
suspected, what additional action should the auditors take?
a. Inform the appropriate authorities within the organization
that a fraud is suspected.
b. Based on the employee’s willingness to make restitution, deter-
mine whether prosecution should take place.
c. Reappraise internal control to determine what aspects of the
operational and control design made the fraud possible.
d. Use proportional analysis to determine the reasonableness of
certain account relationships.
17. Current thinking relative to the concept of materiality as applicable
to the reporting of illegal acts is that nateriality is:
a. An agreed percentage of the total value of the resources exposed
to illegal activities.
b. Not a determining’ factor in that all illegal acts are to be
reported by the auditor.
c. Normally considered as an amount in excess of a stated parameter.
d. Based on subjective determination related to the circumstances of
the case.
e, Related to the type of illegal act.
LB. Of the procedures listed, which is the most likely to detect kiting?
a. Compare the detail of cash receipts (log listings) to the cash
receipts journal, accounts receivable postings, and deposit
slips.
b. tnvestigate checks that have been outstanding for long periods.
c, Account for bank transfers made during a few days before and after
selected dates.
d. Confirm account receivable balances as of a cutoff date.
e. Count cash on hand.
19. One driver for a linen supply service collects cash from custoniers upon
delivery and intentionally fails to record and turn over to the company
certain amounts of cash received. What audit procedure would the
auditor use to obtain assurance that such losses are being detected’
a. Review driver’s daily delivery reports.
b. For each driver, reconcile daily the total billings for clean
linens shipped with cash received and clean linens returned.
c. Have an auditor periodically accompany the drivers on selected
runs.
d. Confirm delivers periodically with selected customers.
e. Undertake compliance testing with respect to daily reconciliation
of linens shipped, cash received, and clean linens returned.
20. Which of the following payroll irregularities would most likely be
discovered by a surprise observation of a payroll distribution’
a. An employee has access to the payroll computer program and raises
his hourly salary by SO percent.
b. Improper deductions are made from several employees’ checks.
c. Checks for terminated employees continue to be prepared.
d. An employee pads his payroll by having a friend punch time carcs
on days he is absent and working on a second Job.
e. Premiuri pay for night-shift work is being paid to employees
working the day shift.
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SECTION 1
GENERAL INFORMATION
ABOUT FRAUD
SECTION 1. Fraud: Definition. Characteristics, Motivation
Objecti yes
This section is designed to define what fraud is and differentiate
it from waste and mismanagement. When we think of fraud, waste, and
mismanagement, we often get confused because they are all similar. How-
ever, fraud usually represents illegal acts opposed to mistakes, errors
in judgilent, carelessness, or dereliction of duty. This section also
describes the different types of fraud, some of the motives to commit
fraud, and why fraud is so difficult to detect. It is important to know
what fraud or possible fraud is so that we can perform the proper tests
and make the appropriate referral. Since fraud is a violation of the law
it often has a more severe impact than waste or mismanagement and is usually
resolved through criminal and/or civil action. By being able to recognize
fraud we can significantly increase our potency as professionals.
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A. FRAUD
A fihe representation or
conculment of a material
fact to induce someone to
part with something of
value.
B. ELEMENTS OF FRAUD
1. False representation
2. Knowledge of falsity
3. Intent
4. Reliance
5. Injury ($damage)
C. INTENT IS A STATE OF MIND
1. DiffIcult to prove
2. Evidence may not be
present
0. FALSE CLAIM
Al 1 fraudul ent attelipts to
cause the Government to pay
out sums of money.
E. ELEMENTS OF A FALSE CLAIM
1. False representation
2. Knowledge of falsity
3. rnt t to mislead
4. Tender of claim to Government
F. MODEL OF WHITE-COLLAR CRIME
1. SituatIonal pressures
2. Opportunities
3. Personal characteristics
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G. MOTIVES
1. Flnartclal need
2. Greed
3. HIde Incompetence
4. Resentment
5. Peer group pressure
H. FRAUD TO BENEFIT THE ORGANIZATION
1. Claims for fictitious work, equipment,
or services.
2. Improper payments such as bribes, kickbacks,
or illegal political contributions.
3. Improper related party transactions.
4. Failure to record or document claims for
work, equipment, or services.
5. Under bidding and using change orders.
6. Circumvent competition by bid rigging or
collusive activity.
7. Prohibited business practices in violation
of Government laws and regulations.
I. FRAUD DETRIMENT TO THE ORGANIZATION
1. Acceptance of bribes or kickbacks
2. Embezzlement
3. Concealment of events or data
4. C a1ms for goods or services not provided
to the organization
J. SOME FRAUDS ARE IMPOSSIBLE TO DETECT THROUGH
NORMAL AUDIT ROUTINES
1. Collusion
2. Forgery
3. Unrecorded transactions
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K. FRAUD INDICATORS
A C site of small events which, put
tog r, point to a possible pattern
of deception.
L. BASIC CONCEPTS FOR FRAUD PREVENTION
1. No activity is immune from fraud—waste—abuse
2. Insist on the adherence to standard procedures
and controls
3. Use trend reports to monitor operations
4. Use independent sources for information
5. Carefully identify the sensitive areas subject to
fraud
6. Maintain effective systeii for administrative and
personnel actions to combat fraud
7. Refer criminals for Investigation and prosecution
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GENERIC CHARACTERISTICS OF ILLEGAL ACTS
CONTROL ENVIRONMENT OPPORTUNITY INDICATOR
1. ONE PERSON IN CONTROL X
2. NO SEPARATION OF DUTIES X
3. PERSONS LIVING BEYOND MEANS X
4. MISSING OR INCOMPLETE INTERNAL
CONTROLS X
5. NO PRIOR AUDIT X
6. DECENTRALIZED MANAGEMENT WITHOUT
MONITORSHIP X
7. EVASIVE RESPONSES TO AUDIT
iNQUIRIES X
8. EXCESSIVE ATTEMPTS TO DELAY AUDIT . X
9. LIMITATIONS ON SCOPE OF AUOIT x
O. MANAGEMENT READILY WELLING TO CMIT
TO MISMANAGEMENT IN SERIOUS MATTERS X
1]. HIGH TURNOVER OF SENIOR PERSONNEL X
12. RECENT CHANGES IN WORKING PROCEDURES X
13. ATTEMPTS TO TERMINATE AUDIT X
14. UNUSUAL CONCERN WITH AUDIT
DOCUMENTATION X
15. MANAGEMENT TOO COOPERATIVE X
16. CONSPICUOUS CHARITY X
17. SUSPICIOUS TRENDS X
18. UNUSUAL BEHAVIOR X
19. RECENT MONEY PROBLEMS X
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GENERIC C ARACTE ISTICS OF ILLEGAL ACTS
ACCOUNTING SYSTEM OPPORTUNITY INDICATOR
I. MANY CONTENTIONS ACCOUNTING ISSUES X
2. EXTENSIVE JUDGMENT INVOLVED IN TOTALS X
3. DIFFICULT TO AUDIT TRANSACTIONS x
4. INADEQUATE OR MISSING DOCUMENTATION X
5. UNUSUAL, UNEXPLAINED ENTRIES x
6. PAYMENTS FOR CASH, UNSPECIFIED
REASONS X
7. INORDINATELY LARGE TRANSACTIONS X
8. SUPPORTING RECORDS NOT PROMPTLY
PRODUCED X
9. PHOTOCOPIED ORIGINAL RECORDS ON FILE X
10. UNACCEPTABLY LARGE ERROR RATES X
11. PROFiTABILITY OUT OF LINE WITH
[ NOUSTRY X
12. QUESTiONABLE OWNERSHIP X
13. MIX OF GOVERNMENT AND COMMERCIAL
CONTRACTS x
14. LOSSES ON COMMERCIAL CONTRACTS X
15. MIX OF FIXED PRICE AND COST TYPE
CONTRACTS X
16. LOW NUI’IBER OF BIDDERS
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GENERIC CHARACTERISTICS OF ILLEGAL ACTS
CONTROL PROCEDURES OPPORTUNITY INDICATOR
1. ALTERED/SUSPECT RECORDS X
2. UNAUTHORIZED TRANSACTIONS X
3. NONSERIAL NUMBERED TRANSACTIONS X
4. UNAUTHORIZED PERSONNEL WITH ACCESS X
5. INVENTORIES NOT RECONCILED X
6. LACK OF OPERATING PROCEDURES X
7. ASSETS SUSCEPTIBLE TO MISMANAGEMENT X
8. POOR TIMEKEEPING SYSTEM X
9. MANY CRISIS CONDITIONS X
10. UNCORRECTED PROBLEMS REPORTED IN
PRIOR AUDIT X
Ii. NO INDEPENDENT CHECKS X
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S ION 2
AUDI’IORS’
R NSIBIL I S
S riai II. Aixiitors’ Responsibilities: GAO ar AICPA Star 1ards.
Objectives
This section highlights portions of the professional aix1itin starxiards
dealin with aix3itors’ responsibility for identifyin ai reportin fra xI ar 1
illegal acts. These stardaxds are gensrally a li ble to PA a xlitors az to
atx itors wt perform rk for PA ar are recx gnize1 thr haxt the aix1itin
profession. This section describes t z far atxiitors s ild go ax what they
s ild do to identify ard respc i to frat 1. This section also describes the
expectations ard limitations of professional a 1it rk in regards to
detection fraixi.
A. r $I L S RD$
1. ite6 States G a1 co mtii Office ( ) (Iovermt Atditin
8taz ards: Star ards for Ai 1it of Govermta]. C ganizations, Pro ,
activities, ai FtmcUo s relevant to cm 1 4 e e with aWliceble laws ai
regulations:
o thapter 4—Field Work Stardards for Finar ia1 3.its.
o thapter 5—P artin Stardards for Finaz ia1 Aixlits.
o thapter 6—Field Work Starxlards for Perfor r Aixlits.
o thapter 7—I portir% Stardards for Performai 1its.
— Lega) ard Regulatory Pequire nts:
- ? . -‘ Ps nt of Qzpliaxx
- &i , IrrEgularities, ard Illegal Acts
— Ilie Care Qir rnirxg Illegal Acts
— Internal Cuntrol
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S’I 1 RES QJ AUDIT S • R!E IBThITY F FDTh CThL & P lA E AUDITS
I T ThE . YEU BOCZ B
- Identify those major laws axx regulations that apply to the entity to be
audited/evaluated aud that are relevant to the assigm nt objectives.
- Assess the risk that ncr xz liance with these laws ax regulations o ild
significantly affect the program operations of financial stata ients beirg
audited.
— Assess the adeguacy of internal contiols for ensurir ociT ,liar ard for
detectirg instances of noncai liance with applicable laws ard regulations as
determir by the risk analysis.
- Design work steps to reasonably ass e (1) the entity’s c plia with
relevant laws ard regulations, ard (2) the detection of erroL, irregularities,
abise, or illegal acts that c xild significantly affect assi n ent objectives.
— Ecercise appr riate precautions relating to illegal acts so as nct to
interfere with potential futire investigations arxl/or legal pro eslings.
- Pranptly prepare an audit/evaluation report which inclu all material
instaix s of rErKxixpljax ard illegal acts that could result in proseaztion.
At itionally, for financial audits, auditors st pruu tly prepare a written
report on ui ]J.ance that contains a stat .nt of positive ass ax on iten
tested for c i liance ard negative as ai on those itens nct listed.
2. american Instithte of Certifieil Public cooimtants (MCPA) Generally
cc t 1 Autiting Staxdards relevant to ocz1 1i ioe with a licable laws aid
regulations: Nine “ çectation p” Staidards.
o SAS No. 53, The Auditor’s Responsibility to Detect ard
Report rors ard Irregularities.
o SAS No. 54, Illegal Acts by Clients.
o SAS No. 55, O3nsideration of the Internal ntrol
Sb e in a Financial Staten nt ) udit.
o SAS No. 56, Analytical Pro ures.
o SAS No. 57, Auditirrj AQx .Intij Estimates.
o SAS No. 58, Reports on Audited Financial Statanents.
o SAS No. 59, The Auditors O ideration of an tity’s Ability
to Ox tinue as a Going Qmcern.
o SAS No. 60, Caimimnication of Internal Co t ol Structhre
Related to Matters Noted in an Audit.
o SAS No. 61, C miunication with Audit Q! rInittes.
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8tat nAnts on Aud.itir 8taz ards 53
The Auditor’s Res onsibiljty to Detect ard Report Errors ard Irr u1arities in
an audit of financial statements.
E ro refer to unintentional misstatements or ai issjons of a .ints or
disclosures in financial statements.
The auditor shcnild assess the risk that erro ard irregularities may
cause the financial stat nts to contain a material misstatement.
Based on that assessment, the ai itor should design the audit to provide
reasonable assurar of detecting material erruLs ard irregularities.
The auditor is responsible for informirg the audit c umittes of
eguivalent of all b.it inconseguential irregularities.
Stat n ts on Auditing Standards 54
Ili, al Acts by Clients
This statement describes the nathre aid extent of the consideration an
irdepeident aixlithr should give to the possibility of illegal acts by a client
in an audit of financial statements.
Illegal acts refer to violations of laws or governmental regulations.
Whether an act is illegal, is a determination beyord the auditors’s
professional o tipetence. HcAIever, whether an act is illegal would be based on
the advise of an informed expert qualified to practice law or may have to
await final determiration by a court of law.
The auditor’s responsibility with respect to detecting, aid reporting
illegal acts is to apply audit procedures specifically directed to
ascertaining whether an illegal act has ocx rred.
Stat ’tts on Auditing Standards 55
nsideratjon of the Internal ContrOl Sb cture fri p Financial Stateirerit Audit
The statex nt on auditing stardards reguires the auditor to have an
urderstardirq of the txol environment, the accxiinting system, aid the
control procedures, aid (1) identify types of potential mistakes, (2) consider
factors that may affect. the risk of mat.eriai misstatement, aitl, (3) design
sutstantive tests. The control environment foc ises on the rIiilosoc iy aid
cperatirg style, organizational structure, aid manag nt’s control methods.
The acs x*mtinj system maintains doa.xmeritation of transacti , aid ti ly
reporting of Lransaction. While the control pruc ures estaI lishes
authorization of transactions, control of acx ounting doam nts, safeguard of
assets, segregation of duties, aid irdepeident diecks.
C2iaracteristi of illegal acts fr l xI obeerving internal control
weakness, personal behavior, relationship, or deviation in recordkespirxg that
raises skeptici n about the fidelity of a fur tion in whicth there is an
cç.porbinity far illegal acts.
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B. Er IV g OF 8ThL’S 10 D P MDI!
}O wi i PPU LN S R I
Aix3iting stardards reguire that a determination be made whether
activities or financial statements beir audited or evaluated are in
oxipliai with relevant laws aid regulations. Aiditors aid evaluators Itn ist
determine when aid to what extent they must test for non xipliance with
applicable laws aid regulations to detect er L , irregularities, ab.ise, or
illegal acts. Generally, the greater the materiality, significance, aid
sensitivity, the greater the degree of reguired c p1iaire testiz .
Depeixiin on an assigrment’ s objectives ard the results of any risk aid
internal corr ol assesements, auditors aid evaluators may: (1) exparxi the
assigrment’s scope, (2) spin off a separate assignment, or (3) refer suspected
nor tpliax to a third party. OIG Manual thapter 122—Oat ljanc, With Laws
aid Pegulations establishes policy aid pro ures far OIG auditors’ aid
evaluators’ use in assessi.rr ccm 1iance with laws aid regulations in
a rdai with Government Auditir Staidards (1988 revision).
Specifically, OIG Manual thapter 122 provides OIG auditors aid
evaluators guidance in decidir :
o when to test for cczrpliaz .
o to identify applicable laws aid regulations.
o h i to evaluate the likelihood that nor xaiip1iance .ild o
aid rv t be detected or prevented by internal controls.
o hcx nn.id testing to do.
o hc* to deal with aid report suspected or actual illegal acts.
EC Z(PLE OF rrz t 8 PIC “10 IN AVDIT PIED X A1 )
Cpl4 T1r e with Laws aid Regulations
— Determinin whether grants e awarded in ardaz with applicable
government regulations.
— Determining whether justification far r rk petitive contract awards
met regulatory reguir ents.
- exaininin aid test.izx collecti of revern.zes to verify that they were
recorded, collected aid deposited in the U.S. Trea y.
- Testirq, by iideperdent confirmation, of assets, iz , iployees aid
hcors thared, c1 in aid expenses.
- E caminurq travel expenses of 1oyees to c firm that reiinbirser nt
was in ac rdar with regulations aid that travel was far official b sir ess.
- Determine whether c uti ctors are cthargin unallc able costs to
contk -dcts (e.g., advertising, entertainment)
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- Determinin whether contractors ar usir goverrm nt a..irier materials
ai egu.ipnent on r rgoverrm nt work, ar if the goverrm nt is gettir the
n terials ar 1 & uip nt back.
— E caminir investigative reports, suspension ard debax nt reports, or
paynEnt of fii s or penalties.
- ninin justifications ard authorizations far large payments far
unspecified services to consultants, affiliates of eznploy .
— E ni.nir* su ç,oitirj documents, sud as invoices, car led checks, ard
agre ents arxl arir with acxxuntir records.
— Q nfirmir significant info ation with other parties or
intern iaries, suth as banks, lawyers, ard other government r rds ( d ds ,
tax or FI )
Risk analysis
- Do i ntive exist for program meriager, participants or beneficiaries
to unit illeqaljtjes?
- Are decisions m c primarily by a sinle person?
— Do aplicable laws arxl requlations contain adequate specificity or are
they too vague?
— Is cash or other assets susceptii le to iiiproper conversion?
— Has manag nt birrx,ver b n high?
- Is the organized decentralized without adequate nonitorin?
- Are test results iix1eperx ently verified?
— Is there a repeated pattern of probl or c iplaints?
Assas t of Internal Controls
- Are there policies ard procedures in place ard are they foll ed?
— Is there separation of duties?
- Is tI e doQ. ntatjon of transacti ard other significant events?
— Is there authorization ard execution of transactions ard other
significant events by a .prcpriate persons.
- Are itsis of value, ir lt ix infonnation, safequarded?
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D! ’INITIa
b ise— F rnishirq excessive services to benaficiarjes or performjj what
may be c nsider i.nproper practices, non of whidi involves nonc plia with
laws ar regulations
rors— Unintentional misstatements or ni sions of an nts or
disclosure in finar ial statements.
Illegal Acts- Failure to fol] . ra uiremerits of laws or inplementh
regulations.
Irregularities- Intentional misstatements or ni ions of a mts or
d.fsclosures in financial state nts.
Materiality- The magnit e of an cr sion or misstatement of acxx*znting
information that, in light of surrouriling ciram tarx ar qualitative ar
quantitative nsiderations, makes it probable that the j xkjment of reasonable
person relying on the information ild have been ciianged or influer by the
c ni s cjon or misstatement.
Significance- The inportance, in relation to the a it/evaluatjon
objectives, of an item, event, information, problem or matter the
aixlitor/evaluator identifies.
Pitos/ vaiuatørs always should perfo. all work with an attitut1e of
professional skepticiEni
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Chapter 6
Field Work Standards for
Performance Audits
Legal and
Regulatory
Requirements
Auditors should design the audit to provide rea-
sonable a.ssurance of detecting abuse or Illegal
acts that could signifIcantly affect the audit
objectives.
u V heii audit ‘ teps and procedures indicate that
.ibuse or illegal acts have or may have occurred, the
audiror needs to determine the extcnt to which
these acts significantly affect the audit results.
ii [ )etecting noncompliance resulting from illegal acts
i ’ gtmerally difficult Doing so commonly requires
special steps, and auditors are expected to devise
and apply such steps as may be effective Because a
sound internal control structure can be effective in
ensuring compliance, an assessment of the control
structure is generally useful
42. In all performance audits’
Auditors should be alert to situations or trans-
actions that could be Indicative of abuse or ille-
gal acts.
43. When information comes to the auditor’s attention
(through audit procedures, tips, or other means)
indicating that abuse or illegal acts may have
occurred, the auditor should consider the potential
impact of these acts on the audit results. If these
acts could significantly affect the audit results, the
auditor should extend the audit steps and proce-
dures, as necessary (a) to determine whether the
acts occurred and (b) if so, to determine the extent
to which these acts significantly affect the audit
results
Due Care
Concerning
Illegal Acts
$4 When an audit is conducted under contract and the
contract does not permit the auditor to unilaterally
extend steps and procedures, the auditor should
obtain written approval to perform the necessary
additional work If such approval is not given to the
auditor. a scope impairment generally exists which
“ ,hould be stated in the auditor’s report
5 Auditors should exercise due professional care and
caution in pursuing indications 01 illegal acts so a.
not to interfere with potential future investigations
and/or legal proceedings Due care would include
consulting appropnate legal counsel and/or the
applicable law enforcement organization, where
appropnate. before proceeding
46. Circumstances may exist in which laws, regulations
or policy require auditors to promptly report indica
tions of illegal acts to law enforcement or investiga-
tory authorities before extending audit steps and
procedures. The auditor may also be required to
withdraw from, or defer further work on, the audit
or a portion of the audit in order not to interfere
with an investigation However, the auditor should
consider whether this would restrict the completior
of the remaining portion of the audit or interfere
with the auditor’s ability to form objective opinions
and conclusions If it restricts or interferes, the
auditor should terminate the audit or discontinue
further action until completion of the investigation
(See reporting requirements in chapter 7)
47 Most auditors are not trained to conduct investiga-
tions of certain types of illegal acts which are the
responsibility of the investigator or law enforce-
ment authorities. However, auditors are responsible
for being aware of the charactenstics and types of
vulnerabihties and potential illegal acts associated
with the area being audited in order to be able to
identify indications that these acts may have
occurred.
48. An audit rn-ide in accordance with the standards in
this statement will not guarantee the discovery of
all abuse or illegal acts. Nor does the subsequent
discovery of abuse or illegal acts committed during
the audit period necessarily mean the auditors’ per
formance was inadequate, provided the audit was
made in accordance with the standards in this
‘ ,tatement
tL 1
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Chapter 7
Reporting Standards for
Perfonnance Audits
Compliance ‘i.i The report should include all significant
U, . i • instances of noncompliance and abuse and all
V ILLI L.dV S indications or instances of illegal acts that could
Regulations result in crüninal prosecution that were found
during or in connection with the audit.’
\ on mphan.e u. l’he auditors’ report should include all significant
instances of noncompliance found dunng or in con-
neetion with the audit, even those not resulting in a
legal liability of the.. ntityAII instances of illegai
acts that could result in the entity, or an official or
employee of the entity, being subject to criznuial
prosecution should also be reported.
Abuse and illegal 36. If, during an audit or in connection with an audit of
Acts a government entity, external government auditors
— become aware of abuse or illegal acts or indications
of such acts that could affect the government
entity, they should promptly report to the top offi-
cial of that entity The auditor should also consider
reporting to the appropn ate oversight body. If the
top official is believed to be a party to such acts or
otherwise implicated, the auditor should in all cases
report to the appropriate oversight body If the acts
involve funds received from other government enti-
ties, the auditors should also promptly report to the
proper officials, including the audit officials, of
those entities
39. Nongovernment audit organizations conducting
government audits will dis-harge their responsibili-
ties for reporting abuse or illegal acts or indications
of such acts f un’i during or in co’viection with an
audit by promptly reporting to the top official of
the entity arranging for the audit.
42. Abuse or illegal acts or indications of such acts that
auditors become aware of should be covered in a
written report and submitted in accordance with
the preceding paragraphs. Such acts may be cov-
ered in a separate report if including them in the
overall report would compromise investigative or
legal proceedings or otherwise preclude the report
from being released to the public. Auditors gener-
ally should not re!ease information or reports con-
taining information on potential illegal acts that
cuuid result in the entity, or olficer or employee of
the entity, being subjected to cruiunal prosecution,
or reports witli references that SUC 1’i acts were omit-
ted from reports, without consulting with aporopn.
ate legal counsel, since this could interfere with
legal processes or subject the implicated individuals
to undue publicity, or might subject the auditor to
potential legal action.
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Cha ter4
Field Work Standards for Financial Audits
The auditor should design audit steps and proce
Errors, Irregularities dures to provide reasonable assurance of
and Illegal Acts detecting errors, irregularities, and illegal acts
that could have a direct and material effect on
the financial statement amounts or the results
of financial related audits.
The auditor should also be aware of the possibLi
ity of illegal acts that could have an Indirect and
material effect on the financial statements or
results of financial related audits.
i4. In fuLfilling the above requirements relating to
errors, irregularities, and illegal acts, the auditor
should follow the guidance contained in the AICPA
$ * 3 standards entitled The Auditor’s Responsibility to
Detect and Report Errors and Irregularities and Ill.
: 4sv galAct .sBydllents.
Due Care is. Auditors should exercise due professional care and
Concerrurig aution in extending audit steps and procedures rel
Illegal Aus aLive to illegal acts so as not to interfere with poter
tial future investigations and/or legal proceedings
Due care would include consulting appropriate legal
counsel and/or the applicable law enforcement
organizations, where appropriate, to determine the
audit steps and procedures to be followed.
16. Circumstances may exist where laws, regulations,
or policies require the auditor to promptly report
indications of certain types of illegal acts to law
enforcement or investigatory authorities before
extending audit steps and procedures. The auditor
may also be required to withdraw from or defer
further work on the audit or a portion of the audit
in order not to interfere with an investigation. How-
ever, the auditor should consider whether the above
circumstances would restrict the completion of the
remaining portion of the audit or interfere with the
auditor’s ability to form objective opinions and con-
clusions If it restricts or interferes, the auditor
should consider discontinuing further action until
completion of the investigation, or terminate the
audit
17 Most auditors are not trained to conduct investiga-
tior .s of certain t ’pes of illegal acts which are the
responsibility of the investigator or law enforce-
rnent authonties. However, auditors are responsible
for being aware of the characteristics and types of
:!!egal expcnditur s and acts associated with the
area bemg audited to be able to identify indications
that these acts may have occurred.
Is Au audit made in accordance with the standards in
this s’atement will not guarantee the discovery of
all illegal acts or contingent liabilities resulting from
noncompliance Nor does the subsequent discovery
of illegal acts committed during the audit period
necessarily mean that the auditor’s performance
was inadequate provided the audit was made in
accordance with these standards
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5
Reporting Standards for Financial Audits
Illegal Acts 10. If. during or in connection with an audit of a gov-
ernrnent entity, external goverrunent auditors
become aware of illegal acts or indications of such
acts affecting the government entity, they should
promptly report to the top official of that entity
The auditor should also consider reporting to the
appropriate oversight body If the top official is
believed to be a party to such acts or otherwise
implicated, the auditor should in all cases report u
the appropriate oversight body If the acts involve
funds received from other government entities,
auditors should also promptly report to the propei
officials, including the audit officials, of those
entities.
18. Illegal acts or indications of such acts that auditors
become aware of need not be included in the
required audit reports, but may be covered in a sep-
arate wntten report and submitted in accordance
with the preceding paragraphs, thus permitting the
required report or reports to be released. However,
auditors generally should not release information or
reports containing information on such acts or
reports with references that such acts were omitted
from reports, without consulting with appropriate
legal counsel, since this release could interfere with
legal processes, subject the implicated individuals to
undue publicity, or subject the auditor to potential
legal action.
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SECTION 3
DOCUMENTING INDICATORS
OF FRAUD
SECTION III. Documenting Indicators of Fraud, Audits Techniques
and Altered Documents
Objectives
This section describes what types of information should be obtained
to help identify and document indicators of possible fraud along with a
review of those audit techniques used to collect audit evidence. This
section also will discuss the need to examine seemingly good audit evidence
and support for the possibility that it has been altered. Auditors need to
look beyond the usual documentation to determine the authenticity of that
documentation. A sound audit trail may be composed of altered or false
documents.
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A. AUDIT TECHNIQUES
.1. Analyze
2. ScrutInize
3. Compare
4. IntervIew
5. Confirm
6. Observe
7. Trend Analysis
B. ANALYZE
Break a ledger balance into its
component parts.
C. SCRUTINIZE
Review documents used to arrive
at the figure in your analysis.
0. COMPARE
Evaluate different sources for
accuracy or proper recording.
E. INTERVIEW
Through a meeting or conversation,
obtain Infornatlon or facts from
another person.
F. CONFIpJI TjON
Corroboration by an outside entity of
the amount, as of a certain date, owed
th i by the audited party or the amount
which they owe the audited party.
G. OBSERVE
Watch with attention so as to see or
learn something.
LU 2 -
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H. TREND ANALYSIS
Rela items in the financial
statnts should change
toge er over time.
I. AUDIT EVIDENCE
1. Audit evidence obtained from an
independent source provides greater
assurance of reliability than that
secured from the auditee organization.
2. Audit evidence developed under a good
system of internal control is more
likely to be reliable than that
obtained where such control is weak
or unsatisfactory.
3. Evidence obtained by the auditor through
physical examination, observation,
computation, and Inspection is more
reliable than evidence obtained indirectly.
4. OrIginal documents are more reliable than
copies.
J. SOURCES OF INFORMATION
1. Deposit slips
2. Loan documents
3. Personal financial statements
4. Deposit accounts
5. Signature cards
6. ndorsed and processed checks
K. CHEC AND RECONCILIATIONS
1.. Names
2. Dates
3. Endorsements
4. Authorizations
5. Purpose
6. Number
7. Federal Reserve Bank notation
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SECTION III. DOCUMENTING INDICATORS
Techniques fop Obtaining Evidence in Contract Fraud Cases
I: Voluntary cooperation of cnntractor
A. Access to records beyond scope of contract right
B. Access to employees on company time
C. Access to premises
II. Compulsory Interview of Federal employees
III. Contract clauses
A. Inspection clause U.S . v Hartley 678 F2d 961
(11th Cir. 1982)
B. Audit clause ZAP v U.S . 328 U.S. 624 (1946)
(10 U.S.C. 22ThT
IV. IG Subpoenas
A. Standard — reasonably related to a legitimate inquiry
and not burdensome
B. Official curiosity
C. Procedures for obtaining subpoenas
D. Upside
1. Contractor records not covered by contract
2. 3rd party records
3. Personal records of contractor and Government
employees
4. Bu records
E. Downsll*
1. TimelIness
2. Destruction of records
V. Outside Sources
A. 3rd party witness interviews
B. Former employees
T 1I-q
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L. ALTERED DOCUMENTS
1. Document substitution
aka spurious documents
2. AlteratIons
M. ALTERED DOCUMENTS: WHAT TO CHECK
1. Delivery addresses
2. Amounts
3. ltms and specifications
4. Authorizations
5. invoice or order numbers
6. Actual checks and bank
reconci liaticris
7. Endorsements
N. EXAMPLES OF ALTERATIONS
1. Disturbing the paper fibers by
hand or by machine
- overwriting
— tracing
— free hand simulation
— information added with a
typewriter
0. DOCWV4T SUBSTITUTION
1. FictItious checks or invoices
2. FIctit ious signatures
3. Repetitious second endorsenent
4. Photocopy different from original,
when offered in place of the
original
i l L - 3
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ExI ’ ib’t ’
QLTESTIONED DOCUMENTS
I
The following is an excerpt from the chapter on
“Document Consciousness’ i t t the book, Evidential Docu-
ments , by James V. P. Conway (1959, Charles C. Thomas,
Pub Lisher).
“There follow a few general questions
pertinent to every document and a number of
specific questions relevant to a few documents.
It has been observed repeatedly that the most
frequently overlooked of these inquiries are
those which should be the most obvious. These
questions are in no sense all inclusive of
considerations which merit study but they
provide a basis for the thoughtful, reasoning
approach to evidential documents.
1. When and where did the document, say a
check, deed, or note first appear?
2. By whom was it presented? What is his
interest? His reputation?
3. Is the document’s very existence suspicious?
Doth it protest too much the cause it was
designed to serve?
4. What did the presentor say about the
document at the time he presented it?
Later? Why discrepancies, if there be
such?
5. Is the document in the same condition now
as when it was first presented? Have you
so assumed or do really know?
6. By whom does the document purport to have
been drawn or prepared?
7. Have you erroneously assumed chat the date,
body, and signature were written by the
same person?
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—2—
8. If an endorsement, have you assumed that
the signature and address were written by
same person? Can you establish the correct-
ness of your assumption?
9. What do the executors of the document have to
say about their participation? Did they indulge
complete details or were they glossed over?
Did you err by permitting a collaborated story
to be given by several interested parties?
10. [ s the date of the document logical to its
content? If a letter, did the author betray
himself by improper tense of verbs or the
“forecasting” of events inconsistent with
the document’s date?
11. Is the date of the document consistent with
the movements of the principal? Have you
considered hos italizacion, injuries, vacations,
business trips.
12. Was the document presented timely in the light
of its date? If not, where has it been, and
why?
13. Are the writing media, pen, pencil, paper,
and ink, consistent with the document’s date
and the representations made for it by its
proponents? With the habits of its purported
author at the time in question? With his
physical and mental condition at that time?
14. Have you identified the author and signer
through his or their handwriting or have you
merely assumed writing authenticity? Have you
acquired technically adequate, provable, and
legally admissible exemplars?
15. Have you examined companion documents of proper
vintage to ascertain their agreement or other-
wise with the habits reflected in the evidential
documents?
16. Do you recognize that authentic companion docuriertts
provide a much more reliable mode of proof than
self—serving, accusatory, or otherwise partisan
statements by interested principles?
flI-7
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—3—
17 , Have you reconciled disagreements between the
evidential document and companion documents?
Is your reconciliation reasonable in itself
and consistent with the representations made
by the proponents of the document?
18. Are there witnesses to the preparation,
executions or presentation of the document?
What is his or their interest? Reputation?
19. Have the witnesses supplied complete details
as to time, place, and circumstances? If not,
why not? Do they remember not wisely but too
well all the self—serving details?
20. Are the witnesses certain they could not be
confused about a similar document? A similar
transaction? Was your consideration of these
points cursory? Partisan? Presumptive?
21. Does the document, for example a check, have
a number? Should it have one in view of the
habits of its purported author?
22. Is the number of the document, say a check
or invoice, in proper sequence by comparison
with companion documents of the same vinta;e,
or has it clearly been postdated or antedated?
23. Have you too readily accepted a hotel or motel
registration as an alibi? Does its time and
does its number coincide with other registra-
tions of the same date? Is is supported by
correct accounting records? Es its format,
including printing, in agreement with companion
regis trations?
24. Does the document bear any ind•ication or
suggestion of an erasure or alteration? Is
the suspect area continguous to or does it
embody a key part of the document?
25. If a photostat, where is the original? Is
presentation of the photostat rather than the
original suspicious Lfl itself?
26. If a photostat, why is the original unavailable
to you, if it is? If a court order or permission
of a third party is necessary for inspection
of the original, have you ascertained complete
details for timely action?
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—4
27. Have you considered and accounted for ALL
the handwriting, initials, addresses, tele—
phone numbers, identification data, stamped
impressions, etc. , on the questioned check?
28. Have you been wasting your time, or do you
have men on your staff who have been
dissipating their time, comparing check
endorsements with the writing of suspected
forgers, without first ascertaining that
parts of these endorsements were not written
by the Eorger at all, but represent the
handwriting of the second endorser or his
agent?
29. Have you dissipated hours of investigative
time, reached erroneous conclusions, and
perhaps confused your document examiner, by
comparing the signatures or issuing particu-
lars on forged checks, when your problem
involved tracings and simulations?
30. Have you issued circulars which advertised
all too clearly that your department did
not understand how responsibility must be
established in cases involving tracings and
studied simulations?
31. Does the document purport to have been
written or signed with a ball point pen
prior to 1945.
32. Does the document purport to have been
written or signed with a liquid lead pencil
prior to 1955.
33. Does the typewritten document contain a short
center “W” or “w” and is it dated prior to
1935.
34. Is the document, perhaps a will, hiding
behind deceased witnesses? Have you examined
their signatures of comparable date, or have
you assumed somewhat automatically that the
witnesses’ signatures are authentic?
35. Is the document ceremoniously hiding behind
a notarial or other seal of no real identiry-
irig value?
JEL-7
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—5—
36. Have you established that the notary or other
public official physically witnessed execution
of a document, so purporting? If so, did he
correctLy identify the signer?
37. Is the seal on the document legible and authentic?
Have you compared it with admittedly authentic
seals?
38. Have you assumed that the si riature of the
notary or other public official was authentic?
Have you compared companion signatures? Are
the latter and related records for the date in
issue maLntained with similar pen and ink?
39. If a printed form, have you checked its origin?
Have you compared similar and companion forms
of corresponding date?
40. Is the location of an obliterated or eradicated
area of the document highly suspicious in
itself? Have you sought specialized assistance
to develop the original writing?
41. If the document is folded, is this condition
consistent with its alleged origin and later
repositories?
42. If the document contains creases and folds,
allegedly because it was carried about in a
pocket or wallet, is the document’s condition
in respect to soiling consistent with this
alleged history? Is the document clean where
it should be soiled and vice versa? Do the
folds fail to reduce the document small enough
to fit the wallet or pocket in which it
allegedly was placed?
43. Does the document fit the envelope in which
it was aLle edly received? Do depressions
and impressions correspond? Ink and pencLL
smudges?
44. If a maiLed incLosure, does it bear a latent
postmark inconsistent with the visible post-
mark on the enveLope in which it was allegedly
inclosed?
lEt
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—6—
45. Does the document bear a watermark consistent
with its date?
46. Have you studied both the apparent and latent
thought content of the document, for example,
an anonymous letter, for evidences of authorship?
47. Have you catalo ued the individualities of word
choice, colloquialisms, spelling, arrangement,
capitalization, and mode of expression for
evidences of authorship? Have you delineated
the individualities of letter conformation and
letter connections?
48. Does the document have a foreign script or
language influence even though its alleged
author was born and educated in the United States?
Or does it have unmistakable “United States”
script and language despite the allegation that -
its author was born and educated in Europe?
49. Are you satisfied that you have scrutinized
the document thoroughly from top to bottom?
front and back, and accounted for all writing,
typewriting, printing, job numbers, marks,
holes, discolorations, odors, erasures, folds,
creases, seals, bindings, fasteners, indentations,
depressions, and what have you therein and
thereon? Have your aggre aLe Lnferences
supported the representations made by the
proponents of the document? Have your aggregate
inferences clearly established the document’s
true origin and subsequent history?
50. Have you consulted a qualified document examiner?
Should you now?
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SECTION 4
REFERRALS TO THE
INVESTIGATORS
SECTION IV. Making Referrals to the OIG Office of Investigations
Objecti yes
This section describes when and how to refer indications of possible
fraud to the OIG Office of Investigations. The actual investigation of
possible fraud is the responsibility of the OIG Office of Investigations.
Although auditors should test for conditions conducive to, and indicators
of fraud, they need to make timely and accurate referrals when they
believe they have identified possible fraud.
tv-f
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A. REASONS FOR PROMPT REFERRAL
1. Investigator may join auditor on-site
2. Wttnesses or others involved may: die,
move, forget, go on vacation, get sick or
change their stories
3. Documents may be: lost, moved, altered, or
destroyed
4. Other physical evidence may be: lost,
moved, destroyed, or disturbed
B. REFERRAL
1. Auditor’s name
2. Name of auditor’s supervisor
3. Names and locations of those involved
4. Why the auditor concluded that the matter
has sufficient probability to warrant
investigation
5. Documentation supporting the conclusion or
establishing the potentially fraudulent act
6. Information on and support for the amount
of actual or potential loss, if known
flZ-L
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UNITED STATES
ENVIRONMENTAi PROTECTION AGENCY
OFFICE OF INSPECTOR GENERAL
401 M STREET, SW.
WASHINGTON, D.C. 48O
MAY 2 9 1986
OIG MANUAL
TRANSMITTAL
59
CHAPTER 22——REFERRALS BETWEEN AUDIT
AND INVESTIGATIONS
MATERIAL TRANSMflThD
Chapter 22——Referrals Between Audit
and Investigations
This chapter establishes policies and
procedures to promote cooperation and
coordination between the Office of
Audit and the Office of Investigations.
The chapter has been revised to require
only the referral form, not all referral
correspondence, to be sent to the AIGs
(section 2—5); to describe the OIG Award
for Excellence (section 2—6); to clarify
the procedures for preparing status
reports (section 3); and to include the
referral status report (appendix 3).
MATERIAL SUPERSEDED
Chapter 22, Issued June 1984
C’rka , .
john C. Martin
nspector General
Disthbution : E
IL 3
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ENVIRONMENTAL PROTECTION AGENCY OIG MANUAL
OFFICE OF INSPECTOR GENERAL
CHAPTER 22--REFERRALS BETWEEN AUDIT
AND INVESTIGATIONS
TABLE OF CONTENTS
Paragraph
SECTION 1. GENERAL
1—1. Purpose •••••••,.. •, • 1
1—2. Background ... 1
1—3. Policy 1
SECTION 2. INFORMATION EXCHANGES
AND REFERRAL REQUESTS
2-1. Interchange of Information on Planned Audits and
Investigations •••••••••••••••••••,• 2
2-2. Requests for Audit Assistance on Investigative Matters 2
2—3. Referrals Audit .. •••••••••••..•.....••• 4
2—4. Referrals for Investigat,ons •..•..••..•.•••••••••• 4
2—5. Referral Procedures 5
2—6. OIG Award for Excellence 5
SECTION 3. STATUS REPORTS
3—1. Status Reports ••••••••,••• 5
APPENDIXES
i__Matters Wh lchMay Be Investigated ••••..••••..•••••••• ••••• 7
2——Referral Form ... 13
3 ——Referral Status Report 16
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ENVIRONMENTAL PROTECTiON AGENCY OIG MANUAL
OFFICE OF INSPECTOR GENERAL
CHAPTER 22-—REFERRALS BETWEEN AUDIT
AND INVESTIGATIONS
SECTION 1. GENERAL
1—1. PURPOSE . The purpose of this chapter Is to establish policies and
procj ijres to promote cooperation and coordination between the Office
of Audit and the Office of Investigations.
1—2. BACKGROUND . To maximize efforts to reduce fraud, waste, and abuse,
auditors and investigators should work together. In the course of
their work, auditors and Investigators should be alert to Issues that
might concern their counterparts. Audits often disclose Indicators
of violations of laws and regulations which merit the scrutiny of
investigators. Investigations often reveal indicators of weaknesses
in controls and procedures which deserve the analysis of auditors.
Even when joint work is not involved, good communication between
offices helps our staff members fight possible fraud, waste, and
abuse in EPA programs.
1-3. POLICY . OA and 01 should work together to exchange information and
resources vital to both offices and to the organization. These
offices are responsible for:
a. Referring to each other all appropriate matters disclosed by
their work or otherwise brought to their attention;
b. Providing each other direct audit or Investigative assistance
on a request basis;
c. Providing audit coverage to management weaknesses as requested
or disclosed by investigations;
d. Providing audit assistance to U.S. Attorneys, the FBI, and other
investigative organizations on a request basis as coordinated
through 01;
e. Participating jointly in projects initiated to uncover fraud,
waste, and abuse;
f. Avoiding scheduling conflicts that might be detrimental to the
work of either office; and
g. Maintaining close coordination and communication between offices
in both Headquarters and field to facilitate a free flow of
information.
—1—
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OIG MANUAL ENViRONMENTAL PROTECTION AGENCY
OFFiCE OF INSPECTOR GENERAL
CHAPTER 22——REFERRALS BETWEEN AUDIT
AND INVESTIGATIONS
SECTION 2. INFORMATION EXCHANGES
AND REFERRAL REQUESTS
2-1. INTERCHANGE OF INFORMATION ON PLANNED AUDITS AND INVESTIGATIONS . The
continuing cooperation between OA and 01 is essential for :
a. Consulting on potential referrals for lnvestfgatlon or audit;
b. Obtaining information about current or recent Investigations of
audit Interest;
c. Gaining perspective on matters referred to OA by 01, or vice versa;
d. Exchanging information on matters of mutual interest; and
e. Planning and working on joint projects.
At Headquarters, there must be a continuing exchange of information
between offices. GA should provide 01 with a copy of its annual audit
plan and quarterly revisions. 01 should furnish GA with Information
on planned investigations which may relate to audits.
At the divisional level, close working relations should exist. Besides
exchanging Information on planned work, DIGs and staff members should
regularly Interchange Information as matters come up which may be of
official interest to one another.
2-2. REQUESTS FOR AUDIT ASSISTANCE ON INVESTIGATIVE MATTERS . 01 should
request from OA any audit or technical assistance required In carrying
out investigations of criminal or civil fraud or other matters.
a. Contents . The request should set forth the:
(1) Nature of the alleged irregularity;
(2) SpecifIc matters to be audited;
(3) Objectives to be achieved;
(4) Specific guidance on how audit results are to be disseminated;
and
(5) Tlmeframes within which the assistance is required.
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ENVIRONMENTAL PROTEC11ON AGENCY OIG MANUAL
OFFICE OF INSPECTOR GENERAL
CHAPTER 22——REFERRALS BETWEEN AUDIT
AND INVESTIGATIONS
b. Sources . Requests for audit assistance on investigative matters
come from:
(1) OffIce of Investigations . OA should make every reasonable
effort to provide Its expertise where needed to conduct
investigations or engage In special joint projects. If the
OLGA thinks a request for assistance cannot be accepted
because of other priorities, he/she should consult with the
ALGA to determine If some adjustment of priorities can be
made or if staff from other divisions can be assigned to the
referral.
(2) Other Investigative Units . Divisional and Headquarters CA
officials occasionally receive requests for assistance
channeled through 01 from U.S. Attorneys, the FBI, and other
agencies with investigative or similar responsibilities. If
requests are made directly to OA, they should be Immediately
referred to 01. 01 should review such requests and determine
the nature and extent of assistance required. If CI finds
that audit assistance is needed, the matter will be referred
to CA for consideration. 0! should coordinate with the
requester and OA to ensure that specific understandings are
reached with respect to the nature and scope of work, time—
frames, staffing requirements, and use which can be made of
auditors’ work.
c. Safeguarding Investigatory Process . OA will take necessary steps
to ensure that the investigatory process is not compromised. When
audit assistance is requested on an investigation where there is
an ongoing audit, care must be taken to clearly segregate these
two processes. Normally, the DIGA can do this by assigning staff
who are not working on the audit to the investigation. In some
rare cases, it may be necessary after coordination with 01 and the
U.S. Attorney to discontinue an audit until conclusion of the
investigation.
CA staff will not disclose in audit reports information which could
compromise an investigation or result In an unnecessary invasion of
privacy. When CA becomes aware that the auditee, related entity,
or persons are under investigation, GA will exclude from the audit
report reference to an ongoing or contemplated investigation.
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OIG MANUAL ENVIRONMENTAL PROTECTION AGENCY
OFFICE OF INSPECTOR GENERAL
CHAPTER 22--REFERRALS BETWEEN AUDIT
AND INVESTIGATIONS
2—3. REFERRALS FOR AUDIT . 01 may refer matters to OA for consideration in
its plan of audit assignments. In the course of their work, investi-
gators frequently obtain information that is outside the scope of
their investigation and may be of interest to OA. 01 should include
with the written referral all relevant Information on the attached
referral fom.
2-4. REFERRALS FOR INVESTIGATIONS . OA should promptly report indications
of criminal violations, civil fraud, conduct violations, and other
matters within OPs purview which are detected during audits or
otherwise brought to its attention. Determining that a matter should
be referred to 0! does not result from a mechanical application of
rules; rather, such a determination depends on the judgment of the
alert auditor based o professional experience and co non sense.
a. Matters Which May Be Investigated . Auditors should be aware that
a great variety of matters may be investigated. Appendix 1 of
this chapter provides a brief discussion of the most significant
matters. In performing audits of EPA programs, grants, and con-
tracts, auditors should be alert to possible Indicators of such
matters.
b. Matters Found During the Course of Audits . Indicators of matters
which should be investigated sometimes are found in audits per-
formed by EPA or others. For example, audit reports prepared by
independent public accountants, State auditors, or other Federal
agencies for OA sometimes disclose Indications of fraud, abuse, or
other impropriety Involving EPA programs and personnel that may
necessitate investigation by 01. When these auditors find matters
in such reports which may require investigation, they should
immediately contact their supervisor and the OlGA. Similarly,
when EPA auditors encounter matters which appear to require
investigation, they should immediately contact their supervisor.
c. Consultation with Investigations . Auditors should continue their
normal audit efforts, but should not expand or modify their audit
coverage until OA confers with 01. -If possible, QA should discuss
the matter with 01 while the auditor who raised the Issue is still
at the audit site. The scope of audits should not be altered
unless 01 indicates that additional information is necessary to
determine whether an Investigation Is appropriate.
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ENVIRONMENTAL PROTECTION AGENCY OIG MANUAL
OFFICE OF INSPECTOR GENERAL
CHAPTER 22--REFERRALS BETWEEN AUDIT
AND INVESTIGATIONS
d. Continuation with Audit . Assuming that It would not interfere
with an investigation, the auditors should be advised t’ continue
with the remainder of the audit and prepare the draft audit report.
After reviewing the workpapers and finalizing the draft report,
the DIGA should coordinate the release of the report with 01. 01
should review the report to ensure that its release will not
interfere with any ongoing investigation. 01 should recognize
OA’s concern about audits being unnecessarily delayed. 01 will
make every effort to provide OA with guidance In a timely manner.
Upon clearance from 01, the report will be finalized and Issued in
accordance with existing OA procedures.
2-5. REFERRAL PROCEDURES . When DIGs think a matter should be referred,
they should informally discuss it with their counterparts. If Informal
discussions confirm that referral is warranted, DIGs should refer the
matter in writing. Referrals should contain all available information
to assist the recipient in making an informed decision and should be
on the attached referral form (see appendix 2).
A copy of the referral form only should be provided to the AIGs in
Meadquarters by the DIG making the referral. If the responding DIG
cannot accept such a referral because of other priorities, the AIG
should be consulted to determine If some adjustment can be made of
priorities or if staff from other divisions can be assigned to the
referral.
2-6. 010 AWARD FOR EXCELLENCE . DIGs will have the option each year of
nominating an individual or team for an 010 Award for Excellence,
which will be presented In recognition of exemplary performance In
conducting and referring an audit or investigation. Information
relating to the selection process, criteria, and award amounts is
detailed in the OIG Manual Chapter 12, Personnel Administration.
SECTION 3. STATUS REPORTS
3-1. STATUS REPORTS . To provide necessary feedback between our offices,
each DIG who receives a referral should prepare a referral status
report (see appendix 3) each quarter listing the status of all open
referrals and referrals that were closed that quarter by either
completing the requested work or by formally declining the matter.
The report should include Information such as the division making
the referral, a short description of the referral, an identification
number, the date referred, the status of the referral, and the
estimated closeout date.
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OIG MANUAL ENVIRONMENTAL PROTECTION AGENCY
OFFICE OF LNSPECTOR GENERAL
CHAPTER 22-—REFERRALS BETWEEN AUDIT
AND INVESTIGATIONS
The reports will be sent to the A1Gs and each DIG fron whom a
referral was received. The offices which made the referrals have
the responsibility of reviewing these reports and reconciling any
differences. These reports will be Issued by the 15th day of January,
April, July, and October. When there are no changes in the status of
referrals from the preceding quarter 1 a copy of the last report will
be sent with a cover letter stating that no changes have occurred.
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ENVIRONMENTAL PROTECTION AGENCY OIG MANUAL
OFFICE OF INSPECTOR GENERAL
CHAPTER 22—-REFERRALS BETWEEN AUDIT
AND INVESTIGATIONS
Appendix 1
Page 1 of 6
MATTERS WHICH MAY BE INVESTIGATED
This appendix sets forth the most conunon matters which should be referred to
01. The elements which constitute various offenses are provided In abridged
form for use as general guidance to assist auditors In recognizing possible
violations. This is not intended to represent a definitive statement of the
elements. Auditors should not attempt to develop Information about each
element before making referrals. When possible violations are recognized,
auditors should seek guidance from their 01 counterparts regarding the
appropriateness of making a referral.
a. False Statements (18 U.S.C. 1001):
(1) The defendant made or used a false statement (oral/written) or
document in relation to a matter within the jurisdiction of a
department or agency of the United States;
(2) The act was done with knowledge that the statement or document was
false, fictitious, or fraudulent; and
(3) The act was done knowlng)y and willfully.
b. False Claims (18 U.S.C. 287):
(1) The defendant knowingly and willfully made or presented a claim to
a Government department or agency;
(2) The claim was made or presented upon or against a department or
agency of the United States;
(3) The claim was false, fictitious, or fraudulent; and
(4) The defendant knew the claim was false, fictitious, or fraudulent.
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OIG MANUAL ENVIRONMENTAL PROTECTION AGENCY
OFFICE OF INSPECTOR GENERAL
CHAPTER 22-—REFERRALS BETWEEN AUDIT
AND INVESTIGATIONS
Appendix 1
Page 2 of 6
c. Conspiracy to Defraud the Government with Respect to Claims (18 U.S.C.
286):
(1) An agreement, combination, or conspiracy;
(2) Involvement of a department or agency of the U.S. Government;
(3) An overt act; and
(4) Obtaining or aiding to obtain the payment or allowance of any false,
fictitious, or fraudulent claim.
d. Theft of Government Property (18 U.S.C. 641). This Includes embezzle-
ment, theft, purlolriing, conversion, unauthorized disposition of
Government property, or reception, concealment, or retention of
Government property.
(1) Intent;
(2) Involvement of U.S. property;
(3) Knowledge of the ownership; and
(4) A loss to the Government.
e. Bribery of Public Officials and WItnesses (18 U.S.C. 201):
(1) The act of directly or indirectly giving, offering, or promising
to a public official or a person who has been selected to be a
public official or to a witness a sum of money or thing of value;
or
(2) The act by said individuals of directly or Indirectly asking,
demanding, soliciting, securing, receiving, or accepting a sum of
money or thing of value;
(3) Doing the act willfully and corruptly; and
(4) DoIng the act with the Intent to Influence or be influenced in
any official act.
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ENVIRONMENTAL PROTECTiON AGENCY OIG MANUAL
OFFICE OF INSPECTOR GENERAL
CHAPTER 22--REFERRALS BETWEEN AUDIT
ANfl TNV STT(ATTONS
AppendIx 1
Page 3 of 6
f. Misuse of Public Funds (18 U.S.C. 648):
(1) Officer or other person charged by act of Congress with safekeeping
public money;
(2) Loans, uses, converts to own use, deposits, or exchanges;
(3) Overt act; and
(4) Knowledge and intent.
g. Concealment, Removal, Obliteration, Mutilation, or Destruction
of Official Documents (18 U.S.C. 2071):
(1) There must be an actual or attempted concealment, removal, etc.;
(2) The act must be willful and unlawful;
(3) There must be intent; and
(4) The act must involve an official record or document.
h. Aiding and Abetting (18 U.S.C. 2):
(1) Affirmative act or association;
(2) Knowledge (criminal intent); and
(3) Commission of crime.
I. Antitrust Violations . Violations of the Sherman Antitrust Act
(15 U.S.C. 1):
(1) The formulation of a contract, combination, agreement, or conspiracy;
(2) The restraint of trade or commerce among the several States.
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OIG MANUAL ENVIRONMENTAL PROTECTION AGENCY
OFFICE OF INSPECTOR GENERAL
CHAPTER 2 2-—REFERRALS BETWEEN AUDIT
AND INVESTIGATIONS
Appendix 1
Page 4 of 6
The following are common bid rigging patterns, violatIng 15 U.S.C. 1,
that agency personnel may be able to recognize:
(1) Bid Suppression . In “bid suppression” or “bid limiting” schemes,
one or severaFcompetftors (who would otherwise be expected to
bid or who have Previously bid) refrain from bidding or withdraw
a Previously submitted bid so that a competitor’s bid will be
accepted. In addition, fabricated bid protests may be filed to
deny an award to a flonconspirator.
(2) Complementary Biddi a , “Complementary bidding” (also known as
“ protective” or “shadow ” bidding) occurs when competitors submit
token bids that are too high to be accepted (or If competitive in
price, then on special terms that will not be acceptable). Such
bids are not intended to secure the buyer’s acceptance, but are
merely designed to give the appearance of genuine bidding. This
enables another competitor’s bid to be accepted when the agency
requires a minimum of bidders.
(3) Bid Rotation . In “bid rotation,” all vendors participating in
the scheme submit bids, but by agreement take turns being the
low bidder. A strict bid rotation defies the law of chance and
suggests collusion.
Competitors may also take turns on contracts according to the
size of the contract. Many cases of bid rigging have been
exposed in which certain vendors or contractors get contracts
valued above a certain figure, while others get contracts worth
less than that figure.
Subcontracting Is another area for attention. If losing bidders
or nonbidders frequently receive subcontracts from the successful
low bidder, the subcontracts (or Supply contracts) may be a reward
for submitting a noncompetitive bid or for not bidding at all.
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ENVIRONMENTAL PROTECTiON AGENCY OIG MANUAL
OFFICE OF INSPECTOR GENERAL
CHAPTER 22--REFERRALS BETWEEN AUDIT
AND INVESTIGATIONS
Appendix 1
Page 5 of 6
(4) Market Division . Market division schemes are agreements to
refrain from competing in a designated portion of the market.
Competing firms may, for example, allocate specific customers or
types of customers so that only one firm submits bids on contracts
let by a certain class of potential customers. In return, his
competitors will not bid on contracts let by the class of customers
allocated to him. For example, a vendor of office supplies may
agree to bid Only on contracts let by certain Federal agencies and
refuse to bid on contracts for military bases.
Allocating territories among competitors is also illegal. This Is
similar to the allocation—of-customer scheme, exceDt that geographic
areas are divided instead of customers.
j. Employee Conduct Violations . The following are common conduct violations.
Additional information may be obtained by consulting the U.S.C. or the
Code of Federal Regulations (CFR) or by conferring with 01.
(1) Employment of relatives: 5 U.S.C. 3110(b); 5 CFR 310.103.
(2) Political activity: 5 U.S.C. 7324—7327, 18 U.S.C. 602, 603, 607 and
608 (Hatch Act); 5 CFR 4.1, 733.121—124; 40 CFR 3.502(b)(3).
(3) Gifts to supervisors: 5 U.S.C. 7351; 5 CFR 735.202(d).
(4) Using public office for private gain: 5 CFR 735.201a(a);
40 CFR 3.103(d)(1).
(5) Accepting gratuities: 5 CFR 7 35.202(a); 40 CFR 3.400.
(6) Outside employment noncompatible with Government duties:
S CFR 735 .203(a); 40 CFR 3.500 et seq .
(7) Receipt of compensation from private sources for Government service:
18 USC 209; 5 CFR 735.203(b).
(8) Conflict of interest: 18 U.S.C. 208; 5 CFR 7 35.204(a)(1);
40 CER 3, subpart A, appendix A.
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OIG MANUAL ENVIRONMENTAL PROThCT ON AGENCY
OFFICE OF INSPECTOR GENERAL
CHAPTER 22-—REFERRALS BETWEEN AUDIT
AND INVESTIGATIONS
Appendix 1
Page 6 of 6
(9) Gambling on duty; 5 CFR 735.208; 40 CFR 3.104(c).
(10) Disclosing information classified or confidential: 18 U.S.C. 798;
50 U.S.C. 783; 18 U.S.C. 1905; 5 CFR 735.210(f).
(11) MIsuse of Government vehicles: 31 u.s.c. 1344 1249; 5 CFR 735.210(h).
(12) Misuse of franking privileges: 18 U.S.C. 1719; 5 CFR 735.210(1).
(13) Giving preferential treatment: 40 CFR 3 .103(e)(2).
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ENVIRONMENTAL PROTECTiON AGENCY
OFFiCE OF INSPECTOR GENERAL
CHAPTER 2--REFERRALS BETWEEN AUDIT
AND INVESTIGATIONS
REFERRAL FORM
OIG MANUAL
Appendix 2
Page 1 of 3
Referral Formil. Date f Report . Au tflnvtigat ion ilurnoerl), File Nurioer
4. Type of Report.
Initial Supplemental Otner ________________________
5. Area of Concern
Conduct Criminal Civil Administrative
5. Referral involves.
EPA Eriployee Contractor Grantee Otner ____________
7. Location of Incilent
. Oate sno Time f Ircioen:/Discovery
9. Source f information
Puolic Contractor Grantee Audit
Crwestigatton Otner ________________________
J. E pec:e i Concern to E ’A
Local Regional National Media Interest
Eiecutiye Interest GAO/Congressional Interest
Otrier __________
I I. EPA program Involved: Z. Estimated Funds Involved:
I I_______
j. &nrornation On 1n OIve
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O1G MANUAL ENVIRONMENTAL PROTECTION AGENCY
OFFICE OF INSPECTOR GENERAL
CHAPTER 22-—REFERRALS BETWEEN AUDIT
INVESTIGATIONS
AppendIx 2
Page 2 of 3
11. Sijnriry of Ficti (Cont’a)
1 . AUlflInce Req eit,a:
lb. U.t, MIIit.anci NUdId by:
lb. T pe b Titlo or ssponhIbJ, urriclil
19. I n turo
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ENVIRONMENTAL PROTECTiON AGENCY OIG MANUAL
OFFICE OF INSPECTOR GENERAL.
CHAPTER 12—-REFERRALS BETWEEN AUDIT
AND INVESTIGATIONS
Appendix 2
Page 3 of 3
INSTRUCTIONS FOR COMPLETING REFERRAL FORM
ITEM 1 Self—explanatory.
ITEM 2 OA should use the audit control number or. if work was done by
contractor, the audit report number. 0! should use the inquiry/
case number.
ITEM 3 Both 0! and GA should include in this number their office
identifier (OA and 01), division identifier, the fiscal year, and
the sequential number of referrals made that fiscal year (e.g.,
Ot-MAD—84—04 for 01,, MId-Atlantic Division, Fiscal 1984, fourth
referral).
ITEMS Self explanatory.
4-14
ITEMS Both GA and 01 should fill in these items when assistance is
15—16 required. If referral is made for information only, these items
need not be completed.
ITEM 17 Indicate whether there are any attachments and the number of them.
ITEM 18 Identifies the DIG making the referral.
ITEM 19 Signature of DIG making the referral.
The original of this report will be sent to the DIG receiving the referral
with copies of the referral form only sent to both AIGs.
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OIG MANUAL
ENVIRONMENTAL PROTECTION AGENCY
OFFICE OF INSPECTOR GENERAL
CHAPTER 22-—REFERRALS BETWEEN AUDIT
INVESTIGATIONS
Appendix 3
Short Description of Referral
OlGA
Referring
Division
1.0.
plo.
Date
Referred
Status
Estimate
Closeout
Signature
REFERRAL STATUS REPORT
/________
I DIG!
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SECTION 5
THE ENVIRONMENT
FOR FRAUD
SECTIOI V. General Indicators of Fraud and Assessing the Environment
for Fraud
Objectives
This section provides an overview of the general administrative and
financial conditions conducive to fraud. It also lists and describes
indicators of weak internal controls and how those weaknesses can be
abused to commit fraud. In addition, this section identifies behavior,
patterns of activity, and documents which could indicate possible fraud,
even when strong internal controls appear to be in place. Also presented
are lists of c nmon fraudulent acts.
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A. OPPORTUNITIES FOR FRAUD WAIT FOR
THE RIGHT ENVIRONMENT
1. Noral climate
2. System of controls
B. MORAL CLIMATE: DANGER SIGNALS
1. High personnel turnover
2. Low employee morale
3. Documentation not available
4. Bank reconciliations delayed
5. Unrealistic job standards
6. Late reports
7. Some employees never vacation
C. INSUFFICIENT INTERNAL CONTROLS
1. Not separating responsibility for:
- authorization
- custodianship
- recordkeeping
2. Not limiting access to assets
3. Not recording transactions
4. Not executing transactions with proper
authorl zati on
5. t implementing prescribed controls
e to:
— lack of personnel
- unqualified personnel
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0. FISCAL/ACCOUNTING CONTROLS: DEFICIENCIES
1. FIscal control duties not divided
2. Records not posted in a timely manner
3. Payment obligations not recorded or
accunul ated
4. Funds disbursed without reasonable
verification of progress or product
5. Disbursements made without proper
authori zat ion
6. Obligations and disbursements not tracked
against budget
7. Funds expended for ineligible or improper
it ems
8. Recurrent audit findings
9. Accumulating Federal funds in advance of
needs
E. MANAGEMENT CONTROLS: DEFICIENCIES
1. Poorly designed programs
2. Lack of plan or targets for accomplishments
3. Cumbersome, costly or unneeded procedures
4. DuplicatIon of effort
5. Inadequately trained staff
6. Vague work assignments
7. Lck of Internal con iiunication
8. Fdi ure to work within approved schedules
9. Failure to act on complaints
10. Inspections not performed or documented
11. Funding projects outside of approved area
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F. DANGER SIGNS
i. Lack of cooperation in providing
records for audit
2. People living beyond means
3. Refusing to take vacations
4. LJnreasonab e association with
a contractor
G. MORE DANGER SIGNS
1. Poor financial condition
2. Poor timekeeping system
3. Mix in types of contracts
4. History of past fraud
5. One or few individuals who
dani nate management
6. No internal or external audits
H. WHAT ELSE TO CHECK
1. Personal items paid by company
2. Overpayment and refund
3. Padded payroll
4. Two checks for same invoice
5. No invoices
6. inusual or large expenditures
7. Loans to third parties
8. Sale of assets
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I. COMMON INDICATORS OF FRAUD
1. Two sets of records
2. Alteration of documents
3. Destruction of records
4. Company provides immediate justification
for irregularities
5. Employees coached on what to say and
withhold
J. MORE COMMON INDICATORS OF FRAUD
1. Failure to correct system deficiencies
2. Inconsistent use of overhead accounts
3. Mistakes always at the Government’s
cost
4. Use of photo copy of invoices or
receipts, not original
5. Second or third party endorsements on
company checks
K. SCHEMES AND DETECTION TECHNIQUES
1. Altered timecards/erroneous charges
2. Supervisor posts tiniecard labor charges
3. False claims/labor fraud
4. Fictitious/nonexistent vendors
5. increasIng vendor invoices
6. IncreasIng contract price by modifications
7. Theft of materials and supplies
8. Purchasing better quality items than
received
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L. MORE SCHEMES AND DETECTION
tECK IUES
1. ,,flrmatlon fran bank of balances of
bank accounts and loans
2. Confirmation of accounts receivable
3. Theft or Illicit sale of fixed assets
4. Checking of collateral
5. Splitting purchases
6. Confirmation of accounts payable
7. Settling of claims
8. Premature withdrawals under a letter of
credit
M. MORE SCHEMES AND DETECTION
TECHNIQUES
1. Theft of inventory
2. Inventory cut—offs
3. Questioned costs
4. Claiming unwarranted costs
5. Cash—flow analysis (cash generation)
6. Net worth calculation
7. Lapping
8. KitIng
ar-c
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GENERAL INDICATORS OF FRAUD AND ASSESSING THE ENVIRONMENT
FOR FRAUD (Controls)
WARNING SIGNALS OF THE POSSIBLE EXISTENCE OF FRAUD
1. Highly d tneer1ng senior management and one or more of the following, or
similar, conditions are present:
— An Ineffective board of directors and/or audit committee.
— Indications of management override of significant internal accounting
controls.
Compensation or significant stock options tied to reported performance
or to a specific transaction over which senior management has actual
or implied control.
— Indications of personal financial difficulties of senior management.
— Proxy contests involving control of the company or senior management’s
continuance, compensation, or status.
2. Deterioration of quality of earnings evidenced by:
— Decline in the volume or quality of sales (for example, increased
credit risk or sales at or below cost).
— Significant changes in business practices.
— Excessive interest by senior management In the earnings per share
effect of accounting alternatives.
3. Business conditions that may create unusua’ pressures:
— Inadequate working capital.
— Little flexibility in debt restrictions such as working capital ratios
and limitations on additional borrowings.
— Rapid expansion of a product or business line markedly in excess of
industry averages.
— A rna.f Investment of the company’s resources In an industry noted for
rapt ck nge, such as a high technology industry.
4. A complex corporate structure where the complexity does not appear to be
warranted by the company’s operations or size.
5. Widely dispersed business locations accompanied by highly decentra1 zed
management with inadequate responsibility reporting system.
6. Understaffing which appears to require certain employees to work unusual
hours, to forgo vacations and/or to put in substantial overtime.
7. High turnover rate in key financial positions such as treasurer.or
controller.
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Eh 1 1i !
GENERAL INDICATORS OF FRAUD AND ASSESSING THE ENVIRONMENT
FOR FRAUD (Controls)
WARNING SIGNALS OF THE POSSIBLE EXISTENCE OF FRAUD
8. Frequent c? ange of auditors or legal counsel.
9. Known material weaknesses in internal control which could practically
be corrected but remain uncorrected, such as:
— Access to computer equipment or electronic data entry devices is not
adequately controlled.
— Incompatible duties remain combined.
10. Material transactions with related parties exist or there are transactions
that may involve conflicts of interest.
11. Premature announcements of operating results or future (positive)
expectations.
12. Analytical review procedures disclosing significant fluctuations which
cannot be reasonabley explained, for example:
— Material account balances.
— Financial or operational interrelationships.
Physical inventory variances.
— Inventory turnover rates.
13. Large or unusual transactions, particularly at year-end, with material
effect on earnings.
14. Unusually large payments in relation to services provided in the ordinary
course of business by lawyers, consultants, agents, and others (including
employees).
15. Difficulty in obtaining audit evidence with respect to:
— Unusual or unexplained entries.
— Inc 1ete or missing documentation and/or authorization.
— Alterstions In documentation or accounts.
16. In the performance of an examination of financial statements unforeseen
problems are encountered, for instance:
— Client pressures to complete audit In an unusually short time or
under difficult conditions.
— Sudden delay situations.
— Evasive or unreasonable responses of management to audit inquiries.
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;1l
GENERAL INDICATORS OF FRAUD AND ASSESSING THE ENVIRONMENT
FOR FRAUD (Controls)
COMMON FORMSIETHOUS OF FRAUD AND ABUSE
—— IncreasIi the amounts of supplier’s invoices through collusion.
—— Issuing credit for false customer claims and returns.
—— Lapping collections on customer’s accounts.
—— Charging personal purchases to the company through the misuse of purchase
orders.
—— Using carbon copies of previously used original vouchers, or using a
properly approved voucher of a prior date by altering the old date.
—— Charging customer’s accounts by amounts equal to the cash stolen from
other accounts.
—— Failing to make bank deposits daily, or depositing only part of the money.
—— Altering dates on deposit slips to cover stealing.
—— Causing erroneous footings of cash receipts and disbursanent books.
—— Seizing and forging checks payable to the company or suppliers.
-— Permitting special prices or priviledges to customers, or granting
business to favored suppliers for kickbacks.
-— Inflating invoices/vouchers/head counts.
-— Substituting low quality merchandise while charging prices for high quality
nierchandi Se.
-— Misrepresenting income and/or concealing assets in welfare type cases.
-— Employees claiming overtime that was never performed.
—— Employees submitting false information on time and attendance reports to
conceal leave taken.
g-7- 3
-------
E h1bJ
GENERAL INDICATORS OF FRAUD AND ASSESSING THE ENVIRONMENT
FOR FRAUD (Controls)
COMMON FORM$J THODS OF FRAUD AND ABUSE (continued)
—— Increasing the amounts of supplier’s invoices through collusion.
—— Issuing credit for false customer claims and returns.
—— Lapping collections on customer’s accounts.
-— Charging personal purchases to the company through the misuse of purchase
orders.
—— Using carbon copies of previously used original vouchers, or using a
properly approved voucher of a prior date by altering the old date.
—— Charging customer’s accounts by amounts equal to the cash stolen from
other accounts.
—— Failing to make bank deposits daily, or depositing only part of the money.
-— Altering dates on deposit slips to cover stealing.
-- Causing erroneous footings of cash receipts and disbursement books.
—— Seizing and forging checks payable to the company or suppliers.
-- Per iitting special prices or priviledges to customers, or granting
business to favored suppliers for kickbacks.
—— Inflating Invoices/vouchers/head counts.
-— Substituting low qua1ity merchandise while charging prices for high quality
merchandi se.
-— Misrepresenting income and/or concealing assets in welfare type cases.
-- Employees claiming overtime that was never performed.
-- Employees submitting false information on time and attendance reports to
conceal eave taken.
Y-7-’I
-------
SUMMARY OF SECTION 5.
Remembers a mistake Is only a mistake if corrective action is taken.
Neglect allowing a pattern to develop is tantamount to intent.
When performtng routine audits, the auditor should be alert to indicators of
fraud. Obviously, he should look into areas where fraudulent activity is
most likely to exist. Some conditions conductive to fraudulent activity
are:
a. Inadequate Internal Control . Any contractor with inadequate internal
controls may be a prime candidate for fraudulent activity. For
example, a small contractor with a limited staff may have the same
person performing incompatible functions. Incompatible functions for
accounting control purposes are those that place any person in a
position both to perpetrate and conceal errors and irregularities in
the normal course of his duties.
b. Poor Financial Condition . A contractor in poor financial condition
will atteiipt to find ways to cut or minimize his losses or achieve
greater profits. In desperation, the contractor may resort to fraudu-
lent activities.
c. Inadequate Accounting Records . Usually a contractor with Inadequate
accounting records will also have poor internal controls and will be
In a poor financial Condition. Inadequate accounting records are an
effective means of concealing a fraud.
d. Poor Timekeeping System . A poor timekeeping systan is a significant
deficiency, not just fFom the standpoint of possible labor overcharges
but from the fact that overhead and G&A expenses are usually applied
to labor costs. Errors in timekeeping and labor distributions should
not be dismissed lightly. It may be that what appears to be an error
was an intentional entry. Erasures and changes made to time cards
should be investigated thoroughly. The nployee may have properly
recorded his time, but management may have changed the charge to their
advantage
e. A Mix of Comercial, Fixed Price and Cost T ’pe Contracts . This has
been an important indicator of the possibility of contract mlscharges.
Earlier, we said that before a fraud could be committed, opportunities
had to exi st. This mix of contract types provides the best “opportu-
nity” avaflable. For example, shifting the cost from a commercial or
fixed prf ’ contract to a cost type contract or shifting costs from a
commerciar contract to a fixed price contract in anticipation of
negotiating a higher price on a follow—on procurement is an enticing
idea with potential for great rewards.
-------
SUMMARY OF SECTION 5 (contInued)
f. A Histor of Past Frauds . Companies or individuals previously involved
in frau nt activity are more likely to commit a second fraudulent
act. TPTeS. individuals have a tendency to be basically dishonest.
g. Management Dominated by One or a Few . These individuals exhibit a
dominance over the entire organization. The individual does not have
to be a member of top management. Their influence is disproportionate
to the status of their positions and their principle distinguishing
characteristic is the fear they generate. Such Individuals usually
have the power and the inclination to override internal controls.
These individuals are often described as the company “strong men.’
h. Individuals Living Beyond Their Means . Accounting literature and CPA
review courses advise auditors to be alert to and aware of individuals
living beyond their means. If this situation is encountered, the
auditor should consider a review to determine any unusual transactions
or occurrences related to functions performed or within the span of
control of that employee. For example, is the employee In the pur-
chasing department? If so, he could be the recipient of kick—backs,
etc. Perhaps the employee is responsible for material control and
has access to high value Government furnished materials.
I. No Internal or External Audits . The fact that audits are or will be
conducted is a deterrent to fraudulent acts. The absence of audits
creates a favorable enviromient for a fraud and is an indication that
internal controls and the accounting system may be less than adequate.
-------
SECTION 6
CASE
STUD I ES
SECTION VI. Case Studies
Objecti yes
This section reviews actual referrals made to the OIG Office of
Investigations from IPA audits that resulted in significant prosecutive
action.
-------
EMANCO PRESIDENT James C.
Barnum. 37, of Tray, and Vice-Presi-
dents Danlerroy, 28. of Mt. Clemens.
and Gary Dom a .Iii, 43. of Oxford.
each were fined $5,000 and sentenced
to serve tour months of one-year prison
sentences. They were convIcted Oct. 2
after pleading guilty.
The company was fined *10,000.
In 1982, the EPA hired EMANCO U
one of four contractors to clean up
wastes at Liquid Disposal Inc. In Shel.
• by Township.
Hayes said EMANCO and the exec-
utives were charged with conspiracy
• to defraud the U.S. government for
filing false claims to the EPA. using
Inflated labor costs, labor charges for
work that was not performed and
inflated costs for a kickback scheme
with subcontractors.
According to court documents,
EMANCO executives received $25,041
In kickbacks In 1982 from a company
called Waste Acid Services for trans-
porting hazardous wages from the
site.
Another $11,355 In kickbacks was
rece*ved by EMANCO In 1983 from
Maes Trucking Co. for transpOrtatlng
contaminated soil, according to the
court documents. Neither of the firms
that paid the kickbacks was charged.
Liquid Disposal, a northern Ma
fraud case
anendon operation, eventually de-
clared bankruptcy sitar two employes
were killed In January 1982 by a
hydrogen sulfide leak.
The day after the deaths, the state
ordered the Incinerator closed, and
court action shut down the entire facil-
ity in February. In Apr Il 1982, the firm
went Into involuntary bankruptcy.
State officials declared the site one
of the worst toxic dump sites In Michi-
gin, making It eligible for Superfund
cleanup money.
More than $3.8 million — most of it
federal money — has been spent to
package and remove the most threat-
ening poisons at Liquid Disposal and to
study possible cleanup measures.
Former EPA Administrator Anne
Burt ord, who was In Detroit on Thurs-
day promoong her new book. said the
EPA expected that Superfund, Like
other federal programs, would be
prone to some illegal profiteenng
Burford, who ran the EPA from
.1981 until herresigzatlon In 1983. said
current congresaooal proposals to
more than quadruple the money avail-
able for toxic cleanups — which could
give Superfund as much as $10 billiQn
— would make the program even moçe
susceptible to illegal activIties.
“How do you conscientiously mazi-
age that? It’s a huge i Iusion of niort-
ey,” Burford said.
Free Press Staff Wruer Bob Camp-
I. • I , .S . — .
,afim fined, 3 ex cs
jailed in EP4
ByJOHNOU PHY -
Fr.,P ’1uSI. WrISs,
In the first prosecution of Its type hi
the nation, a Ufica company has been’
fined and three of Its top officers have
been sentenced to prison for submlt-’
hog more than $1.3 mlllIon’In false;
claims to the Environmental Protection
Agency for cleanup costs eta Macoanb
CowitytozIcdumpsite.’
Environmental Management Corp.
(EMANCO) and three of Its ezecudysa_-
(wee entenced Wednesday by U.S.
District Judge Julian Cook fee submit-
hag false claims for payments from the
EPA ’s Supsrfund.
“TheSupertun4wgsaestedIn 1980
to pay for clesnups’at some of the
(counlr’fs worst tokic dump sites sad
of chemical ‘ cddents .
U.S. Attorney Roy Hayes said the
mexicticc resulted from the first Sii. —
perfund prosecutions in the country. The prosecution ‘was ”:
John Perrcone, an EPA qok’ ’n.n, r • ‘• ‘
said, rhlz Is thi 1 first case where we the first of Its type in
found a contractor cheating the gov.’ e L / ..
eroment on purpose, rather than . e coun 7 .
Ing a midnight dumper of wastes.”
Perrcone said the EMANCO opera-
ton was uncovered during a routine
EPA audit of the company.
1k2
-------
UNITED STATES
ENVIRONMENTAL PROTECTION AGENCY
Z OFFICE OF INSPECTOR GENERAL
NORTHERN DIVISION
‘. I 4TH FLOOR
10 WEST JACKSON STREET
4( CHICAGO. ILUNOIS 00604
March 30, 1984
SUBJECT: Audit Report No. P5cH3 —05 O226_4O836
Audit of Costs Claimed Under Notice to Proceed 68-95—0023
Environmental Management Corp., Utica, MI
FROM: The Inspector General
TO: David J. O’Connor, Head
Procurement Section H
Procurement and Contracts Management Division (PM-214F)
Enclosed are two copies of the subject auuit report. Please note that the
CPA has taken serious exception to the contractor’s accounting system and,
in addition to questioning costs, has made recommendations on administrative
matters. Also, certain incidents Identified in this report have been referred
to our Office of Investigations, We understand that EPA recently awarded a
simflar contract to Environmental Management Corp. for $2,000,000. We reconi-
mend that you assess EPA’s vulnerability on that contract in light of the
findings disclosed in this audit report.
Your office is designated 0 action office’ for this report. Please respond to
the Divisional Inspector General for Audits, Northern Division in accordance
with the provisions of EPA Order 27502A.
This report Is FOR DESIGNATED USE ONLY. The purpose Is to provide Information
for contract negotiations and administration. The information contained in
this report is considered to be Privileged business Information and, as such,
is protected from release to the general public by the Freedom of Information
Act.
Should you have any questions concerning this report, please contact Michael
Rickey at (312) 353—2486,
/ Anthony C. Carroll
For the Inspector General
Enclosures (2)
cc: DIM Internal Audits Division (A—109)
-------
AUDIT OF COSTS CLAI1 D8y
I NMENTAL MANAGE WNT cORP.
UTICA, MICHIGAJ4
EPA NOTICE ‘LV P CEED NO. 68-95-0023
FOR THE PER.IOD JULy 26, 1982 TH UGj SEPT ER 15, 1982
P5cM3— 05 — 0226
k’&iv b’ ¶Joom 2 t
CL’ 4Ld £ ti
& $ MO4 % 63108
-------
AUDIT OF COSTS CLAIMED BY
ENVIRONMENTAL MANAG ENT CORP.
UTICA, MICHIGAN
EPA NOTICE TO PROCEED NO. 68-95-0023
FOR THE PERIOD JULY 26, 1 82 THROUGH SEPTEMBER 15, 1982
P5cH3-05-0226
KENNETH TOa 1ER
CERTIFIED PUBLIC ACCOUNTANT
ST. LOUIS, MISSOURI
-------
CONTENTS
PAGE
I. AUDITOR’S REPORT. . . . . . . . . . . . . . . . . . . . . . —2
LI. STATEMENT OF COSTS CLAIMED. ACCEPTED) QUESTIONED) AND SET ASIDE
FORCONTRACTNO. 68—95—0023 (EXI1IBITA)..I............ ..... 3
I II. LABOR COST (SCHEDULE I).... ......... 4—5
IV. NOTES TO SCHEDULE I .. 6—11
V. EQUIPMENT COST (SCHEDULE II). . . . . 12
VI. NOTES TO SCHEDULE tI........... 13—16
VII. MATERIALS COST (SCHEDULE III) 17
VIII. NOTES TO SCHEDULE III . . 8—21
IX. SUBCONTRACTORCOST(SCHEDULEIV)... 22
X. NOTES TO SCHEDULE IV 23—24
XI. DISPOSAL COST (SCHEDULE V) 25
XII. NOTESTOSCHEDULEV...... 26—27
XIII. OVERHEAD DETERMINATION (SCHEDULE VI) . 46
XIII. NOTES TO SCHEDULE VI......... 47—48
XIV. GENERAL ADMINISTRATIVE MATTERS (EXHIBIT B) .. 49-SO
V’ . 4
-------
‘ E.±i TOOr4P
a 4 e C g *4ua
(3 141 36? .5i
.$ a.e..ith 63t04
Divisional Inspector General for
Audits Northern Division
Office of the Inspector General
U.S. Environmental Protection Agency
10 West Jackson, Fourth Floor
Chicago, Illinois 60604
I have examined the costs claimed by the Environmental Management
Corporation (contractor), under EPA Contract Notice to Proceed No. 68-95-0023.
This contract covered site security, safety and loss abatement at tne Liquid
Disposal, Inc. site In Utica, Michigan.
Except as set forth in the following paragraph, my examination was made in
accordance with the ‘Standards for Audit of Governmental Organizations,
Programs, Activities, and Functions’, revised in 1981 by the Comptroller
General, and Section I l-C of the ‘Audit Guide——Emergency Response Actions’.
Accordingly, my audit included such tests of the accounting records and such
other auditing procedures as I considered necessary In the circumstances.
The purpose of my examination was to perform a complete cost-incurred audit
and provide a reconciliation of all elements of cost to the contracting officer
to aid in the definitization of this Notice to Proceed on a fixed price basis.
Accordingly, my audit was limited in scope to Include only the following:
1. Labor and equipment hours and rates.
2. Mater als purchased and expended.
3. Types and amounts of wastes transported and disposed of.
4. Subcontract costs.
5. Any other costs charged to the Government.
6. Determine if the rates being charged qualify as established catalog or
market prices within the definition provided In 41 CFR 1—3.807—1(2).
7. 1 relIed upon EPA Form 1900-55, signed by the On Scene Coordinator, to
verify that quantities of materials and labor billed ere actually
delivered at the job site and necessary to the successful completion
of the project.
Since the EPA limited the scope of the audit, as noted in the preceding
paragraph, my opinion Is limited to those objectives identified as includable.
In my opinion Exhibit A, Schedules I through VI and the accompanying notes to
the Schedules present faIrly the Information contained therein in accordance
with the financial provisions of the contract.
Ot cV &.L. ,&Li VO
-------
Divisional Inspector General for
Audits Northern Division
Page Two
Based on Information obtained during my exanilnaticr, I have also prepared
general administrative conrents as shown in ExhibIt B.
This report Is Intended for use in connection iith the Contract to which it
refers and should not be used for any other purpose.
; a
KEN NETh TOOMER
CERTIFIED PUBLIC ACCCLJNTANT
St. Louis, Missouri
January 20, 1D84
l q-z
-------
EXHIB!T A
NV I RONMENTAL MANAGEMENT CORPORAl! ON
UTICA, MICHIGAN
EPA CONTRACT NO. 68-95-0023
STATEMENT OF COST SCLAIMEDI ACCEPTED, QUESTIONED AND SET-ASIDE
FOR THE PERIOD JULY 26, 1982 THROUGH SEPT BER 15, 1982
Labor cost
Equipment cost
Materials cost
Subcontractor
cost
Disposal cost
Total
Claimed
326,454.75
19,046.27
5,956.01
18683.04
174,804.00
$244,944.07
Total
Accepted
$
395.00
1,423.99
13,773.54
119,246.10
$134,838.63
Costs
Questioned Set Aside
$26,454.75 $
4,773.39 13,877.88
4,532.02
4,909.50
55,557.90 __________
$96,227.56 $13,877.88
Reference
Schedule I
Schedule II
Schedule III .
Schedule IV
Schedule V
__ -3-
-------
4 cirn 1 . k 1 jkU4 &44JfJ) jj
1limôi,,n Jtl/M( dJe xLn ’)I
[ NYIRONHENTAL MANAGEMENT C0 ORATION
LJHCA MICHIGAN
( PA CONTRACI NO. 68-95-0023
LIQUID DISPOSAL, IIC. Slit — UTICA, MICHIGAN
LABOR COST
(Note 1)
Billed
Paid
Billed
(Note 2)
Paid
Billed
Accepted
Set Aside
Questioned
Reft
James Barnum
Superintendent
Straight
-Overtl.e
Travel
121.00
15.50
19.00
$ .00
---
—--
$25.00
37.50
25.00
$ .00
-- -
-—-
$ 3,025.00
581.25
475.00
$
---
. --—
$
---
---
---
$ 3,025.00
581.25
475.00
Nt
Nt
Nt
Dan Toy
Gary Daanski
Foremen
Technician
—
Straight
Overtime
Travel
Straight
Overtime
Travel
160.00
22.00
24.00
107.00
16.50
15.00
$ç.0O
---
---
*.0O
--—
--—
21.00
3)50
21.00
18.00
27.00
18.00
1 ’.oo
1
-- -
)K.00
---
---
3,360.00
693.00
504.00
1,926.00
445.50
270.00
---
---
-——
— —
—--
---
---
-—-
-—-
---
3360.00
693.00
504.00
1,926.00
445.50
270.00
Nt
Nt
Nt
N(
Nt
Nc
Operator
Straight
Ove ti.e
Travel
94.00
10.00
16.00
4,00
---
---
18.00
27.00
18.00
1(.OO
---
---
1,692.00
270.00
288.00
——-
---
---
---
.
1,692.00
270.00
288.00
Nc
N
Nt
.
Operator
Straight
Overtime
Travel
40.75
6.00
8.00
.$‘. 0
. 5
--—
18.00
27.00
18.00
.
.
-——
733.50
162.00
144.00
——-
- --
——-
---
---
---
733.50
162.00
144.00
No
No
No
Laborer
Straight
Travel
4.00
1.00
*4 )’
—-—
15.00
15.00
.O0
———
60.00
15.00
- --
———
---
——-
60.00
15.00
No
No
Robert
Operator
Straight
Overtime
Travel
191.50
26.00
25.00
0
---
18.00
27.00
18.00
.
..
---
3,447.00
702.00
450.00
— - -
---
—--
—--
---
---
3,447.00
702.00
450.00
No
Robert
Foreman
Straight
Travel
4.00
1.00
O
—-—
21.00
21.00
.O0
——-
84.00
21.00
---
—— -
-- -
———
84.00
21.00
No
No
Ed
Technician
Straight
Overtime
Travel
24.00
4.50
5.00
--—
-——
---
18.00
27.00
18.00
—-—
—-—
—--
432.00
121.50
90.00
———
— --
—--
—--
—--
432.00
121.50
90.00
No
No’
Not
Doug
Laborer
Straight
OvertIme
Travel
69.50
11.50
12.00
)
--—
15.00
22.50
15.00
.
)(.
—-—
1,042.50
258.75
180.00
—-—
—--
— --
—--
—--
1,042.50
258.75
180.00
Not
Not
Not
Dan
Laborer
Straight
Overtime
iravel
16.00
3.50
2.00
---
---
15.00
22.50
— —
---
240.00
78.75
— --
—--
—--
—--
240.00
78.75
Not
HOt
-------
ENVIRONMENTAL HANAG(M [ NT C0 ORAT1ON
IJHCA, MICHIGAN
EPA CONIRMT NO. 68-95-0023
LIQUID D! ’0SAL, INC. SITE - UTICA, HICHIGAN
LABOR COST
Labor Hours Labor Rates Labor Costs Total Labor Costs
(Note iT ( Note 2 )
Billed Paid Billed Paid Billed Accepted Set Aside Questioned Referenc
Larr3 Laborer Straight 24.00 15.00 $ 7j .oo $ 360.00 $ $ - $ 360.00 Note 3
Overti.e 6.00 22.50 --- 135.00 --— 135.00 P te 4
Travel 3.00 15.00 --- 4500 - _ 45.00 Ii ite S
Edward Operator Straight 8.00 18.00 144.00 --- 144.00 Note 6
Overt l.e 2.50 27.00 67.50 --- 67.50 Note 6
Travel 1.00 18.00 18.00 --- 18.00 Note S
• Donna Clerk Straight 236.00 12.00 3,216.00 --- •-- 3,216.00 Note 3
OvertIme 33.00 18.50 647.50 - - - --- 647.50 Note 4
T Totals $26,454.75 $ ——— --— $26,454.75
•.ss.a. . ..s._..a •.s....s.. B.SSa...
-------
ENVIRONMENTAL MANAG9’IENT CORPORATION
UIIL.P ., I’liLHIG _ AN
EPA CONTRACT NO. 68 5-OO23
LIQUID DISPOSAL, INC. - UTICA, M ICHIGAN
NOTES TO SCHEDULE I
NOTE 1: GENERAL
The hours billed agree 100 percent to the hours recorded on EPA
Form 1 OO-55, and approved by the EPA On—Scene Coordinator. (OSC)
Based upon his certification of the quantities and his approval of the
contractor’s final invoice with related costs, I would normally set
aside the straight time hourly costs In excess of the rates actually
paid pending EPA rate negotiations. However, because of following
problems and others pointed out in other sections of this report, I am
compelled to question essentially all costs. Some costs are certainly
allowable because the task was completed; but I am unable, with a
sufficient degree of certainty, to attest to either the reasonableness
or absolute accuracy of the services or materials rendered.
My examination revealed what I believe to be serious billing
problems on this contract. I have noted several instances where
various employees have billed labor time for on site work and they
have also been billed as part of a disposal rate for driving waste
hauling vehicles. I have also noted two Instances where employees
have supposedly been driving waste hauling vehicles on this contract
and at the same time their daily project report and ‘other client”
invoices Indicate they were elsewhere.
The contractor has been billing a standard rate per gallon (which
includes labor) for hauling waste to each of two disposal sites. The
standard labor hours included in calculating a round trip from the
waste site to the Chem—Met disposal facility is 11 1/2 hours and to
the Waste Acid facility is 9 hours. I have discovered Instances of
employees charging 10 hours of on—site labor and also charging for
driving one or more loads to the disposal facility-—this is a physical
imposs1bilil1r y.
In one instance an employee charged 9 hours as foreman while the
disposal manifests indicate he drove 3 separate loads to the waste
facilities. The 9 hours as foreman plus the 29 1/2 standard hours
charged for disposal driving Indicates this person must have worked a
38 1/2 hour day or else there was a defect in the pricing
determination.
The problem of excessive cost for disposal will be discussed in
more detail in a later section of this report and is Included here
Only to reinforce my opinion that a serious problem exists with this
contract and that I do not have the u nost confidence in either the
contractor’s records or the certifications by the OSC.
-6-
-------
NOTES TO SCHEDULE t (continued )
As a result of this situation, I could not verify all hours
worked or billed. I can only attest that the labor hours on the
1900—55 forms agree iith the final invoice and that the OSC signed
both.
NOTE 2: LABOR PAID
This amount represents application of the hourly rate paid to the
hours billed.
MOTE 3: HOURLY RATES $18,946.00
This Is a relatively new company with little established cost
history, and the contractor was unable to provide documentation
regarding the development of the labor rates charged. I was informed
by the contractor that the hourly rates were detern ned in an
“Informal” manner, based upon the owners’ prior experiences as
employees of other companies providing similar services.
The contractor’s labor accounting system was totally inadequate
to record hours worked on this contract. No time cards were available
for the following employees:
James Barnum
Dan Toy
Gary Domanski
Darrell
Ed
Dan
Ed
La rence
The contractor claimed that independent time records were not
necessary since all hours worked were documented on a daily basis Dy a
Personnel Entry and Exit Log maintained at the job site. I was unable
to review the log because a copy was not retained by the contractor at
his place of business. Furthermore, the original log, according to
the contractor, had been “lost by the EPA”. Also, there were no
payroll records for Ed , Dan and Edward
Article V I — Consideration and Payment of this contract requires:
A. “The number of hours for which the Government will reimburse
the Contractor shall include only the time of employees
whose services are applied directly to the work specified
herein. The Contractor shall maintain time and labor
distribution records for all such employees to substantiate
the nimiber hours for which the Contractor claims
reimbursement. These records shall be maintained for each
employee providing services hereunder and shall document the
time worled during the period of performance of the work
specified above.”
-------
lOTES TO SCHEDULE I (continued )
The contractor’s rates are stated on a price list. However, I do
not feel at this point in time the contractor’s price list is
acceptable as a bona fide catalog price list. There are not
substantial sales to conriercial customers who meet the test of the
general public. Furthermore, the condition of the contractor’s
accounting records would prohibit me from approving their rates.
noted, however, that labor rates charged to EPA agreed without
exception to rates per the contractors “Hazardous Material, Spill
Clean—Up Services Price Listu (Appendix A) Included in his source list
application.
In order to assist the contracting officer to definitize the
contract, I have provided a schedule (See AttacMent I to Schedule I )
indicating t) e labor rates charged by the contractor for the same
service to other customers. P’s’ review Indicated that rates charged to
EPA were either comparable or more favorable than those charged to
other clients except for overtime charges for laborers.
The variation between the rates paid as opposed to the rates
billed would ostensibly cover allocable overhead and profit. However
the increases range from 275 percent to 500 percent. I believe these
rates to be excessive and refer the negotiator to the overhead
analysis (Schedule VI) for assistance in negotiating a reasonable
overhead rate and profit.
As previously stated, I
pending a definitized hourly
compelled to question all
conflicting documentation.
normally set
labor rate.
costs due
aside all hourly labor costs
In this case, however, I am
to poor, non-existent or
NOTE 4: OVERTIME PREMIUM
It is
hours billed
the overtime
Based on n y revi ew
overtime costs billed to
could not, however, verify
There were no time records for
The payroll register Indicated
to these employees, but due to the lack
confirm that overtime paid was directly
have, therefore, uest1oned overtime
employees.
Larry and Darrel
that overtime had been paid
of time records, I could not
related to this contract. I
costs associated with these
t3 ,895.OO
EPA’s policy to allow overtime premium when the overtime
are hours worked in excess of eight hours at one site and
premium has been paid to the employee.
of
EPA
that
the form 1900-55’s, It appeared that
were for bona fide overtime hours.
overtime was paid to al) employees.
The owners, James Barnum, Dan Toy, and Gary Domaflski,
salaried employees. These employees were not paid any overtime.
are
I
-B-
-------
NOTES TO SCHEDULE I continued )
was advised by the contractor that salaried employees were at least
partially, if not wholly, compensated in time off for overtime hour’s
,orked. I could not verify his statement because there is no system
of recording and controlling compensatory time earned and taken.
Accordingly, the overtime costs are questior ’ .
Because of the poor, non—existent or conflicting records, I am
compelled to question all overtime costs. Several overtime amounts
are questioned under other “notes”.
NOTE 5: TRAVEL COSTS $2,530.00
The contractor charged one hour per day per employee to cover
travel time back and forth to the site. This is not a usual practice
of EPA, nor does the contractor charge travel tine to all his
clients. Furthermore, I could not verify that all travel costs had
been paid to the contractor’s employees due to the lack of timekeeping
and payroll records. Accordingly, all travel costs billed to the EPA
are questioned.
NOTE 6: UNSUPPORTED COSTS $1,083.75
The contractor did not have payroll records for three employees.
I could not, therefore, confirm that these employees had been paid.
Two of these employees, Dan and Edward , in the words of
the contractor were “paid through Bob - ‘ check”. The
contractor admitted this method of payment was Improper but stated
that these employees were temporary help and he “did not want to go
through the work of putting them on the payroll”.
Ed was paid through the company’s operating account.
Evidence exists to support the fact that this employee was paid an
amount of money; however, from the contractor’s records, I could not
determine If the money he was paid was compensation for time worked on
this contract.
I have questioned all labor costs associated with these
employees. My calculation of questioned costs Is as fol1 s:
Employee Costs Questioned
Ed
Straight time S 432.00
Overtime 121.50
Dan
Straight tine 240.00
OvertIme 78.75
-9-
-------
NOTES TO SCHEDULE I (continued)
pi oyee Costs 0 ues ti oned
Edward
Straight time 144.00
Overtime 67.50
Total Questioned
NOTE 7: MATH ERROR $4 l.oo*
Labor costs for Donna re Inaccurately extended as
detailed below:
Labor Cost Cost
Hours x Rate • Cost Claimed Questioned
Straight
Time 236 x $12.0O/hr • 832.QQ £3,216.00 £384.00
Overtime 33 x 1 8.50/hr • 610.50 647.50 37.00
442 . 5 1 b3 . 5 42) .oo
*ThiS amount Included In total costs questioned under Note 3.
-10-
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ATTAChMENT I TO SCHEDULE
EN’! I RONMENTAL MANAGEMENT CORP ORATION
UTICA, M1CHIG.A 1
EPA C0WT ACT NO. 68 5-Oo23
LABOR RATE COIfARISON
HOURLY LABOR RATES
Hourly Rates Charged To
Coast Ford Lank GeneraT
EPA Guard P1otor Co. Technician Motors
Superi ntendent
Straight time $25.00 $25.00 $
Overtime 37.50 37.50
Travel time 25.00
Foreman
Straight time 21.00 21.00 21.00 21.00
Overtime 31.50 31.50 31.50 31.50
Travel time 21.00
Technician
Straight time 18.00 18.00 18.00
Overtime 27.00 27.00 27.00
Travel time 18.00
Operator
Straight time 18.00 18.00 18.00 18.00
Overtime 27.00 27.00 27.00
Travel time 18.00
Laborer
Straight time 15.00 15.00 15.00 15.00 15.00
Overtime 22.50 21.00/22.00*
Travel time 15.00
Cl erk
Straight time 12.00
Overtime 18.50
‘Overtime for this category was billed at $21.00/hour on an invoice dated
August 16, 1982 and $22.00/hour on an invoice dated Septenter 30, 1982.
-------
SCHEDULE II
ENVIRONMENTAL MANAGEMENT CORPORATION
1JUCA MICHIGAN
EPA CONTRACI NO. 68-95-0023
LIQUID DI OSAL, flC. SITE - UTICA ,T4 ICHIGAN
EQUIPMENT COST
No. of
Days/lirs.
Billed
129.00 hrs.
19.25 hrs.
4.55 hrs.
27.50 hrs.
133.00 hrs.
164.50 hrs.
13 days
26 days
47 days
26 days
1 day
12 days
16.50 hrs.
Cost per
Day/Hrs .
$58.00/hr.
80.25/hr.
80.25/hr.
58.00/hr.
9.66/hr.
5.25/hr.
12.00/day
50.00/day
50.00/day
5.00/day
60.00/day
90.00/day
50.60/hr.
$ 1,4 *12.00 $
1,544.81
365.14
1,595.00
1,284.78
861.01
156.00
1,300.00
2,350.00
130.00
60.00
1,080.00
834.90
2.63 _______
U9,046.27 $395.00
s..sa..s. RSS•S
$ 6,525.00
882.15
556.60
156.00
1,300.00
2,350.00
130.00
60.00
1,080.00
834.90
2.63
sn.uii.e8
sas.sass aa
References
Note 2
Note 3
Note 3
Note 4
Note 5
Note 6
Note 7
Note 7
Type of Eguip.ent
3,000 gal. vacuu truck £ driver
6,600 gal. vaciua truck no. 1 £ driver
6,600 gal. vacua truck no. 2 1 drIver
8,000 gal. vaccsm truck & driver
‘ Operations vehicle
‘ Staff autos no. 1 1 2
Fiberglass boat
Scott air pack
810 back
Eye wash
100 ft boo.
50 ft boo.
Stake truck I driver
Contractor billing error
Total
Costs
Claimed Accepted Questioned Set Aside
$ 957.00
662.06
365.14
1,038.40
1,059.78
691.01
225.00
110.00
$4 • 173.39
-------
ENVIRONMENTAL MANAGEMENT CORPORATiON CHEDULE II
UTICA, MICHIGAN
EPA CONTRACT NO. 68-95-0023
NOTES TO SCHEDULE II
NOTE 1: GENERAL
Quantities billed agree to the quantities recorded on EPA Form
1900-55. The contractor did not retain any equipment logs o r other
data by which I could confirm the data on the 1900-55 forms on an
Independent basis. I noted several instances of equipment being
charged for and acknowledged on the 1900—55 forms such as tankers
being used for hauling hazardous materials, but there is no record
(manifest) of these vehicles ever reaching the disposal site or making
a materials dump. This will be discussed in a later note.
I was informed by the contractor that rates for all equipment
were established in an informal manner as equipment became necessary
at the job site. The contractor has no calculations to support his
rates. Therefore, I have no basis for measuring the reasonableness of
these costs and accordingly, they have been set aside except where
costs iere questioned for specific reasons.
The contractor’s rates are based on a price list submitted to
EPA. It is my opinion that the price list does not qualify as a bone
fide catalog price list.
in order to assist the contracting officer to definitize this
contract, I have provided information regarding equipment rates
charged to other customers for similar services. See Attachment I to
Schedule II.
From the information provided In Attachment 1 to Schedule II, I
noted that other customers had been charged a more favorable rate than
the EPA for an operations vehicle and an 8,000 gallon tanker. I have
questioned the difference in rates for these items In the respective
Notes.
NOTE 2: 3,000 GALLON TANKER AND DRIVER 957.O0
Contractor billed for 16 1/2 hours of usage on this vehicle for
July 26 and 28. 1 analyzed the manifests from the disposal site and
no materials were disposed of on these dates.
NOTE 3: 6,600 GALLON VACUUM TANKER AND DRIVER l ,027.20
Contractor billed for 12 3/4 hours of usage on two vehicles for
July 26 and 28. I analyzed the manifests from the disposal site and
no materials were disposed of on these dates.
71.1+ -13-
-------
NOTES TO SCHEDULE Ii (continued )
NOTE 4: 8,000 GALLON TANKER AND DRIVER $ ,038.40
Contractor billed for 16 1/2 hours of usage on this vehide for
July 26 and 28. I analyzed the manifests from the disposal site and
no materials were disposed of on these dates.
The contractor also charged an incorrect houly rate of $58.00.
His published rate Is $50.60 resulting In an overcharge of $81.40 for
those hours not already questioned in total.
NOTE 5: OPERATIONS VEHICLE $1,059.78
The “operations” vehicle was in fact Mr. Dotnanski’s pick up truck
which he uses for comutfng and which he said he also drove to the
iaste site and “ran errands j U I believe the rate he billed for
th s vehicle is e*cessive not only because he charged the EPA r ore
than either the Coast Guard or Ford Motor Co. (Attachment 1 to
Schedule II) , but also because a mileage allowance would be more
reflective of the value given and received.
Hourly rate charged to EPA $ 9.66/hr.
Less: Hourly rate charged
to other customers 5.25/hr.
Difference In rate $ 4.41/hr.
Hours charged to EPA x 133
Costs Questioned 58b.53
The operations vehicle was billed to the EPA for 15 days. I
estimate that 75 miles a day should be a reasonable allowance for a
round trip from the office to the site taking into consideration that
some errands needed to be run. My calculation for this part of the
cost questioned Is as follows:
$ 75 mile daily allowance
x 15 days
1,125 miles
x .20 per mile reimbursement
$ 225. allowable cost
s .aaa
Total cost claimed $1 ,284.78
Less rate variance 586.53
$ 6%.Z5
Less:
Acceptable mileage allowance 225.00
Unreasonable cost questioned $ 413
-14-
-------
NOTES TO SCHEDULE II (continued )
Cost Questioned:
Rate variance
Unreasonable rental
Cost Questioned
17 days usage charged
x 50 miles
850 miles
x$ .20 per mile
5170.Q0 allowable
691.01 unreasonable rental (questioned)
$861.01 Total Claimed
• •a au
I did not question any cost in this category; however) I want to
point out that on a daily basis on the 1900—55 forms the contractor
billed $100 a day for each of 2 lb—Packs” and 1 “Scott Air Pack”.
By the end of the contract he had decided that this was excessive and
adjusted his final Invoice to reflect only ‘1/2 the amount he had
charged on the daily 1900-55 forms.
The original billing was $7,150.00 and the final adjusted invoice
was for $3650.00. According to the ‘Information available to us this
equipment cost $2,032.00.
I think this Is a further indication of
ac n1n1strat1ve and financial control during
contract.
—1
$ 586.53
473.25
$1 ,059.78
NOTE 6: STAFF AUTOMOBILES $691.01
This represents a charge for the personal automobiles of two of
the owners--neither car was owned by the contractor at the time of
this contract. The automobiles were purchased by the corporation from
the employee owners after this contract was c np ’ 1eted.
In my opinion, the maximum allouable expense for use of these
automobiles should be a simple mileage allowance to travel from the
office to the site and return. Fifty miles is more than adequate for
a round trip. The cost questioned is calculated as follows:
NOTE 7: SAFETY EQUIPMENT
the relative lack of
the performance of this
-------
ATTACHMENT 1 TO SCHEDULE It
ENVIRONMENTAL MANAGEMENT CORP.
UTICA, 11CHIGAN
EPA CONTRACT NO. 68-95-0023
EQUIPMENT COST COMPAR [ SOW
Rates Charged to
Coast Ford Lant enerar
Equipment EPA Guard Motor Co. Technician Motors
Scott Air Pack $50.001 day $120.00/day
Blo Pack 50.00/day
Portable Eye Wash 5.00/day
14’ Boat 12.00/day
Operations Vehicle D.6b/hr. $ 5.25/hr. 5.25/hr. $ 9.6b/hr.
Stake Truck/driver 50.60/hr.
3,000 gal. vac
truck/driver 58.00/hr. 58.00/hr. 58.00/hr. 58.00/hr. $58.00/hr.
6,600 gal. vac
truck/driver 80.2 ihr. 80.2 /hr. 80.25/hi. 80.25/hr.
8,000 gal. tank
truck/dri ver 58 .00/hr. 50.60/hr. 50 .60/hr.
Staff Auto 5.25/hr.
100 ft. boom 60.00/day 60.00/day
150 ft. boom 90.00/day
-16-
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UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
SOU’ r RN DIVISION
UNITED STATES OF AMERICA,
Plaintiff, CRIMINAL NO. 85—80596
vs. HONORABLE JULIAN COOK
JAMES CHARLES BARNUM,
DANIEL LEE TOY,
GARY HENRY DOMANSKI,
ENMANCO CORPORATION, a/k/a
Environmental Management
Corporation,
Defendants.
GOVERNMENT’ S SENTENCING MEMORANDUM
NOW COMES the United States of America, by and thf ugS
its attorneys, Roy C. Hayes, United States Attorney, and
James L. McCarthy, Assistant United States Attorney, both for
the Eastern District of Michigan, Southern Division and
submits this memorandum pursuant to Rule 32(a)(l) of the
Federal Rules of Criminal Procedure.
The purpose of this memorandum is to highlight pertinent
information concerning the defendants’ conduct in order to
provide information appropriate to the imposition of sen-
tence. Because this case has been resolved by means of pleas
of guilty rather than by trial, copies of reports, analyses
and other documents have been attached to this memorandum for
th purpose of giving the sentencing court a complete version
of the government’s version of the facts of this case. The
attached records also allow the court to review the formula
l
-------
used by the govern e to determine the estimated loss of
approximately $146,988.45.
In an attempt to make punishment commensurate with the
offense, the trial judge may consider a broad range of
information concerning the defendant. 18 U.s.c. 3537
provides:
No limitations shall be placed on the
information concerning the background,
character and conduct of the person
convicted of an offense which a court
of the United States may receive and
consider for the purpose of imposing
an appropriate sentence.
In determining the sentence, the court, within its
discretion, may properly assess the Possibility of rehabi].j-
tation, the societal interest in retribution, and the poten-
tial, individual and general deterrent effect of its
sentence. The history and Philosophy of sentencing is that,
“the punishment should fit the offender and not merely the
crime.” Williams v. New York , 337 U.S. 241, 247 (1949).
Government’s Version Of Facts
In May 1981 defendants Barnum, Domanski, and Toy origi-
nally approached James Bentley, owner of Bentley Oil, Taylor,
Michigan to form a new company to secure EPA government
contracts to clean up hazardous waste sites. The company was
named Environmental Management Corporation with the partner-
ship divided between Bentley (30%), Domanski (30%), Barnum
(30%), and Toy (10%). Since neither Barnum, Toy, nor Domanskj
had sufficient money or equipment, Bentley put approximately
$80,000 of his own money into the initial investment.
-------
Unbeknownst to Bentley, Barnum, Domanskj, and Toy secured the
services of another attorney and reincorporated under the
name ENMANCO (Environmental Management Corporation), e ec-
tive July 26, 1982. Domanskj and Toy were Vice Presidents
and Barnum was President. (See A-4). On this same date
Barnum, as Ennianco’s President, signed EPA Notice to Proceed
Contract No. 68-95-0023 to initiate a Superftznd nergency
Response cleanup action on the Liquid Disposal, Inc. (LDI)
site in Utica, Michigan. It should be noted that its 1983
Annual Report filed with the State of Michigan shows that
Enmanco Corp. was then an inactive corporation. (See Al, Al
& A3 attached).
Erunanco’s scope of work included stabilizing the levels
of the incinerator pit and scrubber lagoon, pumping and
storing PCB contaminated oil, and alarming and securing the
LDI site. The cleanup was completed on September 15, 1982,
at which time Enmanco submitted to the EPA invoice No. 06601
in the amount of $212,175.69.
During the progress of the WI cleanup, Enmanco subcon-
tracted Waste Acid Services (W.A.s.), Detroit, Michigan, to
transport and dispose of hazardous waste water from the WI
incinerator pit. During the progress of the WI cleanup,
Barnum telephonically contacted Gerry Groves, W.A.S. Presi-
dent, around August 23, 1982 to see if W.A.S. could handle
the 1,000,000 gallon incinerator pit job. Groves originally
quoted between $.07 and $0.08 a gallon to Enmanco for trans-
portation and disposal of the incinerator pit water. W.A.S.
-------
personnel and trucks began hauling and disposal operations on
August 25, 1982 at the LDI site.
Toy as Operation’s Manager supervised the loading’bf all
W.A.S. trucks sending Groves and other W.A.S. employees to
the Enmanco trailer to sign the paperwork including the Waste
Disposal Manifests (Manifests) certifying gallons transport-
ed. By midmorning Toy approached Groves midway between the
Enmanco trailer and incinerator pit. Toy told Groves that
Groves must charge $.25 per gallon instead of the $.07 to
$.08 per gallon as previously discussed. Toy explained to
Groves that he would now get approximately $.ll per gallon
and would receive an invoice from Enmanco for their “commis-
sion” on the deal. Both Toy and Domanski hand carried the
three false invoices with supporting work sheets to Groves at
W.A.S. Groves had check No. 106063 dated September 16, 1982
in the amount of $25,041.25 made payable to Enmanco. (See
B—i to 8—19).
During their last day on the WI site, W.A.S. hauled
three empty tanker truck loads which were manifested as full
loads by Enmanco on the waste disposal manifests. Groves
himself transported the first empty tanker load of 9,500
gallons. W.A.S. drivers Mark Groves and Gary Xulchar each
transported an empty 8,000 gallon tanker truck load manifest-
ed as full by Enmanco. When Groves returned to the WI site
“mad as hell” and confronted Toy about the empty loads, Toy
responded that the incinerator pit was getting low and we
(Enxnanco) won’t make our day. Later that evening at WI,
11’3-4
-------
Groves confronted Barnum about the empty loads. Barnum
walked away from Groves responding, “I don’t want to hear
it.”
On June 18, 1984, Barnum, Domanskj, and Toy met with
Groves for lunch in an effort to keep the conspiracy from
being discovered. They instructed Groves that they must keep
their stories straight about the $25,041.25 check, false
invoices, and empty loads.
During this time period, Enmanco employees were also
transporting incinerator pit water to W.A.S. for disposal in
Eninanco trucks. During loading operations Enmanco employees
Douglas Duyrislager, Robert Bobrowski, and Darre]. Van Tassel
were instructed by Toy when to pump Erunanco trucks half full.
Toy would stand midway between the Enmanco trailer and
the incinerator pit giving hand signals specifying half empty
loads for the trucks being filled. The paperwork including
waste disposal manifests for these partial loads were pre-
pared by Domanski. Wyman Johnston, Enmanco driver, trans-
ported several partial loads to W.A.S. declaring only enough
liquid was pumped into his truck to keep the front wheels
down. Johnston estimated that Enmanco falsely manifested
100,000 gallons of hazardous waste that was never hauled. He
heard Toy and Domanskj braggxng how they had ripped off the
government. (See C-i to C-3).
During the 1982 cleanup by Enmanco, Domanaki prepared
daily the EPA Form 1900-55’s which were supposed to reflect
specific services rendered and costs incurred by Enmanco in
5
-------
connection with the hazardous waste cleanup of the LD! site.
These 1900-55s were false because the waste disposal mani—
tests, actual number of gallons disposed of, and the $25,041.25
kickback from W.A.S. were included on them in support of
Enmanco’s final invoice to U.S. EPA. Enn anco billed the
government $.28 per gallon for the 278,700 gallons disposed
of at W.A.S.
In addition, Barnum, Toy, and Domanskj submitted false
labor charges on the 1900-55’s and on the invoice to EPA for
Costs incurred by Enmanco on the LDI site. The labor costs
were false because many of the services which were billed to
EPA were also billed to others customers of Enmanco for the
same employees working at the same time, and because the
hourly labor rate listed on the form 1900-55’s for the
employees was much higher than the amounts the employees
actually received. Wyman “Jack” Johnston, Larry R. Nelson,
Darre]. Van Tassel, and Robert Bobrowskj were Enmanco employ-
ees with services billed to LDI and other customers simulta-
neously. Not only did Enmanco employees receive substandard
wages, but Barnum, Domanski, and Toy did not provide health
care insurance, paid holidays, or other fringe benefits as
claimed in the hourly labor rates. (See D-]. to D-60).
Enmanco refused to allow its employees to don new paper
protective suits daily or to change the cartridges in the
respirators as needed when in contact with the hazardous
waste.
ZL -4 6
-------
When Enmanco was awarded the second Notice to Proceed
Contraét No. 68-95-0026 on April 22, 1983 through October 22,
1983 for a second “Superfund” cleanup at the LDI site,,
Barnum, Toy, and Domanski continued the conspiracy to defraud
the government in the same manner as during contract No.
68-95—0023. The scope of the second cleanup was much greater
involving the transportation and disposal of liquid waste
from the LDI ponds, removal of contaminated sludge and the
final capping of the LDI scrubber lagoon and incinerator pit
with clay. During the period of this second LDI cleanup,
Barnum. Toy, and Domanski hired Macs Trucking to transport
sludge from LDI to Wayne Disposal. When Enmanco obtained a
source of free clay, they directed Macs Trucking to transport
the clay to the WI site. Darwin Macs quoted a $1.00 a yard
price transportation cost to Enmanco for the clay. Barnum,
Toy, and Domanski directed Macs to bill Enmanco $2.00 a yard
transportation cost and kickback $1.00 per yard to Enmanco.
Barnum, Toy, and Domanskj received a total of $11,355.00 from
Maes Trucking as part of this kickback scheme. (See E-1 to
E-28).
Barnum, Toy, and Domanskj continued to submit false
labor charges on 1900-55’s and invoices to the government in
the same manner as the first WI contract. Darrell Van
Tassel, James Barnum, Paul Bourdeau, Robert Bobrowskj, Ron
Kendall, Toy, and J. Bruflodt were Enmanco employees whose
time was being billed to other customers and EPA simultane-
ously. Again, Barnum, Toy, and Domanski inflated the hourly
VLS7
-------
labor rate on the 1900-55’s for their employees ignoring the
Service Act stipulations accompanying both contracts. (See
F—i to F—72).
On one occasion Enmanco employee Gary Holleran noticed
some 1900-55’s which Domanskj had prepared in the Enmanco
trailer claiming $18.00 and $25.00 an hour labor charges.
Holleran was surprised in view of his hourly wage of $5.50.
Often Enmanco employees Paul Bobrowski, Phil Bourdeau, Dan
Dubrod, and Jerry Barr were instructed by Toy or Domanskj to
sit in the Enmanco ambulance on the LDI site and do nothing
all day. The idle time spent in the ambulance was being
charged to the EPA cleanup by Enmanco.
When Richard Benson, General Manager of Marine Pollution
Control (also a contractor on the T. DI site) asked Enmanco how
they circumvented the government guidelines stipulating the
hourly wage, Barnum explained that regulations outlined in
the contract did not apply to them. Barnum promised to
provide details to Benson but failed to substantiate his
previous statements on wages.
Over a period from July 26, 1982 through October 29,
1983, James Barnum, Gary Domaneki, and Dan Toy knowingly and
wilfully falsified waste disposal manifests, EPA Forms
1 9 0 0-55’ s, and the following invoices sent to the government:
1. Enmanco Invoice No. 6601 dated 9/28/82 for $244,944.07.
(See G—l to G-5).
2. Enmanco Invoice No. 6900 dated 5/16/83 for $47,300.46.
(See H—i to H-3).
7T.s - 8
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3. Enaanco Invoice No. 6936 dated 6/3/83 for $212,175.69.
(See I—i to 1—6).
4. Enmanco Invoice No. 6970 dated 7/2/83 for $164,737.67.
(See J—i to J-5).
5. Enmanco Invoice No. 7015 dated 8/3/83 for $216,789.67.
(See K—i to K—5).
6. Enmanco Invoice No. 7060 dated 9/7/83 for $271,705.92.
(See L—1 to L—5).
7. Enmanco Invoice No. 7121 dated 10/10/83 for $282,251.89.
(See N-i to M-6).
8. Enmanco Invoice No. 7194 dated 11/17/83 for $6,960.25.
(See N-i to N-4).
LOSS TO THE GOVERNMENT
The government estimates its loss suffered as a result
of this crime to be approximately $146,988.45. That figure
was computed as follows:
1. Labor - $70,856.20 — 4,293 hours of labor multiplied
by $6.00 and subtracted from the
total labor bill of $96,656.20.
This total is conservative be-
cause it does not include the
billings for hours worked for
other EnflanCo customers and
because the actual labor cost
per hour was usually more than
$6.00 less than the amount billed
to the government and because it
does not include overtime.
2. W.A.S. kickback - $25,041.25
3. Haes kickback - $11,355.00
4. Three empty loads — $7,140.00 - (25,000 gallons z $0.28)
5. 100,000 gallons in partial - (Estimates of unhauled gallons
loads - $28,000.00 included in partial loads z
$0.28).
6. Inflated cost of 153,200 — ($0.03 x gallons actually hauled
gallons hauled - $4,596.00 due to inflated cost of hauling
and processing by W.A.S. as
part of kickback arrangement).
-------
Restitution for the loss would be appropriate as part of
any sentence imposed n this case. 18 U.S.C. 3579.
Respectfully submitted,
ROY C. HAYES
ted States Attorney
/972 ‘44
lAMES 1... McCARTHY (P251 e’ ’
Assistant United States Attorney
Dated:
CERTIFICATE OF SERVICE
It is hereby certified that service of the Government’s
Sentencing Memorandum has this Bth day of November, 1985
been made upon the following by placing same in a government
franked envelope and depositing said enve .ope in the
United States mail addressed to:
Neil H. Fink, Esq.
1028 Buhi Building
Detroit, MI 48226
David Steingold, Esq.
1028 BuM Building
Detroit, MI 48226
David F. Dumouche].
1930 Buhi Building
Detroit, MI 48226
Iii
Esther M. Pakauskas, Secretary
US Attorney’s Office
10
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Loo ’( j’ r 2 $ø 1 idj
SMPU c . INC.
YEAR lL
CuimU’T Assrs
1) CA$I CNNAI $ 100
2) CAsii IN BAii Cmciius C 10
3) CAlM IN 3a.u. PAY OU .
CASH IN BANK. TIUST Aee ui i 2 .000
5) CAIN IN BANK. SAVINu 5,000
To C.u $2 ,100
N airraiU SiCi 1TIIl. A Cc.
6) (AT C ci i. l ii t Vau 150.000)8 25.000
MANKrFASU Sic *iiuiI. B Co.
1) CAy Ccii. ‘..aui Vau 820.000) 25,000
TerM. M*auTAIU 5cc *iTiis 50.000
8) AccawrTl Rzcvvuu. Tuu. Nil $ 25.000
Acca%nsTs Riciiv*i .
9) .o ui *i OPFIC!ii 2.500
9) keewiii R iuivuu . SyeeEci .elNi 1.500
9) MCOUNTI RICIIVAIU. APPILIATII 5.000
IC) kce ii?s RlciIvui.f. 0 rI N 5.000
Toya ACCCWITI RLC*IVAIU 39.000
U) !NvINTc i 67,500
1.2) PNIPAID EXPSNSU 1.000
Tetsi. CUNPSI!? Ai im S159.6 O
Ono Maui:
13) Moth Moc*Ivaiu $ 10.000
lq) INVU9wU. Onun C c. 100.000
(Esutrv kits)
Toysi. Otiu Anuts 1110.00
Fix Run:
15) sqo , 000
i6) ui nss 1 60.000
L7) us: ACCJI tA1W D IPKtCIAYION ( 30,000 ) 30.000
EauI wuT ijm nos $100,000
17) Liii: Accwin.AYD ODNiCIATION ( 110.000 ) 50,000
18) U*srnci.c ! PNovv1IIT $ 10.000
17) Uss: ACCWIUI.ATW D1,NICIATION ( 1.000 )
19) MINUM. Du osiTs 81.50.000
20) Liii: Acct,iw.A1i Dupuizo j 1 CC0 ) 135.000
19) STANOING TIMIIN 8135.000
20) Liii: Aeewquu.lio Dupuito,, ( 2C .C 0 )
21) PATIJITI $ 500
22) Liii: MOST!ZATION (300) 200
2 L-C-I
-------
SAP LE c c*m I NC.
BALANa SHEET
YEAR END i2/Jlflx
Fix *s y (cw1i u,,);
RI SWCN MID DIYILO PP’I 5Ny Cart
Tu ?tMIg *s a
OA !ZA11ON CC*IS
Duuua Ci*s*i*
Sus iuu
Goo wi . -
— IOYM. FIXD Ai y s
TOTAL ASSETS
LIABILITIES AI STOC I0t1R3 EGUITY
Cu qtn’ LtA$IUTII S:
AcCRUI C.Ia 5$ S 55 .0 00
Accowr,, P*yasu (ThMI$) 95.000
PAY*OU. T*xgi PA,uu 3 5 , coo
P o,i ry IAXI$ PAYAIU
C IRIN? PortioN op LOHG—1m, OUT 2 . 3D
TOTAl. Cuu,wr LZAIIUTTt s $22C. ::o
OtNu LIASI.ITIU
Lasus.Ti Lialiulin
(C) hiii Not , 8 Z iwismgn $ 50.000
( 0) Tiurt Duo, LU 1,rrIpuT ,g1JI 12/31/12 15.000
Toyai. I.aws Tir. Liai* ii , $135, 000
TOTAL LIABILITIES 1i465 , 0 00
S?OCZICLDU$’ E uxr’
SixL. iutiID £ 10
(E) 200.000 s zs . aumorn S0 ,0O0 200.000
( E) Paio IN CAPITAL IN IZCtU OP PM VIUJI 130 ,000
RITAINED DEFICIT, W 1 110 ‘ - —ez
LESS: CIJUIJ(T YtAl O UATINSt $3
(F) L.zss: Cuuui,y YLAI OiYI E) $ PAZO ________
(F) Rifaiiiu DIFICIT. I10I S MIMICS
TOTAL STOC 40I.DERS’ EQUITY ___
TOTAL LIABILITIES AND STOCJO4OLJER$’ EQUITY
ASSETS (Cow1IMus )
(l.))
(t J 1
2J
*10.000
1
500
3.500
‘ 4.500
iC ’O00
— $SW.?Oi
1777.301
$ (1.000)
(19,599)
( 17,000
(37.91)
53]L 3C
1777.331
-------
D f ct c 0 c
f nq, i I ,,.,i1 A&L1yJ S
1. WATCN OUT FOR EMBEZZLEMENT HERE Loox AT PETTY CASH
VOUCHERS FOR PROPER AUTHORIZATION AND REASONABLENESS OF
DISBURSEMENTS 1 MAKE SURE ALL THE VOUCHERS ARE PRESENT,
WATCH OUT FOR FREQUENT REIMBURSEMENT OR LARGE EXPENDITURES
IJUST BEFORE WEEKENDS.
2. SOMETHING IS VERY WRONG HERE 1 THERE MAY BE SOME ARRANGE-
MENT WITH THE BANK TO HONOR NSF CHECKS, CHECK BANK
STATEMENT TO DETERMINE THIS, OR THE COMPANY MAY BE WRITING
CHECKS BUT NOT SENDING THEM OUT - TAKE A LOOK AT A BANK
RECONCILIATION TO SEE IF THERE ARE LARGE NUMBERS OF OUT
STANDING CHECKS, iF AN OWNER OR OFFICER IS COVERING
DEFICITS WITH PERSONAL FUNDS, THE STRONG DEFENSE OF CO—
MINGLING MAY BE CREATED.
3. THE BOOK BALANCE SHOULD BE NOMINAL IF THIS CHECKING ACCOUNT
SYSTEM IS FUNCTIONING PROPERLY. ALL OPERATING REVENUES
SHOULD BE DEPOSITED TO THE GENERAL ACCOUNT WITH THE ONLY
FUNDING OF THE PAYROLL ACCOUNT BEING GENERAL ACCOUNT CHECKS
THE GENERAL CHECK WOULD BE DRAWN TO COVER NET PAYROLL.
A NOMINAL BALANCE MAY BE LEFT IN THE ACCOUNT TO COVER
EMERGENCIES. A BALANCE AS HIGH AS THIS MAY INDICATE A
KITING SCHEME BETWEEN THE GENERAL AND PAYROLL ACCOUUT -
CHECK THE DEPOSIT SLIPS AND CANCELLED CHECKS FOR EACH
ACCOUNT.
-------
4, THIS MAr REPRESENT A NUMBER OF THINGS BUT IT IS LIKELY
TO BE A DEVICE REQUIRED BY TAXING AUTHCRITIES TO ASSURE
COLLECTION OF AMOUNTS OWING THEM. THE ONLY SOURCE OF
F CS SHOULD BE GENERAL FUND CHECKS AND THE ACCOUNT
BALANCE SHOULD BE ZERO AFTER EACH REMITTANCE. THIS
COULD BE A PRELUDE TO A BANKRUPTCY IF THE COMPANY HAS
BEEN MISSING PAYMENTS TO TAXING AUTHORITIES. ALSO CHECK
TO SEE THAT ALL REMITTANCES FROM THIS ACCOUNT GO ONLY
TO THE TAXING AUTHORITY IF IT WAS, IN FACT, SET UP FOR
THIS PURPOSE.
5. NOTHING SUSPICIOUS ABOUT THIS ACCOUNT PER SE BUT. IT SEEMS
UNLIKELY THAT THE COMPANY WOULD HAVE A DEFICIT IN GENERAL
CHECKING AND STILL HAVE A SAVINGS ACCOWT . THIS MONEY MAY
NOT ACTUALLY BE AVAILABLE TO THE BUSINESS BECAUSE IT IS
SECURING SOME DEBT OR BECAUSE IT HAS BEEN DIVERTED TO
PRIVATE USE. CHECK THE GENERAL JOURNAL/LEDGER FOR HISTORY
OF ACTIVITY IN THIS ACCOUNT AND SOME CLUE WHERE TO GO NEXT.
6. O.K. — SECURITY IS RECORDED AT HISTORICAL COST WHICH IS
PROPER. THE POSITION ON THE BALANCE SHEET INDICATES TH!S
SECURITY HAS A READY FIARKET AND THE CC ’?ANY WOULD SUFFER
t DETRIMENT WERE IT TO DIVEST ITSELF OF THE SECURITY,
THERE FlAY BE SOME QUESTION WHY IT IS NT E!ING SOLD SINCE
THE COMPAr!? SEENS TO BE EXPER!!NCI SC”E CASH FLOW DIFFICL
AND THIS “nEAR CASH” ASSET CCULD BE RE D!LY CONVERTED T C
-7 -2.-
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7. THE HISTORICAL COST h NOT THE CORRECT A1 OUNTS FOR
THE SAKE OF CONSERVATISM, ALL ASSETS ARE SHOWN AT THE
LOWER OF EITHER HISTORICAL COST OR MARKET VALUE, THE
DECREASE IN VALUE SHOULD BE CONSIDERED PERMANENT BEFORE
THE .WRITEDOWN IS ACCOMPLISHED BECAUSE ONCE IT IS WRITTEN
DOWN, ACCOUNTING PRINCIPLE REQUIRES THAT IT NEVER BE
WRITTEN UP AGAIN, IN THIS CASE, BOTH ASSETS AND EQUITY
ARE OVERSTATED AND MAY GIVE A FALSE IMPRESSION AS TO
CRED IT—WORTH! NESS.
8. THE PROPER USE OF THIS ACCOUNT IS TO RECORD AMOUNTS OWING
TO THE COMPANY FROM OUTSIDERS WHO HAVE BOUGHT ITS GOODS
AND SERVICES. TAKE CAUTION HERE: A LOT OF NON—TRADE
RECEIVABLES MAY BE BURIED ILLEGITIMATELY HERE, TAKE A
LOOK AT THE GENERAL JOURNAL/LED(ER FOR A HISTORY CF THIS
ACCOUNT’S ACTIVITY. IF YOU FIND LOANS BEING MADE TO EM-
PLOYEES, OFFICERS, STOCKHOLDERS OR AFFILIATED COMPANIES..
WATCH OUT FOR A CREDITOR RIP-OFF. CLUES TO SUCH A FRAUD
MIGHT BE (1) A SIGNIFICANT INCREASE IN ACCOUNTS PAYAELE,
(2) A SIGNIFICANT DECREASE IN INVENTORY COM3INED WITH A
LEVEL OR SLIGHTLY INCREASING BALANCE IN ACCOUNTS PAYAELE;
(3) INCREASED LONG TERM DEBT; (14) OTHER DIVERSION OF C LEY
SUCH AS DIVIDENDS OR PAYMENT OF INTEREST CU SU3CRDIIATED
DEBT; (5) HIGH DEBT RATIO. THE PRESENCE OF ACCCU TS
i-7 -3-
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RECEIVABLE INDICATES THAT THE COMPANY IS ON THE ACCRUAL
BASIS OF ACCOUNTING RATHER THAN THE CASH BASIS. THAT IS,
THI SAt.E IS RECOGNIZED WHEN IT IS SUBSTANTIALLY EXECUTED
RATHER THAN WHEN CASH IS COLLECTED. “NET” INDICATES THAT
SOME PROVISION HAS SEEN MADE IN THE RECORDS ANTICIPATING
BAD DEBTS. CHECK FOR REASONABLENESS CF THE WRITE-OFF
BECAUSE IT IS TAX DEDUCTIBLE AND IT IS NOT USUALLY SELF—
CORRECTING FOR PRIOR YEAR ERRORS. RECOGNITION OF BAD
DEBTS IS PROPER WHEN THE COMPANY IS ON THE ACCRUAL BASIS.
9. THE EXISTENCE OF ANY OF THESE ACCOUNTS III COMBINATION WITH
A POOR CASH FLOW AND/OR HIGH DEBT RATIO SIGNALS A CREDITOR
RIP—OFF OR BANKRUPTCY SCHEME, CHECK GENERAL JOURNAL/LEDGER
FOR A HISTORY OF ACTIVITY IN THESE ACCOUNTS AND LOOK AT
CANCELLED CHECKS TO PINPOINT A DIVERSION OF CASH.
10. THIS ACCOUNT MAY BE SIGNIFICANT IN RELATION TO THE OTHER
ACCOUNTS. ITS PROPER USE REFLECTS AIIOUNTS DUE FROM NON
TRADE DEBTORS; IMPROPERLY, IT IS USED TO BURY DEBT THAT
WOULD BE INCRIMINATING IF LISTED SEPARATELY, IF THE
BALANCE SHEET BREAKS OUT AS MANY KINDS OF RECEIVABLES IN
DETAIL AS THIS EXAN PLEJ SOMETHING IS PRC3ABLY BURIED HERE
WNICH WOULD SIGNAL DIVERSION OF FUNDS. TAKE A LOOK AT
THE GENERAL JOURNAL/LEDGER FOR A HISTORY OF ACTIVITY I !
THIS ACCOUNT AND A CLUE WHERE TO CO NEXT
ZL-7 - -
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ii.. It1VE !TORY IS VERY VULNERABLE TO THEF1, iNVENTORY t iAy
ALSO BE WORTHLESS OR NON—EXISTENT. PHYSICAL VERIFICATION
0rCOUNT IS YOUR BEST BET BECAUSE IT MAY STILL BE CARRIED
ON THE BOOKS AT THE LOWER OF COST OR MARKET.
INVENTORY SHOULD BE VALUED AT ITS HISTORICAL COST OR ITS
MARKET VALUE, WHICHEVER IS LESS, HISTORICAL COST WOULD
BE THE PURCHASE PRICE OR THE FULL COST OF MANUFACTURE
INCLUDING OVERHEAD. HOWEVER, BE ON THE LOOKOUT FOR
VALUATIONS INCLUDING ESTIMATION, APPRAISAL AND RETAIL
SALES PRICE WHICH WOULD OVERSTATE THE ASSETS AND MIGHT
GIVE A FALSELY ROSY PICTURE TO CREDITORS. THE VALUATIO1
PROBLEM IS FURTHER COMPOUNDED BY ASSUMPTIONS REGAR 1NG
THE PHYSICAL FLOW OF MERCHANDISE. SPECIFIC IDENTIFICATION
OF ITEMS SOLD AND REMOVAL OF THE INDIVIDUAL COSTS
ASSOCIATED WITH THOSE ITEMS IS IDEAL BUT RARELY FEASIBLE
(THE ITEMS HAVE TO BE UNIQUELY AND READILY IDENTIFIABLE
AND THE UNIT COST MUST BE RELATIVELY HIGH). ABANDONING
SPECIFIC IDENTIFICATION, THE MOST COMMON FLOW ASSUMPTICUS
ARE:
(1) FIFO: FIRST—IN, FIRST—OUT
(2) LIFO: LAST-INJ FIRST-CUT
(3) WEIGHTED AVERAGE: GOODS MOVE OUT IN RELATION TO
THE SIZE OF THE LOT PUT INTO INVENTORY.
L-7 -5-
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VARIATIONS IN VALt ATION AflD FLOW ASSUMPTION CAN LEAD TO
MAN IPULATION OF INCOME - ACCOUNTANTS REQUIRE THAT THE
SAME TECHNIQUES BE USED FROM YEAR TO YEAR IN A CONSISTENT
MANP R. TRY TO GET HOLD OF COST WORKSHEETS PREPARED BY
THE,COMPANY’S ACCOUNTANT TO Z TERMIHE PROCEDURES BEING USEDI
12, APPEARS TO BE O.K. RECORDS ONLY EXPENDITURES FOR SUCH
ITEMS AS RENT, INSURANCE AND INTEREST THAT ARE PAID IN
ADVANCE, PARTICULARLY WHERE BEUEFIT IS LONGER THAN THE
CURRENT ACCOUNTING PERIOD. IF THERE SEEMS TO BE A LOT
OF MANIPULATiON IN THE BOOKS TAKE A LOOK AT THE GENERAL
JOURNAL/LEDGER TO GET AN IDEA OF THE ACTIVITY !N.THE
ACCOUNT.
13. THE MOST REPUTABLE USE OF NOTES RECEIVABLE WOULD INDICATE
THE REPLACEMENT OF AN OVERDUE TRADE ACCOUNT RECEIVABLE
WITH A MORE FORMAL :OTE, USUALLY INTEREST BEARING. How-
EVER, THIS COULD BE A HIDING PLACE FOR LOANS TO OFFICERS,
EMPLOYEES, STOCKHOLDERS OR AFFILIATES WHICH ARE NE1THER
FORMAL NOR INTEREST ?EARING. IF THE At’CUNT IS SUBSTANTIAL.
OR IF THERE IS OTHER EVIDENCE OF DIVERSION OF COMPANY FU
TRACE THE TRANSACTIONS TO THE GENERAL JOURNAL/LEDGER A D
GET A Ci UE WHERE TO GO NEXT. 1ATCH OUT - THERE IS A
LIKELIHOOD THESE NOTES ARE UNCDLLECTIBLE , ESPECIALL
THEY AR! NOT CLASSIFIED AS CURRENT ASSETS.
-------
14. THIS-REPRESENTS THE COST OF ACQUIRING AN AFFILIATE:
COMPAf1Y AND THE ACQUIRING COMPANY’S SUBSEQUENT SHARE
OF EARNINGS. THIS DOES NOT REPRESENT A MARKETABLE
SECURITY BECAUSE THE ACQUIRING COMPANY ‘OULD SUFFER
ECONOMIC DETRIMENT WERE IT TO DIVEST ITSELF OF THE
AFFILIATE — THAT IS, THE WHOLE IS PROBABLY GREATER
THAN THE SUM OF ITS PARTS,
15. THE ONLY ACCEPTABLE BASIS FOR LAND ON THE BALANCE SHEET
IS THE LOWER OF HISTORICAL COST OR MARKET VALUE. FOR
ALL PURPOSES, LAND IS VALUED AT COST BECAUSE THE DECLINE
IN MARKET VALUE MUST BE CONSIDERED PERMANENT. LAND
DOES NOT DEPRECIATE — IT IS NOT CONSUMED IN THE COURSE,.
OF NORMAL OPERATIONS. Ii IS NOT PROPER TO RECCGNtZE
ANY APPRECIATION PRIOR TO THE TIME OF THE SALE ( F LAUD.
CHECK THE GENERAL JOURNAL/LEDGER TO BE SURE THAT ANY
CHANGES .QN THE BALANCE SHEET OCCUR ONLY FROM THE SALE OR
PURCHASE OF LAND.
16. THE ONLY ACCEPTABLE BASIS FOR ANY FIXED ASSET IS THE
LOWER OF COST OR MARKET VALUE, ANY DECLINE IN MARKET
VALUE MUST BE CONSIDERED PERMANENT BEFORE IT IS REFL!CTED
IN THE BOOKS BECAUSE IT MAY NEVER BE WRITTE 1 UP AGAIN.
Ii IS NOT PROPER TO REFLECT ANY APPRECIATION IN VALUE,
-7 -7-
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1ATCH OUT FOR ANY WRITE IN VALUE IT’S A WAY OF
CREATING CAPITAL IN AN IMPROPER AND RISKY MANNER,
Pisisi AND EQUIPMENT-LIKE BUILDINGS, MANUFACTURING E( U1P—
NEWT’, TRANSPORTATION EQUIPMENT AND FURNISHINGS ARE
DEPRECIABLE. AN ASSET CAN BE THOUGHT OF AS THE FUTURE
SERVICE VALUE AVAILABLE TO THE OWNER OR USER OF THE
ASSET. DEPRECIATION IS A REFLECTION OF THE SERVICE
VALUE CONSUMED BY THE OWNER OR USER DURING THE ACCOUNTING
PERIOD; THAT IS THE BOOKS ARE MADE TO REFLECT THE
REDUCTION IN FUTURE SERVICE VALUE DUE TO CURRENT USE OF
THE ASSET IN BUSINESS OPERATIONS.
17. ACCUMULATED DEPRECIATION IS THE SUM TOTAL OF ALL THE
DEPRECIATION TAKEN ON PLANT A D EQUIPMENT DURING PRIOR
YEARS OF SERVICE. WHEN IT IS DEDUCTED FROM THE COST OF
THE ASSET, THE RESIDUAL IS KNOWN AS “BOOK VALUE” AND
REPRESENTS THE FUTURE SERVICE VALUE STILL AVAILABLE.
BECAUSE DEPRECIATION IS ONLY AN ESTIMATE, IT IS SUBJECT
BOTH TO ERROR AND TO CONSCIOUS MANIPULATION. IRS PUBLISHES
GUIDELINES FOR MANY TYPES OF ASSETS — CONSULT THIS TO GET
A BALLPARK AREA. WATCH OUT FOR SALES OF PLANT AND EQUIP
MINT BEING RECCR ED IN ACCUMULATED DEPRECIATIOtI — T E
EFFECT IS TO LEAVE AN UNDEPRECIATED ASSET O Z THE BC S
L- 7 -8-
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WHICH THE COMPANY NO LONGER ow s, BOTH ASSETS AND
CAPITAL WOULD BE OVERSTATED IN THIS CASE.
18, THIs ONE INDICATES TROUBLE P1INE TIMES OUT OF TEN.
THIS COMPAUY HAS AT LEAST ONE LEASE CONTRACT OUT-
STANDING, BUT THERE IS VERY UKELY NO RECOGNITION
AT ALL OF THE CORRESPONDING LIABILITY OR OBLIGATION
TO PAY. You MAY FIND MENTION OF THE PAYMENT TERMS
IN A FOOTNOTE BUT THE POPULAR TREATMENT IS TO IGNORE
IT,
19. MINERAL DEPOSITS AND STANDING TIMBER ARE BOTH NATURAL
RESOURCES WHICH ARE SUBJECT TO EXHAUSTION BY EXTRACTION.
THEY ARE CATEGORIZED AS WASTING ASSETS THAT ARE LARGE-
SCALEI LONG-TERM INVESTMENTS ACQUIRED FOR PIECE-
MEAL RESALE OR USE IN PRODUCTION 1 CAUTION: THIS
ITEM MAY BE DOUBLE-COUNTED ON THE BALANCE SHEET.
BE SURE THAT THE UNEXTRACTED RESOURCE IS NOT ALSO
INCLUDED IN INVENTORY. THE INVENTORY SHOULD INCLUDE
ONLY HARVESTED SUPPLIES READY FOR RESALE CR USE IN
PRODUCTION. THE INVESTMENT SHOULD INCLUDE ONLY UN-
PROCESSED ASSETS.
THE ONLY ACCEPTABLE BASiS FOR THE INVESTMENT IS THE
LOWER OF HISTORICAL COST OR MARKET VALUE,
T 2 --7 -g-
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20 WASTING ASSETS ARE SUBJECT TO “D LET!ON.” DEPLETION,
LIKE DEPRECIATION, IS A REFLECTION OF THE SERVICE VALUE
CONSUMED BY THE OWNER OR USER DURING THE ACCOUNTING
PERIOD. ACCUMULATED DEPLETION IS THE SUM TOTAL OF ALL
THE .DEPLETION RECOGNIZED DURING PRIOR YEARS OF SERVICE.
THE SAME CAUTIO ’1S WITH RESPECT TO ACCUMULATED DEPRECIA-
TION HOLD TRUE HERE.
2.1 A PATENT OR COPYRIGHT IS AN “INTANGIBLE ASSET” WHICH HAS
ECONOMIC VALUE ONLY IF IT AFFORDS PROTECTION AGAINST
COMPETITION, PRODUCES INCREASED EARNINGS BECAUSE OF
LOWER PRODUCTION COSTS, OR ENABLES THE COMPANY TO CHARGE
A HIGHER PRICE FOR THE COMMODITY. FOR ALL PRACTICAL
PURPOSESJ THE ONLY ACCEPTABk.E BASIS FOR THE PATENT IS
HISTORICAL COST, EITHER PURCHASE PRICE CR DIRECTLY
RELEVANT EXPENDITURES IF THE PATENT IS DEVELOPED. IOST
COMPANIES PREFER TO CHARGE OFF RESEARCH AND DEVELOPMENT
OF PATENTS IN THE YEAR OF EXPENDITURE RESULTIN3 IN A
VERY NOMINAL CAPITALIZATION. A LARGE AMOUNT ATTRIBUTED
TO PATENTS SHOULD BE INVESTIGATED USING THE COMPANY’S
COST CRKSHEETS CR THE PURCHASE CONTRACT.
ALTHOUGH THERE IS A STIPULATED LEGAL LIFE, THE ECO !CMIC
LIFE IS GENERALLY SHORTER AND THE AS3!T SHOULD BE
IR!TTEM OFF OVER THE USEFUL ECONC AIC LIFE 1 “A ORTIATICN”
L-7 -10-
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IS THE TERM APPLIED TO THE WRITE OFF WHICH IS
SIMILAR TO DEPRECIATION OR DEPLETION.
22, AMORTIZATION IS THE WRITE OFF OF AU INTANGiBLE ASSET
AS IT IS CONSUMED BY THE BUSINESS IN THE PRODUCTION
OF REVENUE. THE SAME CAUTIONS APPLY HERE AS TO
DEPRECIATI ON.
23. MANY COMPANIES SPEND HUGE SUMS ON DISCOVERING AND
DEVELOPING NEW PRODUCTS AND PROCEDURES. WHEN A MARKET-
ABLE PRODUCT IS OBTAINED, AN INTANGIBLE ASSET IS
CREATED. ALTHOUGH UNPRODUCTIVE AVEULES YIELD lNCREAS D
GENERAL KNOWLEDGE, ONLY THOSE RESEARCH PROJECTS WHICH
YIELD ECONOMIC VALUE DIRECTLY SHOULD BE CAPITALiZED,
BECAUSE THE ONLY ACCEPTABLE BASIS IS HISTORICAL COST,
WHICH IS HARD TO DETERMINE, THE POPULAR TREATMENT IS
TO WRITE OFF R & D COSTS IN THE YEAR INCURRED, IN
MOST CASES, THE CAPITALIZED AMOUNT SHOULD 3! NOMINAL
AND INTENDED ONLY TO INFORM READERS AND R & D is AN
IMPORTANT PART OF THE BUSINESS.
24. DON’T LET THE DOLLAR FOOL YOU! ThIS IS PERFECTLY
ACCEPTABLE ACCOUNTING PROCEDURE FOR AN INTANGIBLE ASSETS
IT IS USED AS A DEVICE TO CLUE YOU TO T E EXISTENCE OF
THIS ASSET — REGARDLESS OF THE HISTORICAL C O STI THE
L-7 -ii-
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ECONOMIC VALUE OF THIS ASSET STEMS FROM ..uDUCT
IDENTIFICATION AND DIFFERENTIATION WHICH YIELD
SUPERIOR EARNINGS TO UNBRANDED PRODUCTS, THESE
PROPERTY RIGHTS MAY BE LEASEDJ ASSIGNED OR SOLD AND
THE .SERVICE LIFE IS UNLIMITED SO LONG AS THEY ARE
USED AND YIELD SUPERIOR EARNINGS. IF THE BOOK VALUE
OF THIS ASSET IS RELATIVELY HIGH, BE SUSPICIOUS.
TRY TO SEE WORKSHEETS DETAILING WHAT IS INCLUDED
HERE. ADVERTISING IS NOT USUALLY CAPITALIZED BE-
CAUSE OF THE NEBULOUS RELATIONSHIP WITH SUPERIOR
EARNINGS.
25. ORc-ANIZATION” OR “START—UP” COSTS ARE SYNONYMOUS
AND REFER TO THE FUTURE SERVICE VALUE DERIVED FROM
ORIGINATING THE BUSINESS. THE USUAL ITEMS WHICH ARE
CAPITALIZED ARE LEGAL AND ACCOUNTING FEES A D INITIAL
STOCKHOLDER MEETINGS. USED PROPERLY, THE BALANCE IN
THE ACCOUNT SHOULD EE NOMINAL. I’SED IMPROPERLY, THIS
IS A GOOD PLACE TO BURY EARLY OPERATING LOSSES. IF
THE BALANCE SEEMS TOO HIGH, TAKE A LOOK AT THE GENERAL
JOURNAL/LEDGER FCR DETAILED HISTORY CF TP.E ACCOUNT.
THEORETICALLY, THE COSTS HA’/E A SERVICE LIFE AS LONG
AS THAT OF THE BUSINESS.. BUT IRS ENCC’JRA ES RAPID
WRITE OFF 1
W 7-12-
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26. “DEFERRED CHARGE” IS AT EAST A DUBIOUS ACCOUNT AND
WILL PROBABLY NEED A PROFESSiONAL ACCOWITANT TO
DECIPHER WHAT IS GOING ON IN THE ACCOUNT. ALTHOUGH
THERE ARE SOME LEGITIMATE USES OF THE ACCOUNT,
ALMOST NO ONE USES THEM PROPERLY. A COMMON USE OF
THE ACCOUNT IS MAKING THE BOOKS BALANCE, BUT EVEN
BRIBES MAY BE FOUND HERE.
27, THIS IS NOT A LEGITIMATE ACCOUNT! Ii CAN BE USED AS
AN ACCOUNTANT’S TOOL, BUT IT CAN NEVER BE USED ON
THE FINANCIAL STATEMENT. USE THE GENERAL JOURNAL!
LEDGER TO DETERMINE WHAT IS BURIED HERE IT IS
COMt ’( NLY USED BY AN EMBEZZLER TO COVER CASH SHCRTAGESS
23. ACCOUNTING RECOGNITION OF GOODWILL IS LIMITED AT
THIS TIME TO THE RECOGNITION OF PURCHASED GOCOWILL,
THIS MEANS THAT THE COMPANY WAS PURCHASED AT SOME PRIOR
TIME AS A GOING CONCERN AND THAT AT THE TIME OF PURCHASE
THE EUVERS PAID A PREMIUM PRICE. THE PREMIUM IS
RECORDED AS GOODWILL AFTER THE APPROPRIATE ASSETS HAVE
BEEN WRITTEN UP (THIS IS A LEGITIMATE WRITEUP - NEW
OWNERS ACQUIRE A NEW BASIS WHICH BECOIIES THE HISTORICAL
COST TO THEM) 1 A COMPANY WHICH HAS NEVER BEEN SOLD
CANNOT HAVE RECORDED GOODWILL, GOODWILL IS EVE CE
-7 -13-
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BY A RATE OF RETURN TO OWNERS IN EXCESS OF A NORMAL
RATE. GOODWILL RECONCILES THIS HIGHER RATE OF RETURN
BY RICO14t!LING THE VALUE OF THE BUSIP ESS AS A WHOLE
WITH THE SUM OF ITS PARTS. A QUICK AID DIRTY TEST TO
DETERMINE IF GOODWILL IS PROPERLY RECORDED IS
CALCULATING THE RATE OF RETURN ON OWNER’S EQUITY AND
COMPARING IT TO A NORMAL RATE. THE RATE WITH AN
APPROPRIATE AMOUNT OF GOODWILL WILL APPRCACH A NORMAL
RATE OF RETURN.
GOODWILL MAY OR MAY NOT BE AMORTIZED A 1D ACCOUNTANTS HAVE
SUBSTANTIAL ARGUMENTS FOR BOTH SIDES. CC SULT A PRO—
FESSIONAL ACCOUNTANT IF THIS IS CAUSU C- PROBLEMS.
A. CURRENT LIABILITIES ARE THOSE DEBTS WHICH FALL DUE IN ONE
YEAR OR LESS FROM THE DATE OF THE FIN 1 NCIAL STATEMENT.
THERE ARE SEVERAL DANGER SIGNALS TO lATCH FOR INCLUDING:
(1) INDICATIONS OF A BUILDUP IN A CUMS
OWING TO TAXING AUTHOR!TIES PARTICULARLY
PAYROLL TAXES, BECAUSE THEY HAVE THE
FIRST CLAIMS ON ASSETS AND US’ ALL? COMPANIES
ARE IN VERY BAD SHAPE BEFORE T) !Y 9ECOME
DELINQUENT HERE. BANKRUPTCY IS ! I ENT
SO WATCH CUT FOR OTHER SIGNS CF A CREDITOR
RIP—OFF LIKE DISCRETIONARY DtV!RS:ON OF
FUNDS,
&7 - q-
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(2) SIGNIFICANT INCREASES IN DEBT OUTSTANDING
DURING THE CURRENT YEAR. A VAST INCREASE
— IN TRADE PAVABLES COMBINED WITH A DECLINE
IN INVENTORY AND DECREASING SALES SIGNALS
TROUBLE. CREDITORS ARE WAITING LONGER
FOR PAYMENT SO KEEP LOOKING FOR DISCRETIONARY
PAYMENTS IF YOU SUSPECT FRAUD.
(3) CURRENT LIABILITIES TOTALING AS MUCH OR
MORE THAN CURRENT ASSETS. THIS INDICATES
THE COMPANY’S ABILITY TO PAY OBLIGATIONS
AS THEY FALL DUE IS SERIOUSLY IMPAIRED
THE COMPANY IS “INSOLVENT” AND IT MAY FORt
WARN A BANKRUPTCY. AGAIN WATCH FOR
DIVERSION OF FUNDS AWAY FROM CREDITORS.
IN THIS CASEJ THERE IS INSUFFICIENT INFORMATION TO DETERMIN
IF PAYROLL TAXES ARE BUILDING UP 1 N INCOME STATEMENT CAN
HELP IF IT LISTS THINGS SUCH AS PENALTIES AND INTEREST TO
TAXING AUTHORITIES. THE GENERAL LEDGER CAN HELP DETEF MINE
WHEN THE LAST PAYMENT WAS MADE. THERE IS ALSO INSUFFICIENT
INFORMATION TO DETERMINE IF CURRENT DEBTS ARE INCREASI
RAPIDLY. COMPARATIVE FINANCIAL STATEMENTS ARE THE EASIEST
WAY TO DETERMINE THIS BUT A GENERAL LEDGER WILL. HELP.. T X 1
L-7 -15-
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WE CAN DETERMINE THAT THE COMPANY IS INSOLVENT BECAUSE
CURRENT LIABILITIES GREATLY SURPASS CURRENT ASSETS AND
CASH, ESP€CIALLY LOOKS INSIGNIFICANT. THE COMPANY
SHOULD TRY TO COLLECT ITS NON-TRADE RECEIVABLES AND
SELLJTS MARKETABLE SECURITIES. IF IT FAILS TO DO SO,
BE SUSPICIOUS OF A BANKRUPTCY FRAUD.
B. BE VERY SUSPICIOUS OF ANY LIABILITY W 4ICH IS CLASSIFIED
AS “OTHER” AND IS NEITHER CURRENT NOR LONG—TERM. THIS
IS A GOOD WAY OF DISGUISING DEBT WHICH IS MORE CLOSELY
AKIN TO EQUITY AND WHICH SHOULD PROBABLY BE SUBORDINATED
IN THE PAYMENT OF INTEREST, ESPECIALLY IF MANY OF THESE
DEBTHOLDERS AR! ALSO SHAREHOLDERS. IF A BANKRUPTCY
SCHEME OR A CREDITOR RIP—OFF IS SUSPECTED, TRY TO LOOK
AT INTEREST PAYMENTS ON THIS CLASS OF DEBT IN THE GENERAL
LEDGER. IT MAY BE A DIVERSION OF FUNDS IF, IN FACT, THE
DEBT SHOULD BE SUBORDINATED, IF BANKRUPTCY IS PENDING,
WATCH OUT FOR REPAYMENT OF THIS DEBT RATHER THAN PAYING
CREDITORS WITH SUPERIOR CLAIMS.
C. THE BANK LOAN IN ITSELF SEEMS O.K. BUT IN RELATION TO THE
OTHER AMOUNT OF DEBT OUTSTANDING, IT SEEMS SURPRISING
THAT A BANK WCULD MAKE A LOAN TO THIS COMPANY. THE
COMPANY SEEMS VERY HIGHLY LEVERAGED. THAT IS, CREDITORS
HAVE SUPPLIED MORE FINANCING THAN OWNERS OF THE COMPANY.
V1-1 -16-
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THE USE OF LEVERAGE MAKES REPAYMENT OF LOANS, AT BEST,
A RISKY SITUATION. SHRINKAGE OF ASSETS, ESPECIALLY
bURING PERIODS OF LOSS, CAN AFFECT REPAYMENT AS WELL
AS IMPAIRED ABILITY TO BORROW ADDITIONAL SUMS DURING
TIGHT PERIODS. OT EVEN STOCKHOLDERS BENEFIT FROM
HIGH LEVERAGE BECAUSE LARGE FIXED INTEREST PAYMENTS
INCREASE THE RISK OF BANKRUPTCY AND USUALLY SOME STRINGEN
RESTRICTIONS ARE PLACED UPON MANAGEMENT COURSE OF ACTION.
SUSPICIOUSLY HIGH LEVERAGE STARTS WHEN TOTAL DEBT EXCEEDS
50 PER CENT OF TOTAL ASSETS, THE MOST OBVIOUS EXPLANA-
TIONS ARE (1) THE COMPANY HAS GREATLY APPRECIATED IN
VALUE AND THE LOANS ARE MADE ON THIS BASIS OR (2) FALSE
FINANCIAL STATEMENTS HAVE BEEN PRESE ZTED TO SECURE CREDIT
IL IN ADDITION TO THE COMMENTS MADE UNDER “C” WITH RESPECT
TO THE USE OF LEVERAGE, THE 12 PER CENT INTEREST RATE
IS PROBABLY IN VIOLATION OF CALIFCRNIA USURY LAWS.
E. FROM THE TWO ACCOUNTS LISTED AS “COM DN STOCK” AND “PAI-
CAPITAL” WE CAN DETERMINE THAT OWNERS OF THE CO 1PANY HA’.’E
CONTRIBUTED $350,000 TO THE BUSINESSd H! CE 1 THIS SECTtC.
OF THE BALANCE SHEET IS TERMED “CCNTPI3UE: CAPIT. LI” tT
REFLECTS THE PAR CR STATED VALUE CF THE STOCK PLUS ANY
ADDIT!OrIAL PROCEEDS THE CC PANY RECEIVED FR T Z I 1 ’ItT
ISSUANCE OF ITS STOCK, THE Pf R OR STATED VALL!E CF THE
L-7 -17-
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STOCK MUST BE $1 BECAUSE IT IS VALUED ON THE BALANCE
SHEET AT $200,000 FOR 200,000 SHARES. THE COMPANY
ACTUALLY RECE!VED MORE THAN $200,000 AND THE PREMIUM MUST
BE USTED SEPARATELY BY ACCOUNTING CONVENTION.
Ii SEEMS A POOR POLICY TO SECURE DEBT IN THE MANNER OF
THIS COtIPANY WHEN THERE IS STILL STOCK THAT COULD BE
ISSUED. THIS WOULD BE AN OBVIOUS REMEDY TO BOTH THE
CASH FLOW PROBLEM AND THE LEVERAGE PROBLEM.
F. “RETAINED EARNINGS” OR “RETAINED DEFICIT” REFER TO THE
ACCUMULATED NET PROFIT OR LOSS THAT THE COMPANY HAS IN-
CURRED SINCE ITS INCEPTION. IN THIS CASE, AT THE BEGINNING
OF THE CURRENT FISCAL YEAR, THE COMPANY HAD ALREADY SUFFERED
A TOTAL LOSS OF $1000 DURING THE PRIOR YEARS OF OPERATION.
IN ADDITION, IT SUFFERED A LOSS OF slg,6gg DURING THE
CURRENT YEAR WHICH IS NOT A GOOD SIGN, THE NATURE OF THE
LOSS SHOULD BE DETERMINED BEFORE PROCEEDING, IF POSSIBLEI
THE INCOME STATE 1ENT OF THE COMPAtIY SHOULD HELP. SUCH A
LOSS COULD OCCUR 3ECAUSE OF DECLINING SALES, INCREASING
COSTS WHICH THE CONSUMER CANNOT ABSORB, AN EXTRAORDINARY
LOSS OR WRITE-OFF WHICH DOES NOT REFLECT ON ORDINARY
US!NESS OPERATIONS OR EVEN PAYMENTS OF PERSONAL
EXPENSES BY THE CORPORATION.
L7-13-
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FINALLY, THERE IS THE ISSUE OF THE PAYMENT OF
DIVIDENDS. THIS IS AN OBVIOUS AND UNJUSTIFIABLE
DIVERSION OF CASH FROM THE BUSINESS WHEN IT IS
NOT EVEN LEGALLY PERMITTED. DIVIDENDS MAY ONLY
BE PAID WHEN THERE IS RETAINED EARNINGS AVAILABLE
IN AN EQUAL AMOUNT; THAT IS, THE PAYMENT OF
DIVIDENDS MAY NEVER CAUSE THE RETAINED EARNINGS
ACCOUNT TO SLIP BELOW ZERO.
-7-ig-
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Problem No. 1
eview of Internal Control of Materials
1 . You . re assigned to a resident office where the contractor
fabricates and installs various electronic devices
the (. vernment. You are given tne assignment to review the internal
controls for the purchase, receipt, storage, and issue of
materials. You have completed your review and sumarized the
following corrvnents which describe the contractors procedures.
a. Must of the materials are nigh value electronic components which
are kept in a locked storeroom. Some of the components contain
gold and silver contacts and precious metal impregnated
circuitry. Storeroom personnel include a supervisor and four
clerks. All are .qell trained, competent Individuals. Materials
are removed from the storeroom only upon the written or oral
authorization of one of the production foremen.
b. Occasionally, the production areas will accumulate excessive
quantities of material. These excess quantities result from
over requisitioning and because some of the components do not
meet the electrical specifications. For security reasons, the
excess quantities In the production areas are returned to the
storeroom for safekeeping.
c. When ordered materials arrive, they are received by the
storeroom clerks. The clerks count the merchandise and verify
the counts to the shipper’s bill of lading. All vendor’s bills
of lading are initialed, dated, and filed In the storeroom to
serve as receiving reports.
2. Required:
Describe the weaknesses in Internal control and reco TInended
improvements for the purchasing, receipt, storage, and issue of raw
materials. Organize your answer sheet as follows:
Weaknesses ecoc!aended Improvements
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Problem No. 2
Review of Purchasing
1. Bill Buyrnore is a buyer for the Coulomb Company. Bill specializes in
procurement of high value electronic parts. Because of Bill’s superior
knowledge and experience in electronic parts procurement, he has been
the sole buyer of high value electronic parts for the past ten years.
Knoll Inc., has been selected by aill as Coulomb’s high value
electronic parts vendor, without exception, for the past six years.
i1I lns rtjcts Knoll Inc., to ship all parts directly to him, to assure
proper handling and security. Upon receipt, sill completes all
receiving and inspection documents. He personally hand carries the
high value parts to a secure storage area where a material clerk
updates the inventory records. Bill Buymore lives in a beach house in
Costa Mesa, CA, drives a Jaguar XJS, and has just purchased a new 40
foot jacnt.
2. Required:
a. List all procurement fraud Indicators.
b. Uescrlbe preventative measures that could deter procurement fraud.
8’ 2.
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P,øbIer ?lo.3
Case Study - Labor Mlscharges
The following is an actual case that demonstrates another
technique used to manipulate labor charges.
BACK 0UNQ - The contractor had several 1 vernment time and
material (T& iT contracts to test and evaluate gasoline generators. In
addition, at the same division, the contractor had several fixed price
commercial contracts. Biweekly time sheets were maintained by
supervisors and signed by the employee.
HOW THE F AUL) WAS t.ETECTED - During an incurred cost audit, the
auditor noted that the billed, booked and timesheet hours did not
a jree. Contronted with this situation, the auditor explained his
difficulties and requested the contractor to prepare d complete
recunLiliation of hours billed with those on the books and
timesheets. the auditor conferred with his FAO Chief and a decision
was made that tue auditor should witndraw from the audit.
Later, a corporate Vice-President requested a meeting with the
auditor. At the meeting, the corporate officer revealed allegations
made by a former division level Secretary/Treasurer relative to
contract billings on the T&4 contracts. The corporate officer made
available various written documents (memos to file) which Indicated
that division level contractor representatives were involved in
falsification of time sheets and related submission of false claims
for services not performed. The documents showed that corporate
officials had oeen aware.of the alleged wrongdoing for two years, but
ac not made any dlsclo;i’re prior to the meeting with the auditor.
According to the allegations made by the former Secretary/Treasurer,
the vernment, over a six year period, was overbilled by $500 to $700
tflc usand for services not performed.
DETAILS uf THE Fi AUD - The former division Secretary/Treasurer
contacted the company’s CPA firm and requested the services of two
auditors for a 2-4 week period to assist in straightening out his
books and records so he could comply with corporate reporting
requirements. The CPA firm W4S to submit Its invoice for these
accounting services directly to the Secretary/Treasurer, who would
approve piyment. The CPA firm notified the corporate office of the
Secretary/Treasurer’s request because this billing procedure departed
from the past practice of submitting billings for accounting services
tO tisC corporate office for approval. The CPA firm also Indicated to
corpordte officials that tne Secretary/Treasurer was incompetent.
Corporate officials decided to terminate the Secretary/Treasurer
because of his incompetence and tne fact that he had attempted to
acquire accounting assistance without their knowledge.
Juring the ilexit fnterview, the Secretary/Treasurer informed
corporate officials of irregularities regarding the billing procedures
on the ( vernment TM4 contracts. Me alleged that each month a certain
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amount of time spent on commercial fixed price jobs was reallocated to
vernment T&li contracts. These reallocations were made at the
direction of tne division President to conceal the fact that the
corm ercial work could not be accomplished within the fixed price hour
budget. He alleged the following procedures were used to “adjust”
time criarges.
1. The computer preprinted a tiinesheet for each employee to use for
charging nis time to either an active job number or an overhead
category for non-productive time. The timesheets covered the two
week pdyroll period and were composed of three copies (copy one -
original, copy two - duplicate, and copy three - pink sheet).
2. After tie first week of the two week payroll period, each
employee submitted his “pink sheet” for processing. The “pink
sheet” aS coded anu processed on the computer to provide a labor
distribution for the week. The labor distribution was reviewed
to ascertain how many hours nad been charged to T&M contracts for
that week.
3. At the end of the second week, the other two copies were turned
in for tne full two week period, coded and processed on the
computer. This processing produced another report showing the
total hours charged to T&M jobs extended at the T&I hourly
billing rate.
4. Division “top management” would review this report and make
certain adjustments wnich took the form of moving time from one
sub-task to another within the same contract, moving time from
overi’iead accounts to T&M contracts, and moving time from fixed
Jrice commercial contracts to T&M contracts.
5. unce enough ddjustmentsu had been made to achieve a
“satisfactory” oilling level, the computer was used to rerun a
fresh set of timesneets for that payroll period. Various
clerical personnel within the accounting department would prepare
new tiniesheets for tnose employees whose time had been uadjusted
to make tnese timesheets agree with the adjusted billin .
After all the “new” tirnesheets had been prepared, the employee s
signature w s traced from the original timesheet submitted. All
original tiinesheets were destroyed. The new timesheets were then
coded and run on the computer to create a new distribution of
time and an “adjusteo” T&M billing. The old reports reflecting
correct time charges were destroyed.
when asked how the Secretary/Treasurer was able to prevent UCAA
from uncovering the scheme for overcharging the ( vernment, he
r sponded that whenever a A audit took place he was careful to note
the timesheets examined by the auditor so that such timesheets did not
become a part of the “adjusted TM timesheets for that month and In that
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way there were never any discrepancies between the nours on the
timesneets the auditor examined and the hours billed the Government.
The division Secre avy/Treasurer was terminated. The corporate
office hired another Secretary/Treasurer and instructed him to report
to the corporate office any irregularities noted. The new
Secretary/Treasurer reported a $10,820 overbilling during his first
noith of employment. However, accounting personnel indicated to him
t t the adjustments for that month were no where near as much as
prior months. dased upon this information, the division President was
terminated.
The corporate office obtained legal counsel and attempted to
determine the extent of the overbillings. Because the records had
been destroyed it was impossible to determine the exact amount. The
CPA’s workpapers were reviewed to determine if they would shed any
light on the matter. They found no evidence of any audit work
performed that would have uncovered any of the problems.
Alter reviewing the written documentation (memos to file), and
discussing tne matter with corporate officials, the auditor issued a
report of suspected wrongdoing. A 0CM Form 1 suspendIng $700,000 was
issued. n investigation by the uepartment of justice was made,
resulting in a grand jury proceeding and a trial in U.S. District
Court.
The contractor pleaded guilty to two counts of violation of Title
18, U.S. Code section 287, False, Fictitious or Fraudulent Claims and
was fined the maximum of $10,000 for each count. In addition, the
contractor reached a settlement with the vernment totaling $633,716
in restitution for the overcharges.
The division President was found u1lty on Ii counts of violation
of Title 18, U.S. Code Section 287, False, Fictitious or Fraudulent
C ,..inis and was sentenced to three years on each of the eleven counts
to be served concurrently.
L i c+ c p or 4 F ve J,,cJ,cgJors a . E/ ,,,oJs ,f Frtw /
1. _________
2. —
3.—
5.
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CASEL - OTHER DIRECT cosis
THE SOS COMPANY HAD A COST REIMBURSABLE CONTRACT WITH THE AGENCY TO
EXAMINE THE PERFORMANCE OF VARIOUS PROJECTS FUELED WITH RENEWABLE ENERGY
RESOURCES. THE $800,000 PER YEAR CONTRACT WAS ISSUED 3 YEARS AGO. THE
SCOPE OF THIS AUDIT WAS LIMITED TO AN EXAMINATION OF OTHER DIRECT COSTS
INCURRED. THE OBJECTIVES OF THE AUDIT WERE TO DETERMINE THAT COSTS
CHARGED TO THE CONTRACT WERE:
1. ALLOWABLE UNDER APPLICABLE LAWS AND REGULATIONS,
CONTRACT TERMS, COST PRINCIPLES CONTAINED IN THE FAR,
AND GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND
PRACTICES.
2. REASONABLE IN AMOUNT.
3. PROPERLY ALLOCABLE TO THE CONTRACT.
THE AUDITOR FOUND THAT COMPANY REVENUES FOR SIMILAR TYPE SERVICES
WERE OBTAINED FROM COMMERCIAL (35%) AND FEDERAL GOVERNMENT (65%) SOURCES.
THE TWO OTHER GOVERNMENT CONTRACTS WERE FOR LESSOR AMOUNTS THAN H S
AGENCY’S CONTRACT. THE COMMERCIAL CONTRACTS WERE GENERALLY FIXED PRICE
AGREEMENTS.
THE SOS COMPANY WAS RELUCTANT TO LET THE FEDERAL AUDITORS EXAMINE
ITS RECORDS. THE AUDIT WAS INITIALLY SCHEDULED TO START 6 MONTHS EARLIER
BUT COMPANY OFFICIAL BEGGED FOR DELAYS GIVING AS EXCUSES THAT KEY
INDIVIDUALS WERE SICK, SPECIFIC DOCUMENTS HAD BEEN MISPLACED, AND THAT
URGENT MATTERS RESTRICTED THE AVAILA8LE TIME THAT KEY OFFICIALS WOULD
HAVE TO SPEND WITH THE AUDITORS.
ONCE THE AUDIT BEGAN, THE AUDITORS FOUND THAT CERTAIN SUPPORTING
RECORDS COULD NOT BE PRODUCED TO ACCOUNT FOR EXPENSES CHARGED AGAINST THE
AGENCY’S CONTRACT AS OTHER DIRECT COSTS. WHEN PRESSED TO SUPPORT ITS
CHARGES, THE AGENCY COULD PRODUCE ONLY COPIES OF ORIGINAL DOCUMENTS.
FURTHERMORE, THE PROCEDURES EMPLOYED BY THE COMPANY TO ALLOCATE COSTS TO
ITS FEDERAL CONTRACTS WERE NOT CONSISTENT WITH ITS BUSINESS PRACTICES O
IT COMMERCIAL ACCOUNTS.
IN THIS AUDIT, THE AUDITOR FOUND THAT THE COMPANY HAD CHARGED COSTS
ON ITS GOVERNMENT CONTRACTS THAT DID NOT APPEAR TO BE ASSESSED EQUALL O
ITS COMMERCIAL CONTRACTS. AVAILABLE RECORDS DID NOT SUPPORT THE
ALLOCATIONS OF COSTS THAT WERE MADE. WHEN QUESTIONED ABOUT THE
DISCREPANCIES, THE ACCOUNTING SUPERVISOR INDICATED THAT THE CHARGES WERE
BASES ON PROVISIONAL ASSESSMENTS THAT WOULD EVENTUALLY BE RECONCILED ANt
SETTLED AT THE END OF THE CONTRACT.
‘ S1 : 1 I tify the dar ct - of i11e 1 acts that cist.
2. For one of the above aracter.j d ign a rcpriate a t
stem that “ .i1d help dete nj intent.
3. Ideritjfy at least one fra statrte that iy have been vic1at aid
tra rr porrJ .q e1 j t of prc f r .iiraj.
1 -5W-C
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CASE 5 - TRAVEL
THE REGION INITIATED AN AUDIT OF TRAVEL ADVANCES AND REIMBURSEMENTS•
THE AUDIT WAS IDENTIFIED AS A PERFORMANCE AUDIT WHERE THE ECONOMY AND
EFFICIENCY OF THE ACTIVITY WERE TO BE EXAMINED. AT THE ENTRANCE
CONFERENCE THE AUDITORS IDENTIFIED THEIR AUDIT OBJECTIVES, SCOPE AND
METHODOLOGY. THE AUDIT OBJECTIVES WERE TO DETERMINE THAT:
1. TRAVEL REIMBURSEMENTS AND ADVANCES WERE PROVIDED ONLY
FOR PROPERLY AUTHORIZED TRAVEL.
2. AMOUNTS PAID WERE IN ACCORDANCE WITH APPLICABLE
GOVERNMENT TRAVEL REGULATIONS.
3. REIMBURSEMENTS WERE TIMELY, PROPERLY APPROVED, AND
PROPERLY RECORDED TO THE APPROPRIATE ACCOUNT.
4. ADVANCES WERE LIQUIDATED WITHIN REASONABLE TIME PERIODS.
THE AUDIT BEGAN WITH A SURVEY OF OFFICE PROCEDURES. THE AUDITORS
FOUND THAT TO EXPEDITE TRAVEL ARRANGEMENTS THE OFFICE DIRECTOR HAD HIS
SECRETARY PREPARE ALL TRAVEL ORDERS BASED ON ITINERARIES PROPOSED BY THE
STAFF MEMBERS. LIKEWISE, THE SECRETARY HAD THE TRAVELER SKETCH OUT HIS
EXPENSES FOLLOWING A TRIP AND SIGN A BLANK VOUCHER THAT WAS THEN TYPED BY
THE SECRETARY, APPROVED BY THE OFFICE DIRECTOR, AND SUBMITTED FOR
PAYMENT. A COPY OF THE TYPED VOUCHER WAS RETURNED TO THE TRAVELER. THE
SECRETARY PICKED UP ALL TRAVEL ADVANCES AND EXPENSE PAYMENTS THEN
REIMBURSED THE TRAVELER.
WRITTEN OPERATING PROCEDURES DID NOT REFLECT THE PRACTICES IN PLACE.
BOTH THE OFFICE DIRECTOR AND HIS SECRETARY WERE IRRITATED BY THE
QUESTIONS ASKED THE AUDITORS REGARDING CURRENT OPERATING PROCEDURES.
WHEN THE AUDITORS BEGAN REVIEWING A SAMPLE OF OUTSTANDING TRAVEL
ADVANCES, TRAVEL VOUCHERS, AND TRAVEL AUTHORIZATIONS THE OFFICE DIRECTOR
INSISTED ON KNOWING WHICH ITEMS WERE BEING TESTED.
AUDIT TESTS FOUND THAT TRAVEL ADVANCES HAD NOT BEEN SETTLED MONTHS
AFTER THE TRAVEL WAS TO HAVE BEEN COMPLETED, THAT APPROVED TRAVEL
VOUCHERS OCCASIONALLY REFLECTED DEPARTURES FROM TRAVEL ITINERARIES
ORIGINALLY PROPOSED, AND THAT ONE INDIVIDUAL WHO FILED SEVERAL TflAVEL
VOUCHERS DURING A SIX MONTH PERIOD COULD NOT BE VERIFIED AS BEING ON THE
PAYROLL.
‘ .S1 ; 1. Ic1 tify t1 d aracterjstj of i11 .1 acts that exist.
2. For one of the above C aracteristj , design a pzt riate a i .t
ste that ‘xxzid help determine intent.
3. Identify at least one fra statute that my have be violated arxl
th. rx pcrdii e1 nta of pzv f r 1red.
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SECTION 7
CIVIL AND
ADMINISTRATIVE ACTIONS
SECTION VII. Civil and Administrative Actions
Objectives
This section briefly discusses the civil and administrative actions
available to EPA to obtain recoveries of fraudulently obtained funds. These civil
and administrative actions are iniportant in deterring and preventing
fraud and should be pursued even if criminal actions are not likely.
This section specifically addresses the new Program Civil Fraud R nedies Act
and the EPA OIG Suspension and Debarment Program.
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A. PROGRAM FRAUD CIVIL REMEDIES
ACT OF 1986
“Mini—False Claims Act” designed to authorize
agencies to recover, administratively, double
damages and civil penalties on fraud cases
below $150,000 - if the DOJ declines
prosecution.
B. CAUSES FOR SUSPENSION OR DEBARMENT
1. CivIl and criminal judgments
2. Criminal violation without prosecution
3. Nonperforinance on a contract
4. Noncrpliance with regulations, laws or
standards
5. Other practices showing lack of business
integrity
6. Debament by another Federal agency
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Fraud Detection in EPA Projects
CIVIL AND ADMINISTRATIVE ACTION
Suspension and Debarment Program
EPA ’s policy is to do business only with contractors, grantees, and persons
who are responsible, honest, and who comply with applicable rules and regu-
lations. EPA enforces this policy by suspending or debarring any organiza-
tion or person for acting improperly, having a history of substandard work,
or willfully failing to perform on EPA or other Federally funded activities.
Suspensions and debarments deny participation in Agency programs and
activities to those who represent a risk of abuse to the Government.
I. PURPOSE
A. Protection of the Govermient-contractor responsibility
B. Cut down on exposure to corrupt corporations
C. Only legal means to stop doing business with contractor
II. GROUNDS FOR DEBARMENT — The Federal Aquisition Regulations (FAR) provide
the grounds for debarment.
A. FAR 9.406—2 Causes for Debarment . The debarring official may debar
a contractor for any of the causes listed in I through 3 following:
1. Conviction of or civil judgment for ——
a. commission of fraud or a criminal offense in connection
with obtaining, attempting to obtain, or perfoming a public
contract or subcontract;
h. violation of Federal or State antitrust statutes relating to
the submission of bids or proposals;
c. commission of embezzlement, theft, forgery, bribery, falsi-
fication or destruction of records, making false statements,
or receiving stolen property; or
d. commission of any other offense indicating a lack of business
Integrity or business honesty which seriously and directly
affects the present responsibility of a (overnrnent contractor
or subcontractor.
2. Violation of the terms of a Government contract or subcontract
so serious as to justify debarment, such as -—
a. willful failure to perform in accordance with the terms of
one or more contracts; or
b. a history of failure to perform, or of unsatisfactory perform-
ance of, one or more contracts.
3. Any other cause of so serious or compelling a nature that it
affects the present responsibility of a Government contractor or
subcontractor.
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Ei h i
Fraud Detection in EPA Projects
CIVIL AND ADMINISTRATIVE ACTION
Suspension and Debarment Program (continued)
B. In addition to the firms and individuals debarred for the above
causes the following firms and individuals are identified as
“ineligible.”
1. Contractors excluded pursuant to the Davis—Bacon Act, Waish—Healy
Act, Service Contract Act, or for violations of the Copeland
Anti—Kickback Act, Contract Work Hours and Safety Act.
2. Buy-American Act, 41 U.S.C. 10.
3. Enviromental Statutes
a. Federal Water Pollution Control Act 33 U.S.C. 125; or
b. Clean Air Act, 42 U.S.C. 1857.
4. Equal Employment Opportunity, Executive Order 11246
a. Violations of the Equal Employment Order 11246;
b. Failure to submit acceptable affirmative action plans; or
c. Failure to meet minority utilization goals
C. Grounds for Suspension - FAR 9.407-2 are similar but stated more
simply. Indictment for any of the enumerated crimes is stated to
be adequate evidence for suspension.
III. DUR TI0N OF DEBARMENT AND SUSPENSION
A. Duration of Debament
1. Generally does not exceed 3 years (credit for “time served”)
2. tce keyed to “responsibility” courts may permit showing of
p,esent responsibility or corporate reforms
B. Duration of Suspension
1. Normally not exceeding 12 months unless legal proceedings
initiated, but if they have been, then until completed.
2. Assistant Attorney General may request an additional 6 months.
IE-J-’
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Fraud Detection in EPA Projects
CIVIL AND ADMINISTRATIVE ACTION
Suspension and Debarment Program (continued)
IV. GOVERNMENT-WIDE SCOPE OF DEBARMENT
A. All executive branch gencies.
B. Covers contracts and subcontracts for which Government approval is
requi red.
C. Does not cover “contractors under grants” but agencies in which
most of funds are given to others to contract with are developing
“linkages” between debarments of contractors and contractors under
grants (HUD, DOT, EPA)
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SECTION 8
SPECIFIC TYPES OF FRAUD
FOUND IN EPA WORK
SECTION VIII. Specific Types of Fraud Found in EPA Projects and Their
mdi cators
Objectives
This section synthesizes the information from the previous sections on
general fraud schemes and their indicators and applies it to specific types
of fraud found in EPA. Experience has proven that EPA contracts and pro-
jects are particularly vulnerable to certain types of fraud. This section
outlines several of those fraud scheiies and the indicators that can be
used to test for and identify the possibility of fraud. It should be
eflphasize’1 that any questioned costs where funds were spent: outside
the scope of the grant agreement, for items clearly ineligible for grant
funding, for items that have been previously disallowed, in excess of
industry standards, for unnecessary items, where supporting records of
transactions are consistently unavailable or Incomplete, with unapproved
or frequent use of modifications or change orders, and, by splitting
contracts to avoid the competitive bidding process represents possible fraud
instead of merely mistake if there appears to be any indication of intent.
: I-’
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A. FRAUD FOUND IN EPA-FUNDED WORK
1. Labor fraud
2. Product substitution
3. AntItrust violations
4. Defective pricing
5. Cost mischarging
6. Progress payment fraud
7. Contract modification fraud
8. Corruption
B. DEFECTIVE LABOR
1. Falsely allocating costs to or frani
other contracts
2. Padding the payroll with
a. Fictitious employees
b. Separated employees
c. Excessive, false, or
undocumented overtime
C. LABOR FRAUD: BASIC CONCERNS
1. DId the employees charge the project
on which they actually worked?
2. Were the proper rates and hours charged?
3. re the specifications for the amount
ar type of labor accurate (or padded)?
4. W ere the employees claimed to have
been paid actually employed?
5. Were the employees paid the amount claimed?
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D. FRAUD FOUND IN EPA-FUNDED WORK
1. Excessive or unusual labor charges by
personnel who are normally part of
overhead
2. Abrupt changes in labor charge levels
for no apparent reason
3. Labor time and charges inconsistent
with project progress
4. Inability of contractor to immediately
supply time cards upon demand
5. Time cards show consistent erasures
or alterations
6. Time cards completed by supervisor
7. Low—level work charged by high-level
wage earners
E. LABOR FRAUD: SUC GESTED AUDIT STEPS
1. Verify standard costs
2. Check time records
3. Compare payments to claims
4. Interview workers about how work
is being charged
5. Perform head count
6. Analyze changes or adjustments
7. Do trend analysis
F. DEFECTIVE PRICING
1. False vendor costs for goods
2• False billings
3. Exchanged checks and
fictitious corporations
4. Overpayment and refund
5. Overcharge and kickback
by vendor
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G. DEFECTIVE PRICING: INDICATORS
1. Ptrsfstent or repeated defective pricing
2. Filling to update data when prices
decreased
3. Use of unqualified personnel to develop
data
4. Falsification or alteration of supporting
data
5. flenlal of existence of historical data
that was later found
. Failure to make complete disclosure of
data
7. Protracted delay in release of data to
Government to preclude possible price
decrease
8. Employment of persons who previously
defrauded the Government
9. Identical high salary history data on
employees or consultants
H. ANTITRUST ACTIVITIES
Agreements to:
1. Adhere to published price list
2. Raise price by stated Increment
3. Establish, use, or eliminate
dl scounts
4. Not advertise prices
5. Use stated price differentials based
on quantity, type, or size of product
-------
Practices or Events that may Evidence Collusive Bidding or Price
Fixing are :
1. Bidders io are qualified and capable of performing but who fail to
bid, with no apparent reason. A situation where fewer competitors
than normal submit bids typifies this situation. (This could indicate
a deliberate scP enie to withhold bids.)
2. Certain contractors always bid against each other or conversely
certain contractors do not bid against one another.
3. The successful bidder repeatedly subcontracts work to companies that
submitted higher bids or to companies that picked up bid packages and
could have bid as prime contractors but did not.
4. There is an apparent pattern of low bids regularly recurring, such as
corporation “x” always being the low bidder in a certain geographical
area or in a fixed rotation with other bidders.
5. Failure of original bidders to rebid, or an identical ranking of the
same bidders upon rebidding, when original bids were rejected as
being too far over the Government estimate.
7. Bidders that ship their product a short distance bid more than those
who must incur greater expense by shipping their product long distances.
8. Identical bid amounts on a contract line 1t by two or more con-
tractors. Some instances of identical line item bids are explainable,
as suppliers often quote the same prices to several bidders. But a
large number of identical bids on any service—related item should be
viewed critically.
9. Bidders.frequently change prices at about the same time and to the
same extent.
2 11 1 .-S -‘
6. A certain company appears to be
bids than on other bids with no
for th increase, i.e., a local
an it i to he delivered locally
away.
bidding substantially higher on some
logical cost differences to account
company is bidding higher prices for
than for delivery to points farther
-------
E hi
Practices or Events that may Evidence Collusive Bidding or Price
Fixing arE : (continued)
10. Joint ve ture bids where either contractor could have bid Individually
as a pr? e. (Both had technical capability and production capacity.)
11. Any incidents suggesting direct collusion among competitors, such as
the appearance of identical calculation or spelling errors in two or
more competitive bids or the submission by one firm of bids for other
firms.
12. Competitors regularly socialize or appear to hold meetings, or other-
wise get together In the vicinity of procurement offices shortly
before bid filing deadlines.
13. Assertions by employees, former employees, or competitors that an
agreement to fix bids and prices or otherwise restrain trade exists.
14. Bid prices appear to drop whenever a new or infrequent bidder submits
a bid.
15. CompetItors exchange any form of price information among themselves.
This may result from the existence of an “industry price list” or
“price agreement” to which contractors refer in formulating their
bids or it may take other subtler forms such as discussions of the
“right price.”
16. Any reference by bidders to “association price schedules,” “industry
price schedules,” “industry suggested prices,” “industry—wide prices,”
or “market-wide prices.”
17. A bidder’s justification for a bid price or terms offered because
they follow the industry or industry leader’s pricing or terms. This
may include a reference to following a named competitor’s pricing or
terms.
18. Any statements by a representative of a contractor that his company
“does not sell in a particular area” or that “only a particular firm
sells in that area.”
19. Statements by a bidder that it is not their turn to receive a job or
conversely that It Is another bidder’s turn.
20. Differentgroups of contractors appear to specialize in Federal,
State, or local jobs exclusively.
21. There is an inexplicably large dollar margin between the winning bid
and all other bids.
-------
I. EXAMPLES OF COLLUSIVE BIDDING
1. Bid suppression or limiting
2. Complementary bidding
3. bid rotation
4. Market division
J. COST MISCHARGING
Contractor charges the Govermient for
costs which:
1. are not allowable
2. are not reasonable
3. cannot be directly or indirectly
allocated to the contract
K. COST MISCHARGING - UNALLOWABLE COSTS
1. Advertising costs (with exceptions)
2. Rid/proposal costs exceeding a set
limit
3. Stock options or other deferred
compensation
4. Contingencies
5. Entertainment costs
6. Contributions or donations
7. Interest
8. Independent RID costs exceeding a set
limit
9. Cost of idle facilities (with exceptions)
10. Losses on other contracts
11. Long—term leases exceeding ownership
costs
12. Legal costs related to a contractor’s
unsuccessful defense against charges of
contract fraud
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L. DEFECTIVE PRODUCTS
1. tbstltution of inferior products
for those specified
2. False test results
3. False certification of
a. Tests
b. Compliance with
specifications
H. PRODUCT SUBSTITUTION
Attempts by contractors to deliver
goods to the Government which do not
conform to contract requirements:
1. Without informing the Government
of the deficiency
2. While seeking payment based on
delivery of products or services
alleged to conform
N. PRODUCT SUBSTITUTION: INDICATORS
1. Delivery of look—alike goods made from
nonspecification materials
2. Materials not tested as required by
contract
3. Foreign-made products when domestic was
requl red
4. 1 ck —on “MADE IN USA” emblems
5. aces with part of label always obliterated
6. Goods always defaced in the same area
7. Goods without I.D. or specification plate
8. Goods that seem used when new was required
9. Differences between goods that should be
s aiie
10. Hissing source origin documentation
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0. PROGRESS PAYMENT FRAUD
ContractQr requests payment
based on:
1. Falsified direct labor charges
2. Material costs for items not
actually purchased
3. Falsified certification of a stage
of completion or work accomplished
P. PROGRESS PAYMENT FRAUD: INDICATORS
1. Firms with cash flow problems
2. Payments that do not coincide with
contractor’s plan or capacity
3. Claims for materials for which
the contractor has not paid
0. PROCESSING PAYMENTS
1. Review reports on progress of work
2. Tie payments to definite tasks or
milestones
3. Compare invoice data to work status
reports
4. Determine if payments were suspended
or work was stopped
5. Track total payments to the contract
terms
6. Determine if work was completed before
contract award or notice to proceed
7. Resolve monitoring or audit findings
before making final payment
8. Segregate duties
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R. CONTRACT MODIFICATIONS
1. Adequate documentation
2. Justification of
a. Need
b. Nonc upet1tive procurement
c. Benefit to Government
3. Cost or price analysis
4. Proper advance approval
S. CORRUPTION
1. Conspiracy
2. Conflict of interest
3. Embezzlement
4. Conversion
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SUBCONTRACTOR KICKBACKS
1. IntroductIon
Recent Senate hearings focused on abuses in subcontract management,
specifically subcontractor kickbacks. It was estimated in testimony at
those hearings that from 10 to 50 percent of al subcontractors are
involved in some type of payment scheme. The abuses could range from
paying for a buyer’s lunch to payoffs in the thousands. With subcon—
tracts for DOD procurements running $47 billion in FY 1984, subcontract
kickbacks and substantial sums to the price of everything the Government
buys.
Subcontractor kickbacks are apparently a widespread, longstanding, and
entrenched practice. Buyers can easily disguise kickback situations by
producing documentation to demonstrate and justify the award of a pur-
chase order. Kickbacks occur most frequently in subcontracts under
$100,000. Purchase orders under $10,000 are extremely vulnerable because
of lack of scrutiny.
Unfortunately, standard audit approaches and Contractor purchasing system
reviews are not likely to uncover subcontract kickbacks. The documenta-
tion involved appears legitimate and the paid invoices usually do not
reflect the kickbacks. Instead, internal control reviews should be used
to assess the contractor’s vulnerability in these areas. The failure of
the contractor to monitor and control its employees’ activities properly
contributes to the problem through lack of attention and inaction.
2. Background
Kickback schemes are arrangements between subcontractors and the prime
contractor’s buyers, high level officials or even owners. The subcon-
tractor agrees to pay a percentage of all subcontracts awarded to the
subcontractor by the prime. One kickback scheme is called a “bump”
agreement. In these cases, the prime’s agent tells the vendor how much
he or she can raise the bid and still be low bidder. Another system is
courtesy bidding. Courtesy bidding revolves around various vendors
taking turns being the low bidder. When a company is not designated the
low bidder, It submits an artificially high bid to protect the designated
vendor’s bid. In other Instances, the contractor’s agent may disclose
the legitimate bids to the designated vendor so he or she can underbid
the competition. The contractor’s representative may also disqualify
legitimate low bids on the basis of technica1 or financial capability
and award the subcontract to the preferred vendor.
Kickbacks can be in various forms. Cash, illegal drugs, cars, appliances,
tools, airline tickets, package vacations have all been used as payoffs.
In some extreme cases, the recipient of the kickback has sent bills to
the subcontractor for purchased items or used the subcontractor’s credit
cards for purchases.
The subcontractor could also pay kickbacks to a nonexistent company or
one that is created solely to facilitate payments from the subcontractor
to the recipient of the kickback. These payments may be for consulting
services or services and materials which appear related to the contract,
however, when compared to overall costs and other actual charges, they
show up as unusual.
____ -1
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Ex hi LI I-
3. Fraud Indicators
a. Poor contractor Internal controls over key functional areas, such as
purchasing, receiving, and storing.
b. Lack of subdivision of duties between purchasing and receiving.
c. Lack of rotation or subdivision of duties in the purchasing depart—
rnent. Buyers should be rotated to prevent familiarity with specific
vendors.
d. None or few contractor policies on ethical business practices.
e. Poor enforcement of existing contractor policies on conflicts of
interest or acceptance of gratuities.
f. Purchasing employees maintaining a standard of living obviously
exceeding their income.
g. Instances of buyers or other Enployees circumventing established
contractor procedures for competition of subcontracts.
h. Poor or no established procedures for the competition of subcontracts.
I. Poor documentation of sole source award of subcontract.
j. Poor documentation of award of competitive subcontract.
k. Lack of competitive awards.
1. Nonaward of subcontract to lowest bidder.
ni. A one—time payment to a company for services or materials usually
bought from another vendor(s). The kickback recipient could be
using the company to obtain his payoff.
4. C,eneral Comments . Detection of subcontract kickbacks is difficult.
Standard audit procedures nomally will not uncover such schemes. The
auditor must be alert to obvious weaknesses in the contractor’s internal
controls which make taking payoffs easy Instead of difficult. Audits
of the cagtractor’s material purchasing, receiving, and storing systems
will po1 out other weaknesses or noncompliance with existing con-
tractor poUcles and procedures. Physical verification of the existence
of Inventories or materials charged direct to a job will also show how
vulnerable the contractor’s systeii is to fraud. A subcontract manage-
ment review may be the best way to evaluate the contractor’s policies
and procedures for awarding subcontracts. This could assure that the
contractor is following the proper procedures.
-------
ACCOUNTING MISCHARGES
1. Scenario . A s nplirig of time cards revealed that time card
alterations were pervasive. Time card changes for engineering and
production personnel were either made before or after the time cards
were keypunched fnr payroll preparation and labor distribution. In some
instances, alterations were made by erasures or typing correction fluid;
and changes were made by lining out the original job order/project
number and substituting another number. Analysis of job cost records
showed that labor costs were switched: (1) from CPFF overrun contracts
to those with remaining funds, and (2) from Government FFP/commercial
contracts to CPFF contracts with available funds.
Indicator . In the course of auditing labor charges to Government
contracts, many instances were found where time cards were altered
without evidence of approval by the employee or supervisor. Also,
review of established internal controls disclosed that the contractor
did not have a written policy on changes or corrections to time cards.
Monetary Impact . Over 5,000 hours were transferred equating to a
benefit of $110,000 to the contractor.
b. Scenario . The time sheets and accounting records did not show charges
to one or more of the jobs on which employees had identified during the
floor check. The mischarging involved charges to two overhead accounts
instead of fixed—price commercial and Government T&M contracts.
Indicator . While conducting a review of timekeeping procedures which
included observations of work areas, the auditor discovered that
employees were being directed by management to charge overhead accounts
for work done on fixed—price commercial and Government T&M contracts.
Monetary Impact . Estimated overcharges to Government cost—type
contracts totalled $500,000.
c. Scenario . Many original time report entries had been obliterated by
applying typist snopack (white ink) on both the face and reverse of
the time report so that another entry could be substituted. The
employee semi—monthly time reports were summarized on a Monthly Labor
Distribution Summary (MLDS) to support the direct labor billed to the
Government. The auditor found that the MLDS was also altered to
match the entries on the employee semi—monthly time reports. The
effect of the alterations shifted labor costs from commercial contracts
to Govermient contracts.
Indicator . During a review of direct labor costs charged to Govern-
rient cost reimbursement—type contracts, the auditor noted considerable
alterations of employee’s semi-monthly time reports.
Monetary Impact . The magnitude of the mischarged labor cost and
applicable indirect expenses amounted to $475,000.
3L-1I
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Scenarios of Potential Fraud -— Making the Referral
ScenarIo 1 : iile reviewing claimed equipment rental costs, you noted that
the supporting vendor invoice’s serial nurnbr was neither compatible in
tyographical size nor in numerical sequence with other vendor invoices
submitted during the period. It was also noted that the typed statement
on the invoice “Paid in Full (Cash), 30 September 1980” was in larger
typeface than preceding paid invoices from the same vendor. A review of
the general ledger receivable account at the vendor location revealed no
record of this transaction. You ascertained that the contractor used a
“dumy” vendor invoice to support the estimate.
Scenario 2 : During discussions with a vendor company official, you learned
the quotes had not been furnished to the contractor. The contractor had a
supply of signed blank supplier’s quotation forms which he used to support
the proposed Inflated prices. The supplier said he had provided the con-
tractor with the blank forms with the proviso that, after the contractor
completed the forms, they would be returned to him for validation.
Scenario 3 : You conducted a labor floor check with the assistance of a
Government technical representative and observed that several engineers
were charging an overhead account for work effort which should have
classified as either Independent Research & Development (IR&D) or Bid and
Proposal (B&P). Also, examination of the engineers’ notebooks confirmed
that the effort was IR&D/B&P and not other indirect effort. (The company
required engineers to maintain notebooks to record notes, idea sketches,
computations, illustrations, etc.) Had such work been charged to the
proper IR&D or B&P project, the contractor would not have received
reimbursement from the Government since the authorized ceiling amounts
had been exceeded.
ScenarIo 4 : Examination of the job site equipment listing revealed that
two material hoists were never assigned to the job site, although $15,000
was claimed for rental. Further analysis of the equipment list equipment
transfer dates showed that other equipment costs were overstated by $28,000.
In addition, the contractor included $27,000 in the claim for “Operating
Engineers” to operate the material hoists. The contractor proposed $65,000
for job supervision and engineering—-ostensibly representing the salaries
of 10 employees for the entire 125-day delay period. A comparative exami-
nation of the enployee listing with payroll records disclosed that some
individuals were either hired by the company during or after the claimed
delay period 6r were transferred from other contracts to the subject contract
during the dehy period. Excessive costs of $25,000 were questioned.
IiJ !2)
-------
2
ScenarIo 5 : WhIle reviewing equipment rental costs of $62,000 relating to
a 200-ton crane, you requested as documentation, a lease agreement and
respective invoices. The lease çreement and the initial invoice showed
that the crane was delivered to the work site during June 1986, with the
first payment covering the period 27 June 1986 to 26 July 1986. The costs
claimed for the crane were Incurred after the purported delay period
(15 January—30 June 1986); therefore, the contractor had no basis for
including the rental costs in Its claim. The contractor could not offer
any basis or rationale far its Inclusion.
Scenario 6 : The contractor included $70,000 for materials in its PPR
supposedfy invoiced by the vendor company. Close examination of the invoice
indicated it was fictitiously prepared using another company’s invoice.
Information on the earlier invoice was eliminated with correction fluid,
except for the “company name” and “sold to” information. False information
pertaining to a purchase was entered on the forged invoice, e.g., descrip-
tion of the material quantities and monetary extensions.
Scenario 7 : A prime contractor submits a proposal to EPA which includes a
subcontract for a major piece of equipment using the subcontractor’s
budgetary quota to support the price of the piece of equipment. Within a
few days of sending the budgetary quote, the subcontractor provides firm
quotes in response to a request from the prime contractor.
You begin a review on the contract and find the price of the equipment is
different than the one proposed. The review also shows that, at the time
of price agreement, the contractor had both budgetary quotes and firm
quotes. The firm quotes were lower than the proposed prices, but this
information was not disclosed to the Goverment, The date on the firm
quotes were within a few days of the budgetary quotes and, in some instances,
were received on the sane day. None of the finn quotes were ever disclosed.
Scenario 8 : A contractor submits a proposal for a follow-on contract to
paint a building that is part of a wastewater treatment plant under construc-
tion and says that he will use the prior contract as a basis of supporting
the proposed labor costs for the follow—on contract.
The contractor uses learning curve techniques to arrive at the cost estimation
for the labor hours. Everything seems to be in order and properly disclosed.
The contractor prepares the proposal by using the painters’ labor hours times
the labor rate. The contract is negotiated based on the cost and pricing
data. What the contractor fails to disclose is that on the previous contract,
painters, painter helpers, and laborers were used to do the job.
During the contract performance, the company sends status reports listing
the hours incurred on the previous contract and the painter labor rate. As
part of your review, you ask for the labor records. The contractor tells
you that the timecards and other labor records have been destroyed.
An additional review of the payroll records shows that the workforce was
evenly split between painters, painter helpers, and laborers. You also find
that other painting contracts had the same labor mix.
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EXAMPLES OF DEFECTIVE PRICING
EPA Pays
Excessive Amounts
for Emergency
Cleanups of
Hazardous Wastes
Problem
The urgent need for
emergency hazardous waste
cleanups led EPA to award
multirnilijor , dollar contracts
for Emergency Response
Cisanup Services (ERCS) with
limited competition and
wltho t assurances that the
n.gatiatsd rates wire
reasonable. As a result. EPA is
paying excessive amounts for
the emergency clunups.
Background
Following Superfund
authorization in 1980. EPA
initially used Notice to Proceed
contracts authorizing a specific
1 irrn to perform emergency
cleanups However the rates
arid other terms of the contract
were frequently not finalized
until the cleanup was well
underway or completed The
ERCS contracts were meant to
provide a better approach for
obtaining cleanup services by
dividing the country into four
geographical zones with an
ERCS contractor responsible for
emergency cleanups in each
zone The zone contracts
specified 126 equipment items
and labor categories for which
fixed rates were negotiated
Other services were
retmbu able under a
cost-plus-fixed-fee arrangement
The potential value of the
contracts over a 3-year period
was $186 million Actual
cleanup work for specific sites
was authorized through
individual delivery orders
We Found That
On the twelve individual delivery
orders audited ERCS
contractors were paid an
average markup of 40 percent
over their labor costs arid labor
billed to EPA under the fixed
rates ranged from 14 percent to
103 percent Over the
contractors actual costs
Contractors billed labor at
holiday and overtime premium
rates even though they
frequently did not pay these
Equipment items were billed
to EPA with markups over cost
ranging from averages of 143
percent on monthly rates to 321
percent on hourly rates
Markups on individual items
varied from 37 percent under
costs on a particular pickup
truck to an instance when the
contractor billed EPA 160 times
The ERCS contracts provided
for subcontracting transportation
and disposal of hazardous
wastes from cleanup sites by
the four zone contractors We
found that of $1 2 million in
transportation and disposal
services we reviewed. $240 500
of cost may have been incurred
unnecessarily by the Agency as
a result of poor procurement
practices of the zone
higher rates to their employees
Contractor and subcontractor
emaloyees who are working
away from nome are allowed
per diem expenses to cover
food and lodging However we
found that per diem expenses
were invoiced to EPA with an
average 10 percent markup or
$25 452 more than actual
expenses
Below are some examples of
the overtime rates charged but
not Daid
the cost of a trash pump at the
fixed rate
Below is an example of a
commonly used item which was
excessively marked up
personal protection equipment
(level B). including chemical
resistant, and disposable
clothing with hard hat 2-way
radio, and breathing apparatus
contractors We found instances
where the lowest bidder was
not selected and where EPA
paid rates that were higher than
rates charged “preferred
Customers
Below are examples of some
additional Commonly rented
items which were excessively
marked up Mark ups vary
based upon the rental period
1V3JL”13 1
Ringiof rinosof
Estmst.d Costs 5 1usd aat.s
Costs
Ov.vtiin. Markup
Contr.ct Rat..
Clerk
$58
80
42°i
$14
14
$21
50
52°/c
1
Amo mt 51Usd
Estlmst.d Cost
Mirlup
2
$100
$12
864%
3
26087
8.675
4,925
4.208
430%
106%
ItsTh
Ring. af M . upi
Stakebed Truck (2-ton)
HandTools
$2
95 , $51094
S
16• $1 365
442%
157°Io
16-5346
511-5126
6775%-3542%
Decontamination Trailer
Trash
54
64 - $10046
$300 - $3 000
6473% - 2 886%
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New York Firm
Indicted for $6
Million Fraud
Michael GeIb and Thomas GeIb,
president, vice president, and
Sole owners of Federal
Chandros, Inc (FCI). were
indicted on February 11. 1987
for fraud on the EPA-funded
Owls Head Wastewater
Treatment Plant protect in
Brooklyn. New York. on which
FCI was the pnme electrical
contractor According to the
indictment the Gelbs were
involved in a continuing scheme
between 1980 and 1986 to
defraud the city of New York by
submitting false or altered
claims for payment
The indictment charged that
FCI obtained a total of $6 million
in illegal payments and credits
on electncal contracts from
various city agencies Besides
the EPA-funded Owls Head
project, the Gelbs were charged
with defrauding the city on
electncal prolects for the New
York City Transit Authority, the
New York County Supreme
Court. the New York City Police
Department, and the
Metropolitan Museum of Art
The Geibs allegedly
phOtOCOpied invoices paid by
FCI. altered the dollar amounts
and delivery information.
rephotocopied the invoices to
disguise the alterations and
Submitted them for
reimbursement In addition, they
allegedly submitted totally
fictitious claims Seized records
of FCI included numerous blank
invoices and stationery of other
vendors
The indictment charged the
Gelbs with fraud in connection
with the employment of
minority business enterpnses
(MBE) to meet Federal and City
contractual requirements on the
Owls Head project and other
contracts Allegedly, the Geibs
fraudulently received credit for
$5 3 million under the MBE
program
This indictment resulted from
the toint investigative efforts of
the EPA Office of Inspector
General the OIG for the New
York City Department of
Environmental Protection, the
Federal Bureau of
Investigations and the New
York City Department of
Investigations
Pipe Supplier Prosicuted in Consp r, y Sch.me
The owner and operating manager of a New York City pipe
company pled guilty of Conspiring to transport stolen pipes
that were to be used on E°A-funded wastewater
treatment projects in New York City and to defraud the
Internal Revenue Service
Both aeferidants admitted paying New York City
employees responsible for maintaining the city s pipe
yards about S250 000 in bribes for access to the material
in those yards The defendants Subsequently stole and
resold pipes to the contractors doing business with the
city on EPA t unded and other projects
Tiiey created and supplied city contractors with
aoproximately $3 million worth of fictitious invoices for
pipes used on city projects and paying the contractors
suostantial Kickbacks laundered through their own shell
and other corporations
lnad.qu. . Docum.nt.tlon Creat . . Diullowances for
Charleston, West Virginia. Grant..
Despite receiving a $168 million sewage treatment gran ’.
the Elk Pinch Public Service Districts recordkeeping and
accounting practices did not comply with EPA and Fed aj
regulations Insufficient support, duplicate entries, ip4 ff
participation formulas, and the claiming of unrelated
expenses led to $926,870 in questioned costs We also
set aside $1 7 million, pnmarily associated with
architectural and engineenng fees, until further
documentation could be provided
The regional oMcsals sustained 51.275.221 of questioned
and set-aside costs as a result of this audit
Cons oe Ds Poor Pfs,u aed
Unautho, .d Ch..g. OrtM. flaesdt As *8
MIfllon Df$I!Ui,vuw, q o f GraM..’. CI
The Middlesex County Utilities Authonty in Sayreville, New
Jersey, received three construction grants totalling $80.3
million to improve and upgrade its sewage facilities. We
questioned $3.8 million due to construction delays.
unauthorized change orders, the submission of insuff’ic*ent
cost documentation, and expense claims that were not
within the scope of the grant
Cost overruns, construction delays, uncertainty of
performance, and change orders also accounted for about
$13 million in set-aside costs
As a resuft of our recommenda n that guesuorieb costs
be disallowed and that the eligibility of set-aside costs be
evalu.terj, R . on 2 sustained 59,78425201 the amount w
questoried or set as .
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EXAMPLES OF ANTITRUST VIOLATIONS
Five Indictments
Short Circuit
Electrical
Contractor’s Bid
Rigging Scheme
Dynalectric Company. McLean.
Virginia, Fischbach and Moore
Inc, Dallas, Texas. Paxsor,
Electric Company. Jacksonville.
Florida. G W Walther Ewatt.
President of Dynalectric
Company and Wesley C
Paxson. Sr. President of Paxson
Electric Company were all
indicted on September 19.
1986. for mail fraud and
unreasonable restraint of trade
and commerce in violation of
the Sherman Act
The defendants were charged
with conspiring to rig bids and
fix prices on an electrical
construction subcontract on the
EPA•funded Snaptinger Creek
Waste Water Treatment Prolect.
DeKalb County, Georgia
The indictment charged the
defendants with submitting
collusive. noncompetitive bids
so that Paxson Electric would
be the low bidder and receive
the electrical construction
subcontract at the artificially
high sum of $4,915 000
In return for Fischbach and
Moores participation in the
scheme. Paxson Electric
allegedly agreed to forgive its
Preexisting debt of $89,330 06
In return for Dynalectnc s
participation, Paxson Electric
allegedly agreed to form a silent
loint venture with Dynalectnc
pursuant to which Oynalectnc
would receive 50 percent of the
profits earned from the
performance of the subcontract
and Paxson allegedly then paid
Dynalectric $880,000 as its
share
These indictments resulted
from the loint efforts of the
Department of Justice Antitrust
Division and the EPA Office of
Inspector General
Electrical Contractors Rig Bids on Chattanooga Project,
Fsn.d $900000
Commonwealth Electric Company ICEd and FiSChb Ch
and Moor. Inc (FMI) were indicted on July 2 i986 for
unreasonable restraint of trade and commerce in violation
of the Sherman Act The indictment charged that CEC and
FMI agreed that CEC would be the low bidder on the
EPA-funded Moccasin Bend VVastewater Treatment Plant
prolect in Chattanooga, Tennessee and in return for FMI $
participation in the conspiracy. CEC would make a payoff
to FMI out of the profits CEC expected to earn from the
contract or CEC would submit a collusive art’fically-high
and rigged bid for FMI on a future prolect
FMI was convicted and fined $500,000 and CEC pled
nob contendere arid was fined $400 000 on September
29. 1966 EPA is seeking civil recoveries from FMI and
CEC
Conspiracy to Rig Election and Bids on Siwer Project
Bnan lngber. Supervisor of the Town of Fallsburg, New
York. Howard Ingber. Wayne Pimos. Thomas Peck and
Service Scaffold. Inc. lngbers’ family business were
charged with conspiring to rig bids so that Service
Scaffold. Inc. would have an advantage in winning an
equipment Supply contract on a $24 million sewer prolect
The defendants allegedly manipulated the bidding process
by conveying false information to competing bidders arid
concealing Brian lngbers conflict of interest between his
business and official position which included administering
the sewer probect
The defendants were also charged with rigging Ingber ’s
1983 election as Supervisor by forging the signatures of
registered voters on ballots and fraudulently obtaining
sçned absentee ballots
Brian lngber was convicted on January 16. 1986. of m l
fraud for forging absentee ballots dunng his 1983 election.
Bnan lngber was Convicted again along with Wayne Pimo
on June 18. 1986. for false statements and Brian lngbec
and Sevice Scaffold. Inc. were found guilty of mail fraud
VIlI ” 3
-------
Electrical Contjacth, Fined for Bid Rigging
An eIectr,c contracto, of Huntingtofl West Virginia pled
guilty on May 8, 1987. and was fined $50 000 for
consoiring with others to rig bids on a $2 million
EPA-funded wastewater treatment protect in Huntington,
West Virg’ri a
The contractor submitted an intentionaliy.high and
noncornpetitive bid on the project, artificially raising the
price of a contract awarded to a co-conspirator In return.
the co-conspirator pa:d the Contractor in the form of
electrical construction materials
Contractor Convicted and Fined for Bid Rigging
The Modem Electric Company (MEC) of StatesviHo. North
Carolina, and company officer E Eugene Carson along
with co-conspirators were convicted on January 9. 1985,
of submitting collusive, non competitive bids to Boone.
North Carolina. so that one of the conspirators would be
awarded a $247,639 contract for elecincal work on an EPA
funded project On February 25. 1985. MEC was fined
$10,000 and Carson was fined $2,500 and sentenced to
120 days in a work release program to perform community
service
Prosecution for Bid Rigging
The . , c Moore Co. Inc. of Greenwood, South Carolina.
pleaded guilty on Jufy 25. 1985 to ngging bids in-violation
of Section 1 of the Sherman Antitrust Act (15 USC. 1). In
the Apnl 4. 1985 indictment Moore Co along with
co-conspirators were charged with submitting colluswe
bids so that one of the conspirators would recefve an
award of $1,689,820 to work on the EPA funded
Winnsboro Sewage System Improvement Project Moore
Co was fined $50000 Actions by Reporting Penod. Fiscal
1985
S W E Boyerte and his company. Watson Electnc
Company, Wilson, North Carolina. were each debarred for
two years on ApnI 15, 1985 On March 12. 1985, Boyette
and Watson Electnc pled guilty to charges that they and
co- conspirators submitted collusive non-competitive bids
on an electrical contract at a wastewater treatment facility
in Orange County. South Carolina The collusive bids were
submitted so that an artifically high contract award of
$626,300 would be made for an EPA-funded project
Boyene was sentenced to 7½ months lmpnsonment
Watson Electric Company was fined $248,000
-------
W DN(SOAY. FEBRUAR’Y I 7. 1968
. 96 PAGES 25 CE 4TS
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-------
EXAMPLES OF COST MISCH 4 4RGING
Contractor Billed EPA $600,030 in
Excessive Costs.
Several Conirac ors performing emergency cleanup ac-
tions under the Superfund program overcharged the
EPA more than $600000 by billing at rates thai were
excessive compared to those charged on similar con-
tracts The problem of excessive rate charging was
Chronic because contractors were employed on an
emergency basis before negotialion of terms We rec-
ommended that proper contracting and procurement
contrcls be implemented and enforced
Grantee Final Construction Grant Claim Includes
Over $1.4 Million of Ineligible or Unapproved
Costs that were Sustained
The West County Agency of Contra Costa County claimed
$3 732.990 of questionable expenditures for the
construction of a wastewater treatment facility includ ng
over $1 milton previously disallowed by EPA and
51 226 335 of technical services costs which exceeded
reasonable amounts overstated actual indirect costs were
outside of the approved prolect scope, and were applicable
to the ineligible portion of the construction
The Regional Adminisrratoi Region 9, sustained
$1 449 621 Federal share of the costs questioned or set
aside and deferred $449,916 pending a technical review of
a contractor’s settlement claim
.4 M8$on OlsoUowsd en Mertid . CaHf .la, Sewag.
Grant
The city’s finance department customanly Processed
construction and engineering claims without first
determining if they were eligible project costs As a result.
the City of Merced claimed $1 586.059 of unallowable
costs
We also set aside $831,491 of interest that the grantee
earned on a duplicate claim for ineligible Construction costs
and $136,650 in claims relating to the plant’s landscaping
to determine its eligibility
We recommended that the Regional Administrator (1)
disallow and recover Federal share reimbursements ma
to the grantee, (2) evaluate the set-aside costs, and (3)
ensure that the Public Works Deportment review claims
for grant reimbursement before submission to the Stat.
Boai and EPA
The Regional Admsnsss’aser ius ed $2,463,793 of the
questioned end set-a
False Claims and kiclibesk Conspiracy in Superfund
C l ssnup
In our first Superfund related prosecution the
Environmental Management Corporation (EMC). Utica,
Michigan and three of its owners/officers pled guilty to
conspiring to defraud the Government EMC allegedly
submitted false manifests and site receipts during the
1982 Superfund cleanup of the Liquid Disposal Inc. site
During our investigation haulers admitted driving only
half-full trucks that EMC manifested as full and a waste
disposal firm admitted paying EMC a $25 000 kickback for
receiving its business Each defendent was fined $5,000
and sentenced to 4 months in prison EMC was fined
$10000 arid placed on five years probation
EPA Region.I Administrator Disallows Over $5.5
Million on Philadelphia Grant
The City of Philadelphia claimed about 51 5 million of
construction charges that it withheld from the contractor
pending a settlement on financial damages involving Soil
and waste removal We referred for Agency review 57 3
million of costs that were not within the scope of the
prolect grant An additional 51 7 million of costs were also
referred for Agency review pending the submission of
supporting documentation by the grantee
We recommended that the Regional Administrator,
egion 3, not participate in the Federal share of qciesooneij
costs, determine whether EPA should participate ,n the cost
referred for review, and recover all ap/icable amounts due
EPA
The Regional Administrator, Region 3. sustained $5 53
million the costs ques honed and referred for review
Extensiv, Overcharges Identified in Cleanup at
Drum Recycling Facility
E° awarded Si 3 million in contracts for emergency
cleanup following a Fire at the General Disposal
Company, a paint and chemical recycling facility in
Santa Fe Springs, California The contractor, IT
Corporation did not maintain an adequate accounting
system for the identification of individual prolect costs
The contractor billed EPA $163,000 I or ineligible costs
and $341,000 for questionable costs including duplicati
payments to vendors, charges in excess of actual
material and equIpment rental costs and full cost for
items which the contractor received vendor dis ounts
We recommended that the ineligible costs be
disallowed, the questioned costs be reviewed to
determine eligibility and that ir Corporation be advvsdd
that their accounting system is inadequate for EPA
contracts
Litigation and Rudget Overruns Result in EPA
S .st jning $838874 of Ineligible and
Unsupported Costs
The Gates-Chili-Ogden Sewer Oistnci. New York, claimed
over $1 million of ineligible legal, settlement, and
construction costs on an EPA grant resulting from litigation
with its construction contractor which delayed the
expansion and upgrading of a treatment plant by 3 years
We also set aside over $1 million in budget overruns and
unsupported costs
The Regional Administrator. Region 2, sustained
$638. 674 of the Federal share of questioned arid set-aside
costs
Grantees Overcharge $3.9 Million For Waste
Water Treatment Projects.
fri separate grant awards, Dade County Flonda. Delano,
California, and Houston. Texas charged the Waste
Water Treatment Works Construction Grants Program
$2 4 million. 511 million, and $400,000 respectively for
ineligible costs beyond the scope of the profect or un-
approved change orders We recommended recovery of
these costs.
-------
EXAMPLES OF EMPLOYEE FRAUD/ ABUSE
Theft and Misuse of
Government
Property, False
Travel Claims
Based on allegations from an
EPA laboratory director and
complaints from a private
citizen, we initiated an
investigation of a scheme by a
former EPA employee to steal
gasoline purchased with a
Government credit card, misuse
a government vehicle, and
falsify travel vouchers
Mr Finck would drive as much
as 800 miles a day to return
home and remain there for 24
hours while supposedly on a
continuous travel status for
which he falsely claimed
expenses
Steven J Finck admitted
stealing 120 gallons of gasoline
and falsifying 25 percent of his
travel vouchers by an additional
quarter of a day to be paid
additional per diem He resigned
Oh August 9. 1985
Mr Finck was indicted on
October 15 1985, on three
Counts of false claims, one
Count of false statements and
one count of theft of
Government property
EPA Employees
Suspended for
Conduct Violation
Two EPA employees, a branch
chief and an inspector were
suspended without pay for 30
days for violating the EPA
standards of conduct Dunng
the investigation, both
employees admitted that the
inspector obtained bags of
fertilizer from sites that he
officially inspected and provided
them to the branch chief, who
had requested them for his
personal use They also
admitted using Government
vehicles to transport the
fertilizer to the branch chief’s
residence In addition, the
inspector admitted receiving
meals, home and garden
products, and “b.ke.ethon
donations from mpanies —.
inspected
Former EPA
Purchasing Agent
Prosecuted for
Self-Dealing
Richard Crossgrove a former
EPA employee oled guilty to a
criminal nformation on . une 24
986 charging him with
performing official Government
acts to affect his personal
financial interest
The information charged that
from May 1982 to September
1985 Mr Crossgrove while
working as a purchasing agent
for the EPA in Pensacola.
Florida personally and
substantially participated in
procurement of materials for
EPA from Applied Science
Distributors IASD) a company
which he founded operated
and nad a financial interest in
During the investigation Mr
Crossgrove admitted that he
founded ASD ri the name of his
then-14.year old stepdaughter
who had a different last name
because tr’e Government
looked more favorably or
mnorty owned business and
he did not want the Crossgrove
name on ASD s records At first
Mr Crossgrove collected about
‘0 percent of the price as profit
but he eventually ‘ncreased me
proft margin to 3bOut 50
percent Mr Crossgrove
estimated that ASD’s profit
from sales to EPA fits orily
CuStOmerf totalled about
$12 000 to $15 000
On August 8 1986. Mr
Crossgrove received a
suspended prison sentence 5
years probation a S3 000 fine
and a special monetary
assessment of $50 Mr
Crossgrove resigned from EPA
when he learned that the OlG
would be investigating his
activities
EPA Employee
Suspended for
False Statements
An EPA secretary whO
submitted falsified documents
to the EPA Personnel Office
was notifed on July 14 1986
that she would be suspended
frorr ner lob for 21 calendar
days
The suspenson resulted from
an OIG investigation during
which the employee admitted
signing her first and second
let,eI supervisors names or
ratng forms she prepared fpr
herself for upward rnob’lity
oos’tor s . r ’ ri t e Aoerc’,
Theft of
Government
Checks Results in
Prosecutive Action
Blair J Lyons former employee
Accounting Operations Branch
Financial Management Division
EPA pled guilty on August 28
1986 to the charge of forging
endorsements on U S Treasury
checks
During the investigation,
conducted jointly by the EPA
Office of Inspector General and
the U S Secret Service. Lyons
admitted stealing 19 checks
worth over $8 000 from the
EPA Financial Management
Division He cashed and forged
at least 14 of them before being
apprehended
Senior Official
Reprimanded for
Conducting Law
Practice on
Government Time
An EPA employee was given a
written reprimand for
conducting a private law
practice using Government tme
and property including office
premises telephone a Lextron
word processor and
accompanying diskettes
During the investigation
initiated by a complaint to the
OfG Hotfine 21 Lexitron disks ri
the employee s possession
were inspected by the OlG
Twp contained material
exclusively related to his law
practice, the other 19 contained
a combination of Government
work and personal legal
documents Some of the legal
documents listed the
employee s EPA telephone
number as hi private law office
telephone
The written reprimand
directed the employee not to
misuse Government equipment
supplies office space
telephone or secretarial support
in the future A copy of the
reprimand was entered into the
employee s official personnel
fife
-------
Embzztsmsnt of Govsnwn.cvt Funds
Project Officials
Embezzle Almost
$65,000 of Grant
Funds
tiVilliarn H Year , a Bell County.
Kentucky official along with
Elmer Cleveland a former EPA
prolect officer pled guilty on
July 17 1986. to charges of
embezzling grant funds and
filing fraudulent travel vouchers
totalling nearly $65,000 Shortly
after being hired by Bell County
to manage a $410,000 EPA
grant. the county official began
systematically converting grant
funds to personal use In
carrying out the scheme be
terminated the bookkeeper,
developed a close personal
relationship with the EPA
proteCt officer responsible for
The participants attempted to
cover up the scheme by
discouraging audits and
destroying or altering records
However, based on the strength
of allegations an DIG auditor
worked effectively with the FBI
and independent third parties
suCh as banks credit card
companies and telephone
companies to reconstruct
enough records to prove fraud
Mr Veary and Mr Cleveland
were each sentenced to 3 years
imprisonment on September 25
1986 All but 60 days of Mr
Cleveland’s sentence was
suspended However he was
also fined 51 000 and ordered to
perform community service
while on probation
This case, developed by the
Olfice of Audit in response to a
direct request by the FBI. is
particularly important to EPA
since it will be given
widespread publicity to deter
future schemes
monitoring the grant and used
a facsimile device to forge his
supervisor’s signature on
checks. assuming complete
control over all grant funds He
substantially increased his salary
and converted portions of cash
travel advances to personal use
He also used grant funds to pay
for a week’long vacation in
Gathnburg. Tennessee,
extensive personal phone calls
and other personal
entertainment
The EPA project officer played
a more passive role in the
scheme and benefilted to a
lesser extent During a 2 1/2
year period he travelled
extensively with the coLinty
off icial irt connection with the
prolect T keep the EPA prolect
officer from blowing the whistle
on the scheme, the county
official used grant funds to pay
for the EPA prolect officer’s
meals, drinks golf fees and
occasional motel rooms The
EPA project officer filed
fraudulent travel vouchers for
reimbursement of these same
expenses
Falsifica on of
Employment to
Receive
Unemployment
ael.dfits
In August 1984. a match of
unemployment benefit
recipients of the California State
Employment Development
Department with EPA
employment roles identified
several EPA employees who
may have simultaneously
received unemployment
benefits while employed by
EPA A subsequent investigation
determined that May Kei Wong,
a former part-time clerk for EPA.
received $1,545 in
unemployment benefits by
falsifying her employment
status with EPA On September
20 1985, May KeiWong
admitted falsifying documents
to receive the unemployment
benefits and agreed to make full
restitution May Kei Wong was
charged with making false
statements on September 27
1985
An unannounced audit of an EPA imprest fund by
regional staff on March 30 1984. revealed a $3,343
shortage in the lurid entrusted to Verve Lee Rogers an
EPA travel clerk and cashier During a subsequent
investigation by the DIG, Rogers admitted embezzling
tne money Rogers resigned from EPA effective April
6 1984 and made restitution to the imprest fund for
$3 343 Verve Lee Rogers pled gulty to the charge and
was sentenced to two years probation and ordered to
perform 200 hours of community service
Perjury, False Statements
A former EPA consultant David B Twedell was
sentenced on January 23. 1984. to one year in prison
after pleading guilty to fabricating his academic
credentials As a geologist for JAB Associates. McLean.
Virginia. Twedell supervised test drillings at Love Canal
and other hazardous waste sites and appeared in Court
as an expert witness for the Government while working
on a number of malor EPA prolects between December
1979 and hJovember 1981 He claimed to have a Ph D
and a B S in geology from the University of Houston
where in fact, he was d missed for academic failure
within only a few semesters
-------
EXAMPLES OF DEFECTIVE PRODUCTS! PRODUCT SUBSTITUTION
Alan Blane Grant and his
company Polymer Chemicals
Inc of Atlanta Georgia pled
guilty on September 24 1987
to consplrlrg to defraud the
United States by selling
undervveight bags of chemical
grout to sewer contractors and
making false statements on
U S Government forms
regarding the origin of the grout
From 1981 to 1987 Polymer
Chemicals was in the business
of mixing and selling Chem G-9
acrylamide grout, a
waterproofing sealant for sewer
lines Investigation revealed that
Polymer Chemicals short
weighted bags of Chem G-9
grout used by contractors on
EPA and other federally funded
sewer rehabilitation projects
thereby risking compromise of
me sealant s effectiveness
u’ider certain conditions
Polymer Chemicals also
falsely represented to EPA
Department of Defense and
other contracting officials as
well as to insurance carriers,
that it was an importer
warehouser distributor
wholesaler, and reshipper of
Chem G-9 grout manufactured
in England whereas in
actuality Polymer Chemicals
imported the chemical
components and mixed them in
tne United States to create the
grout
Ronald B Connellv Presdent of
REQ Construction Company
and Marion L Robinson
inspector with McClenaon
Enginering Company were
indicted by a Federal grand lury
on August 24 1987 for
Submitting false statements in
connection with an EPA’funded
sewer rehabilitation prolect The
grant provided $1 184 000 for
testing, repairing. ana replacing
the sewer lines of the town of
Shubuta, Mississippi
The investigation determined
that claims were submitted for
over one hundred repairs that
were not performed Connelly
was charged with making false
statements that he repaired or
replaced numerous sewer lines
Robinson was charged with
making false statements that he
inspected various sewer lines
and found that they had been
repaired or replaced according
to specifications
Sunbelt Auto Imports Inc of
Houston Texas and its vice
president Floyd Redale Carney
of Eustis Florida, were indicted
on February 27 1987 for taking
part in a gray market scheme of
importing cars that did not meet
Federal emission and safety
standards
A loint investigation by the
EPA Office of Inspector General
and the Department of
Transportation (DOT) revealed
that Carney allegedly falsely
certified to EPA and DOT that
certain modifications were
performed on gray market
vehicles to meet Federal
emission and safety standards
The certification process
requires the car importers to
send photographs of the
modifications performed on the
vehicles to EPA and DOT The
indictment charges that Carney
and Sunbeàt established a file of
dup scate photos of property
modified items on the imported
cars Between December 1982
and February 1984. the
defendants allegedly submitted
false photographs to receive
compliance certifications on the
vehicles
Construction
Company
Managers Indicted
for Fraud on Sewer
Project
William B Kruse Project
Manager/Superintendent
William F Jordan Project
Foreman and Charles B Bryon
Project Foreman all of Gates
and Fox Ltd construction
company were indicted on
June 27 1986 The indictments
were for false claims false
statements and mail fraud ri
Connection with a $1 4 million
EPA-funded contract with Gates
and Fox, Ltd for 19000 feet of
sewer pipeline in the City of
Corning. California
The contract specifications
required that the pipeline be
surrounded with rock over the
entire length of the prolect This
rock “envelope” was needed to
provide support to the sewer
conduit and to prevent cracking
and collapse of the pipeline The
indictment charges that as part
of their scheme to defraud the
defendants ordered that pipeline
be covered with native soil
rather than with the layer of
rock called for in the contract
that the defendants allegedly
regularly employed ‘spotters’
at the job site who were
instructed to alert the pipeline
construction crew whenever the
contract inspector approached
the area where native soil was
fraudulently used, and that the
defendants ordered that a layer
of rock be placed over
designated sections of the
pipeline that might be sublect to
observation (hereby making it
appear as (the entire pipeline
had been properly back-filled
The false claim false statement
and mail fraud violations
allegedly occurred as the
defendants falsely stated and
claimed that the project was
completed according to
specifications and used the
mails to fraudulently obtain
oa ment The deficient
constructor’ which Could nave
caused tne failure of trie
pipeline was subsequently
corrected by tne corstructOi”
company at a cost of 5300 000
On August 26 1986 Bryori pied
guilty to making false
statements
Z L’ 131
Sewer Grout
Supplier Convicted False Photos
of Selling Inspector and Expose Gray
Underweight Bags Company President Market Dealer to
of Grout Indicted for Fraud Indictment
on Sewer Project
Tw.nty Rvs Plied Guilty In Emissions Testing
Conspiracy
A malor Orange. California laboratory which tested air
emissions for imported “gray market” cars and 24
individuals who were indicted ri an emissions testing
conspiracy in March 1987 pled guilty to those charges in
Los Angeles on September 4 1987
The laboratory cheated on its testing procedures and
falsified and fabricated test results to EPA on the gray
market cars including Ferraris Rolls Royces.
Mercedes-Benzes Porsches and BMWs
I Joseph 0 Krueger and Insufation Speciatty Company,
Inc. of Cuyahoga Heights. Ohio, were debarred for three
years on October 4, 1984 An OIG investigation
determined that dunng improvements to a wastewater
treatment plant, Krueger and his firm had substituted
aluminum pipe lacketing for the more expe s ve stainless
steel jacketing specified in the contract, and that they had
billed the Northeast Ohio Regional Sewer District at the
higher price Upon discovery of the substitution the
materials were replaced at contractor expense The project
was funded by EPA
-------
Conspiracy, False Statements, Mail Fraud
Consulting
Engineer Indicted
for Bilking Grantee
Out of $253,000 on
Sewer Rehabilitation
Work
Sarriar Chatterjee oresident of
lJr iiversai Engineering Services
Inc and AES Engineers Inc in
Willow Springs, Illinois was
indicted on August 31 1987 for
Conspiracy, mail fraud aria
making false statements n
connection with consulting work
he did on the EPA-funded South
Stickney, Illinois Sewer District
sewer rehabilitation study
Chatter(ee was arrested when
indicted and held on a $1 4
million cash bond Prosecutors
said he was a flight risk
because of his extensive
financial interests in his native
India
The indictment charged
Chatterlee with suDmittirig false
testing data concerning sanitary
sewer connections flow
gauging, manhole Inspections
and sewer survey reports to
EPA and the Metropolitan
Sewer District of Greater
Chicago In addition Chatter ee
received EPA grant funds of
over $200 000 for work that he
allegedly did not perform
Chatterlee S indictment
resulted from a 3-year
investigation into allegations of
financial fraud ri the South
Stickney Sewer District The
investigation was conducted
jointly by the EPA Office of
Inspector General EPA Office
of Enforcement and Compliance
Monitoring, and the FBI
David Wirt his wife Judith
and their son Gordon ownerS
and executive officers of Mu-
nicipal and Industrial Pipe Ser-
vices (MIPS) pled guilty on
January 13. 1984, to de-
frauding the government on
sewer protects David was
sentenced to 8 years in prison
Gordon and Judith were given
prison terms of 33 months and
6 months respectively Each
was fined S10.000 The 47
count indictment charged the
Wins with a 10 year $8 mil-
lion scheme to defraud the
Federal government on sewer
maintenance prolects by failing
to perform tests and repairs
that they were paid to perform
white they distorted test re-
sults and fabncated progress
reports The scheme involved
several states and three for-
eign countnes
The MIPS investigation be-
gan in October 1981. after two
former MIPS employees re-
ported to city officials in
Marietta. Georgia, that David
Wirt was defrauding the
Federal government on an
EPA sewer rehabilitation
prolect by deliberately pinching
test hoses and failing to use
grout in sealing sewer lines At
the time they were hired, Wirt
had told the employees that
the sewer rehabilitation busi-
ness “was lust a scam
anyway -.
When evidence showed that
about half of the Company s
contracts were with U S mili-
tarv installations, including
several foreign bases the In-
spector General’s office re-
quested assistance from the
Defense Criminal Investigative
Service of the Department of
Defense
Rehabilitating a sewer pipe
involves Cleaning by high-
pressure water let followed
by television inspection with
remote cameras drawn
through the pipe from one
manhole to the next by cable
Each Ioint is air-tested for
leaks and leaking oints are
sealed with two liquid com-
pounds that, when combined.
gel into a grout substance
Televising, testing, and sealing
are accomplished from inside
a van parked near one of the
manholes City inspectors
monitor these procedures
while sitting beside the TV
operator in the van
Wirt claimed to have sealed
defective sewer pipe lOintS
with grout when none was ap-
plied by installing hidden
switches in company’s televi-
sion inspection trucks to re-
route grout back into the truck
tank while the meter registerd
it as going to seal sewer pipe
loints
Wirt manioulated hIS con-
tacts whenever possible ?o
provide for payment accoro
to the number of pipe or s
found to be defective HS -
main effort thereafter was
thwart inspection efforts—c
keeping inspectors off the-
trucks and ‘blitzing” (00 s.
with more TV trucks ano
crews than there were .n-
spectors to monitor nem
spread Out hiS trucks and
crews as far as possible 0v
the prolect keeping inspect
in travel stat .. ‘etween un
faking equipment areaKaow
when inspectors approacrie
unit, and devising strategies
make the inspectors extren-
uncomfortable in the TV
trucks
When these and other lac
tics failed, repair crews and
Wirt himself at times resor
tO intimidation of the in-
spectors, Sometimes
threatening violence pnvsc
inlury or lawsuits
To corroborate the testi-
mony of former employees
Sewer pipes were dug p a
Air Force bases n Mississ
and Texas and at an EPA-
funded propect in Moultrie
Georgia Analysis of pipe so
pies at EPA’s National Enfo
ment Investigations Center
Denver showed that in plac
where grout was said to na
been applied, there was
actually little or rio grout at
False Claims
• Environmental Technology of Amenca, Inc of
Wilbrartam Massachusetts and itS president Norman F
Smith were debarred for 3 years on February 23 1987
following Mr Srritri S convict’on ‘or rnal fraud ri Orlando
Florida arid on plea of ccnPendere to a charge of
forgery n Hartford Con”ect J1 Mr Sr’iiw ‘ad crarged
the State ‘ Dl Pl r da br cr c , ” C3 1 tests SuOpCSOdly
Perfor—.ed iOr “'ri’ by or eri ,.rc”mertaI test.rg labcratory
•r Cricooee Massacr’,jsetrs “3 ! ,vere CQt 3C. OlJy
per 1 orr ’—ed
The former city engineer of Moultne. Georgia was
encedon September 15. 1983, to 3 yeeis in i4, a
$10,000 fine and 2 years probation after pfe nQ
of conspinng to appi-ove payments of $90000
false claims for an EPA funded project The city
neer approved payments for t iu’ç u repfaclng
hole covers and pavement cleaning, inspecting testing
and groutirig of sewer pipe lOints without the work
being performed In return the engineer received a
motorcycle from the contractor
-I c )
-------
IINGTON POST
MOMMY, Apaii. 11,1988 C15
NIH Runs Research on Blind Faith
T he National Institutes of Health gives away
more than $5 billion a year for research. But
whether that money is well spent is anybody’s
guess. For the most part, NIH blindly trusts that
the money went for credible research.
Rarely does NIH challenge the integrity of
prestigious universities or their esteemed
scientists. The trust runs so deep that only one
person on the NIH staff is assigned full time to
investigate allegations of fraud.
Walter Stewart and Ned Feder, two NIH
scientists, are scheduled to testify April 12 before a
House Energy and Commerce subcommittee
chaired by Rep. John D. Dingell (D-Mich.). They
plan to tell the subcommittee that research is too
often neither checked nor challenged. Feder and
Stewart have long urged scientists to take a more
active role in ensuring the quality of research.
“The peer review system does not pick up
fabricated work,” Stewart told our associate Jim
Lynch. “You can get away with murder for a pretty
long time.”
Examples of questionable research likely to be
studied by the oversight and investigations
subcommittee include these cases, which have been
detailed in medical journals:
• A blue-ribbon committee at Harvard in 1982
defended the research of scientist John Darcee,
who had published his findings on heart medicines
while at the university’s medical schooL Almost all
of Darcee’s writings, including more than 100
articles, were later found by NIH to be fabricated.
Some of the information was ridiculous on its face,
like the 52-member family Darcee invented for his
a a — . .
research. One of the men in that family was said by
Darcee to have fathered his first child at the age of
8 and his second at age 9.
• University of Wisconsin biochemist Hector
DeLuca allegedly pirated the work of a colleague to
conceal defects in his patent for producing a
vitamin D derivative. The patent is now more than
15 years old. Before the allegations against DeLuca
recently came to light in a lawsuit over the patent,
he had been mentioned as a nominee for the Nobel
Prize. DeLuca contests the charges, and the
university is investigating the matter.
From 1982 to 1987, NIH found evidence of
misconduct in about 15 of 100 reported allegations
of fraud. Investigators for the oversight and
investigations subcommittee have determined that
the number of abuses reported is reduced by an
NIH system that tends to protect the offending
scientist and put the whistleblower on the
defensive.
If an allegation of fraud warrants investigation,
NIH tells the university where the research is
being conducted. The university then investigates,
a process that sometimes covers up rather than
exposes fraud. If NIH still smells a rat, it appoints
an investigative panel. But that panel is staffed by
scientists who are hesitant to lower the ax on their
peers.
Even if a scientist is implicated in fraud, the
evidence can disappear, making it hard to prove
that the scientist deliberately doctored the
research. In 1979, one drug researcher under
investigation swore that all his data was lost when
his rowboat flipped.
1 JACK ANDERSON and DALE VAN AT
-------
Con &-aG+
Ld Pi-o qrairn
Description Of
S&cted
Proscutlv•
Açons-
le a b*1 4 &n of
,- &t.
sIig t*
repore ç — Soni. 01 these
ac i.a i simed ft’or,,
£nve3* ;JflS e,.dated be e
Ccmberl, 199Q
Conn.cdci C np.’iy
8ackd. d R.suI
Used Un.pproved Lab
A Corvi 4 onn .tiy. Y
Inc .. — hi
false b EPA aid
was Ihied $ 1,O OL EPAs
Y —
them _i i _
____ d reaid
sd ikT Ø.s * I0
‘iWC’a Vodi Lab lea
DM*n fery hi
Conrieciia*. was w app,ovsd
Cl.P site. ‘VWC was thagsd
.w th badcda ng ow 80
analyses end Ushig I V isil .
unapprowed le sy si
W1 ippa ny, New Jersey. to do
ein iss.
Superfund Contract
Laboratory Program
lnv.stlgatlon
The O of Inves gaIlons has
g ,s joi’ kws aVv !n a ’
erwsy thii the Superftind
program, (fr ed at fraud Ii the
Canracs Laboratory Program
( P) Laborn,ry aia ltes
V i . CtP -, ti err *lc
bs$ Vie en u Superfund
progrmnt Based on tasVng for
tie presenca of hazardous
themicals by these taboratofles,
Vie Supertund program decides
wtiith cleanups to initiate and
to carry them out
Fraudulent analyses ccu result
In a danger to the public health
and safety as weli as the
unriecassary expendit.ire of
cleanup ?unds Ii addition,
fraudulent analyses uid hinder
the Deparainent of Jusoon’s
e4Tor to or ecs the st of
cleanups from the responsible
The folowwn lIve a ons
resulted from the r acs lab
M1UOWI Lab Charged
with False Test Data
Me ene . Inc., Earth City.
Ilseourt aid of former
4l s . Cs By*ngton,
Exeo . VIce Prasadent. and
Kennili 8au inwi, Vic*
Prealdmr*. ._, pl gtjifly b
SUbITWISiQ ?5I Iements to
EPA aider tie CLP. It Li
a ged fiat tie _____
aniyed b’ certet’, EPA
aaviito.s war itot performed wi
cornp &* lie protc
required t.sider the EPA rltact
Specdnicaly, Libora!crv oersonne
Ilegedly manipulated resut s for
‘ilon aid diecii standards
I a flat lily showed that a
group of si or’rnontai sample
resulte were fuliy mp1lant wrth
prox4 or tena when, wi lacs,
they were not.
Testing Equipment
Allegedly Not
Calibrated
Jayer* Slirvç.arpure, fbnner
— (GC
laboratory a EAI. Corporation
(now Iciow as TMhjp4orcaj),
R mon Catfom wls
ldc d on Marth 29,1991.
Slnrhigarpure Li alleged to have
dre d employees at EAL to
.eflorrn CC/MS analyses of
samples wiUloul Ilrst tuning and
calibrateig the GC/MS
equipment as reguued by the
EAt. ounracs with EPA.
Shrh-igwpure is alleged to have
also throcted CCMS Operators
to make onpies of previously
generated tuning data, so this
data could be used as pal l of
the dooumentation subnutted to
EPA for other CC/MS analyses.
EPA oM ais estimate the toss to
the Government at $200,000.
California Lab
Backdated Analyses
hi araieie , case mvoM ig fraud
and abuse within EPA ’s Contiad
Laboratory Program, sax former
employees of t ’ie Eiiv onmental
cr amhay Laboratory of lie
Sden —
tem Th Co orilon (SAJC).
L a JoM. C Mm. have pled
guly to dnw es of makIng false
sra nte to EPA, sidIng and
abe i g lie rnakhç of false
sta anw to EPA, and eidutg
and £ ig the coiwsion of
Go wvn.arit money. SAC
nta d wln EPA to perform
on samples taken from
Supertund tox.c waste sites in
cider to (1) determine Vie
amount and identity of ts toxic
then ls. (2) establsli prbries
among vIes so that Vie moat
dangerous sites are deaned up
lIrsi. and (3) help wi erafvuig
lie paroes responsible so that
r rr wsement for Via cleanup
co can be obWIed.
hi Vi. MT SAC
a EPA EPA rs*od that
. be
W I WI deys, hi
— Vtat
*- - --, p.
weri assessed or lateness. In
addiltan the con a required
that sanipl, ai.a?ysis equtpn’isnt
be tuned aid rsted every
twelve hoits to liaise sacy
The oU,t Iwes abon by Vi.
EPA O aid Ins F
imoowed flat bed ng of
sample ted resulte oooured Vi
order to avoid the penalty. ftjso,
the manipuislon of tie sarTipie I
analysis ecp n WI
was pedurmed to fraudulerily
ryecl the racy of analysis
equipment.
Duo Allegedly
Provided Dirty Test
Containers
AMa C. Rudd, MaMn W. Rudd.
arid -CHEN Research, Inc. of
Hayward, California, were
vidicled November 30, 1990. by
a Federal irand $sy on charges
of conspwwng to mak. falas
dainis to EPA. Mvvhi Rude is
also charged ‘anti one couri of
using false doajmente.
From June 1983 uni
December 1987. 1-CHEM was
EPA’s sole cuppI
co sai ies —
contariera used to Iv s
samples b amnalysle and
evakiatlon by ti. Ccn aof
Laboratory Progrw The
Iidl r ierf d’segss fiat I .CHEM
and lie Rudes cona iIed to
make false ris to EPA
providIng cor ia*frse
— co under
ctnflcs. It Li slsgsd fiat I-
CHEM shipped sample
onntahiers to aaitioflzed EPA
requesters wIliøut acaialy
PedOITTIiQ Vi. reguVed quabty
onrn ol les*ig on the containers,
noM Vistandmg corlllcetlors by
l-Cl-i M to Vial effed.
-------
Civil And
Administrétive
Actions To
Recover EPA
Funds
inveStigatiOr S acid audits of the
Of f.ce of Inspector General
provide t ie basis f r civil and
adminrstrati ve actiOnS to recover
funds fraudtjlefl ny obtained from
EPA Through the Inspector
General Qivision of the Of (ice of
General Counsel the OIG uses
variety of tools to obtain
restitution These include
cooperative efforts with the
Department of Justice in filing
civil suits under the False
Claims Act the Program Fraud
Civil Remedies Act, and other
authorities, working with
ran tees using their own Civil
litigation authorities, invoking
the restitution provisions of the
Victim and Wtness Protection
Act during ci,minel sentencing.
using the Agency s authority to
administratively offset future
payments and to collect debts.
arid rteqcriat:ng voluntary
settlements providing for
OSti(u!iOn in the context of
jspension arid debarment
3cnior is
Civil arid administrative
crions to recover funds usually
“. t nd over several semiannual
corring periods Progress ig
eing made on several Such
‘ rters
Roy F iNeSICrI Inc f cr’v te
2ennsy vara ri ‘escorse ‘0 a
civil action led by tr’e
Department of JusIce under
it’e Faise Claims Act rias paid
e Government 5750 000 The
payment is part of a consent
ludgment arising from cnargeS
that the company submitted
false claims for payment
As part of SuperfLuId, EPA
has established a contract
laboratory program ri which
EPA contracts for analytical
services on material from
Superfund sites Weston
obtained Such a contract ct June
1987 to perform certain
laboratory work through one of
itS divisions. Weston Analytics,
at its laboratory c t Lioriville
(‘he contract requited Weston to
perform tests on Soil and water
samples One test, volatile
organic analysis, had to be
performed on each sample
within ten days of receipt to
ensure accurate results
According to the complaint. over
the course of a year Weston
Analytics failed to complete
certain volatile organic analyses
on time, concealed this failure
by backdating its testing
instrument and then
fraudulently billed EPA for these
tests As a result, some of t e
results submitted to EPA were
unreliable, and EPA s esponses
to environmental hazards cpuld
havO been affected
In addition to the payment of
5750000. Weston agreed to
withdraw i.ioluntarily (torn
certain kinds of laboratory work
at the Lionvtfle facility I or a
period from 4 months to a year
subject to EPA’s satislactiori
with t Ile compliance program
Weston instituted iri response
to trio Federal investigation
The case is part of a rational
nutialive by the Office of
Inspector General into
allc aticn3 of lrauij. asie. and
abuse by EPA’s laboratory
con::actOrs under the Su erturid
prOgram The matter was
r erced to the lG by EPA’S
Superfurid program o (”ce
Or Marcri 28 1990 E°A
entered into arc agreement with
the Caoe May County Municipal
Utities Authority and the State
of New Jersey to split up
5250 000 in restitution paid as a
result of a bribery conviction
involving the construction of lice
Ocean City. New Jersey
wastewater treatment plant
Under the agreement. EPA will
receive 5171 077, the Authority
will receive S60674 and the
State 51 8248 Carl E Widell
paid the restitution in
connection with pleading guilty
to bribing local officials to obtain
construction contracts and
change orders EPA paid 75
percent of the costs of the
Drolect
3 -l
Contract Lab Operator EPA Recovers Over
Agrees to Pay $170,000 from New
$750,000 Jersey Bribe
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Superfund
Contract
Laboratory
Program
Investigation
Yielding
Formidable
Results
The Office of Investigations
has a major Investigative
initiative underway within the
Superfund program, directed at
fraud in the Contract
Laboratory Program (CLP).
Laboratory analyses under the
CLP are the empirical basis for
the entire Supertund program.
Based on testing for the
presence of hazatdou$
chemicals by these
laboratories, the Superfurid
program decides which
cleanup to Initiate and how tO
carry them out. Fraudulent
analyses could result In a
danger to the public health and
safety as well as th
unnecessary expenditure of
cleanup funds. in addition.
fraudulent analyses could
hinder the Depatti’rieflt of
Justlc’S efforts to collect the
cost of cleanups from the
responsible patties.
Our Initiatives In the CLP.
which are very complex and
ume.consuming. to date have
resulted In a cwil settiement of
$150000. which was reported
ri the last semiannual period
ending Match 31, 1990.
During this period one
indlctrllaflt. reported below.
was returned against a
laboratory supervisor lot
providing fraudulent labaratoly
test results to EPA.
Contract Lab
Supervisor
Indicted
Dr. Vinh Iran, a former group
leader of the Gas
ChromatO graPhIMaU
Spectrometer Unit at Weston
Analytics. UonviUe,
Pennsylvania. was charged on
July 30, 1990 with two counts ot
making false statements to EPA.
Weston Analytics Is a dMsioi’ or
Roy F. Weston, Inc.
Dr. Tran had allegedly
engaged In backdating laboratory
analysis results of certain water
and sd samples obt in.d from
various Superfund sites by EPA
and submitted 1* Weston for
analysis. It Is further alleged that
Or. Tran acted to conceal the
fraud by a process known as
‘time trave(’ which Involved
setting back the computer dock
attached to the Gas
ChromatOgraP lVM aU
Spectrometer Instruments to a
dale and lIm earlier than the
actual date arid time In order to
meet sample testing
aqulzamenta set by EPA.
As reported previously. Roy F.
Weston. Iric, of tionville,
Pennsylvania. paid the
Government $750,000 as part of
a consent judgment In response
to a cvll action (lied by the
Department of Justice under the
False Claims Ad.
DØscription Of
SØlected
Proaecutive And
Administrative
Actions
Concerning EPA
Employees
The 013 investIgates and reporta
information, allegations, and
indications of possible
wrongdoing at misconduct by
EPA employees and persona or
firms acting In an oMols? capecMy
d!,ecttf with EPA or through its
grunroel. in addftion, the
Senate Report of th
Supplemental Appropriations and
Rescission Act oil 080 states
that apprOpri ti adminls iOW
action Is expected to be taken in
cases where employees have
acted knpfopsvty.
Employee Makes
Restituti 0 In
Travel Fraud and
FTS Telephone
Misuse Case
An EPA employs. at
Headquarters In Wuhingto
D.C. entered Into a Prutijat
Diversion Agreement on M i
31,1990 wIth the U.S.
Attorneys Omne, Otstilct 01
Columbia. Thu agr. .mei*
was reached after the
employee admitted friuduls
obtaining $1,450 in trsv
advances, accepting $408 I
collect telephon. cells on li
of? telephone. end
frauduleney obtaining $165
claims for reimbursement
applied for in the nems 01
other employees. As past c
the smploy .s’$ otter to mU
Ml rs*titulicfl in Sts amount
$2,021 and to perfo1sn 40
hours ol community wVIcS
pros. stion was 4stened to
1j2 months alter which the
recordwauld be expunged,
the employs. meets eI the
condItions ci th egreemera
The employee has sflady
begun making reedtstion. E
has begun s on to remove
the employee.
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Attachment
Page 1 of 4
SUCCESS TECHNIQUES FOR LOCATING PROBABLE TROUBLE SPOTS
IN EMERGENCY RESPONSE CLEANUP SERVICES CONTRACTS (ERCS )
by Deirdre M. Tanaka
Divis-ional Inspector General for Investigations
Northern Division
âUI
Auditors and/or project managers must be alert to potential fraud and
abuse in every facet of cost reimbursement items, or with fixed prices, the
quantity controlled items.
In pre—ERCS, contracts were all cost reimbursement type. In post-ERCS,
most contracts are fixed price with some cost reimbursement types. Know
what kind of contract you are reviewing. With a cost reimbursement con-
tract everything is subject to fraud, however, with a fixed price contract
on.ly the part of the multiplier that is not standard is subject to fraud and
should be reviewed.
WHAT TO DO
Look at entry/exit logs, both personnel and equipment. Check to see if
different names are in the same handwriting or if the original signed logs
are not in time sequence, or lost.’
Look at 19OO—55 . Check to see who is signing them on behalf of the
Government and the company. Is there a change in the way the company billed
for certain items, i.e., from a total monthly cost to an hourly or per diem
cost rate.
Look at invoices. Check to see the categories or items where the
company is making large amounts of money. Is the company billing for items
in categories inconsistent with coninon sense. For instance, most emergency
cleanup is accomplished with rented equipment is this listed as subcontract
equipment; is the lessor and location identified.
Look at manifests. Check the quantities billed, dates, drivers, and
truck numbers. Are there inconsistencies in handwriting, or between the
names on the entryfexit logs.
Compare daily pollution reports to the 1900-55s. Could the contractor
have done what he said he did.
Compare the number of laborer and technician hours to the equipment
hours billed during a certain period. Could the contractor have used this
equipment.
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Attachment
Page 2 of 4
SUCCESS TECHNIQUES FOR LOCATING PROBABLE TROUBLE SPOTS
IN EMERGENCY RESPONSE CLEANUP SERVICES CONTRACTS (ERCSI
Find out what kind of internal documents are maintained by the prime.
Find out through the company’s insurance file what equipment is listed
and what the initial equipment cost is.
Find out through corporate minutes or Dun and Bradstreet reports the
names of companies the contractor has an interest in.
Look at entertainment or marketing expenses for EPA and TAT team members
names.
Look to see who the company is keeping you away from. What was their
position and what could they. tell you if they were allowed to talk. In the
EMC case the company told the auditors and investigators that the truck
drivers had all moved away.
Find out the names of individuals who were responsible for submitting
data for 1900—55s; or negotiating leases or provided laborers. Normally
kickback arrangements or inflated cost arrangements are made by someone of
at least managerial rank although the arrangement may be implemented by
someone of much lower rank.
Do not make assumptions; let the contractor explain.
Always look at original records, if checks are provided, always check
the reverse to determine if the named payee is the actual payee or if there
has been a second endorsement.
Always check the general ledger to determine how much business the prime
contractor was doing with the subcontractors prior to and subsequent to the
cleanup. If there were any payments from the subcontractor to the prime
contractor during the term of the contract or following EPA payment to the
prime contractor this should alert you to potential kickbacks.
When you ask to see invoices, try to get the entire invoice file for
that subcontractor so that you can determine if the invoices submitted are
on the same form, in similar type and format to that previouSly submitted.
Also check the invoice numbers to see that they are sequential for both
private and cleanup business.
Some material is available free of charge or at a minimal cost, for
example, flyash from power plants can be used as part of an earth cap at
a cleanup site. The only cost should be transportation.
1:zIJI 3
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Attachment
Page 3 of 4
SUCCESS TECHNIQUES FOR LOCATING PROBABLE TROUBLE SPOTS
TNTMERGENCY RESPON E CLEANUP SERVICES CONTRACTS (ERCS )
Some hazardous wastes are worth money to the disposers, for example,
hypochiorinated wastes can be used to treat cyanide wastes, if the disposer
treats private companies cyanide wastes he is willing to do what sThecessary
to get our wastes.
Some wastes can be converted to a non-hazardous waste on site through
controlled chemical reactions. For example, isocyanates can be turned into
a solid foam, and acids can be disposed into the sanitary sewer with the
permission of the sewer district.
Proforma invoices are usually available on demand. Sometimes they are
marked as a proforma or as a price quotation. Check a subs entire invoice
file (both EPA, and non-EPA). to determine if there are differences between
the subs actual paid invoices and the ones being presented to EPA to support
Superfund charges.
If there are two or three prime contractors on the same site, determine
if they are subbing to each other. Remember, their services are worth
5-15 percent more because of the handling charge if they arrange to work
indirectly for each other rather than directly for the ERCS contractor or
the Government.
Look to see if your subs have subs which more logically should have
been direct subs. At each tier someone else adds a charge.
Be careful handling original documents such as checks, invoices, or
1900—55s, Investigators might have to subject the documents to forensic
examinations, i.e., fingerprint or handwriting, to tie the documents to a
particular employee.
It is very important that the auditor document where, when, and from
whom he gets information. Sometimes incriminating documents will be
subsequently destroyed and unless we can authenticate the documents, the
copies will be inadmissable. The auditor should initial, sign, and date
the documents.
Vi i’
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Attachment
Page 4 of 4
SUCCESS TECHNIQUES FOR LOCATING PROBABLE TROUBLE SPOTS
IN EMERGENCY RESPONSE CLEANUP SERVICES CONTRACTS (ERCS )
Whenever you have a situation which you feel is suspicious, it is
important to informally contact the DIGI as soon as possible. Following is
cr me information which will probably be asked:
1. Who is the contractor, and what is his location.
2. Where was the cleanup.
3. What was the type and amount of the contract.
4. When was the cleanup started, when did it end and when was the
final invoice submitted.
5. Who was the contractor’s on—site representative, who was the
contractor person responsible for submitting invoices and
arranging for products or disposal.
6. What item(s) do you think presents a problem; how much did the
item(s) cost.
7. If a subcontractor is involved, provide as many details about
the name, location, and responsible official, as you have.
yJJi-’
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1 11111 ;i I ‘i I I
I1Ih ,i1 I
111111 ; jji I
In this issue
The Importance of Budget Exe cution
The AICPA Sing’e Audit Guide
Property Tax Revenue Recognition
Auditor’s Role in Detecting Fraud
Treasury’s Report on Operations
—and more!
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THE OOVW M (T A OVWTAKT$ JOURNAL
The Auditor’s Role in
Detecting Fraud During Audits
Michael J. Blndar
IJDITORS OFTEN FEEL NERVOUS and con.
used about their role in detecting fraud dur-
tag audits, and it is easy to see why. The Sccu-
rnies and Exchange Act of 1933 put the burden
of proof on the auditors, who were assumed to
be either culpable or negligent in failing to detect
a fraud. Even though the Securities Act of 1934
legally removed that burden of proof from the
auditor, the courts have constaruiy been filled
with actions against auditors, both with and with-
out merit. Cases such as McKesson and Robbins
in 1938. among the first major lawsuits against a
CPA, in which the firm of Price Waterhouse and
Co. settled out of court for S522.402; and United
States vs. Benjamin, in which criminal habdity
was assessed to the auditors, have caused many
people to think that if something goes wrong,
then ii must be the responsibility of the auditors
because they were making the audit. The profes-
sion has maintained for years that it cannot be
held responsible for the detection of management
fraud. The professional standards are written to
protect the auditor from that responsibility.
However, the auditor’s role in detecting fraud
is vague at best, because it is based upon a sub-
jective interpretation of the professional stan
dards. But auditors working as part of Office of
Inspector General organizations have begun to
exercise a broader application of the professional
standards to greatly increase their probability of
detecting fraud. This is not to say that auditon
of Inspector General orpnl2tt ons have a greater
responsibility to detect fraud, but just a more
comprehensive approach in applying abstract
standards.
So let’s look at how the professional standards
define the auditors’ role in detecting fraud and
how the 010 auditors are applying those stan-
dards. The fourth General Standard for Govern-
mental Auditing best illustrates this role. The
standard is as follows:
‘Due professional care is to be used in con-
ducting the audit and in preparing related
reports.”
The American Institute of Certified Public
Accountants (AICPA) stases that:
“Exercise of due care requires critical review
a: every level of supervision of the work dune
and the judgment exercised by those assisting
in the examination.”
The AJCPA further states:
“The matter of due care concerns what the
independent audito does and how well he
does it.”
According to the General Accounting Office’s
yellowbook ‘Standards for Audit of Govern-
mental Org ni7 tions, Programs, Activities and
Functions,” the “due care” standard does not
imply unlimited responsibility for disclosure of
liTegulanlJes or noncompliance. According to
GAO, neither does it imply infallibility on the
part of either the audit organization or the indi-
vidual auditor. Rather, the standard imposes upon
the auditor a requirement to be alert for situations
or transactions that could be indicative of fraud,
improper or illegal expenditures or operations,
inefficiency, waste, or ineffectiveness. The stan-
dard does not require, according to GAO,
• . That the auditor give absolute assur-
ance that no material improprsely exists; nor
does it require that a detailed audit of all
n-ansac:io’u normally be undertaken.”
Audits are not primarily or specifically designed,
and cannot be relied upon, to disclose errors or
irregularities even though their detection during
an audit may, in fact, occur. In performing any
audit, the auditor is required to comply with gen-
erally accepted auditing standards, or in the case
of the Federal, state, or public auditors perform-
ing audits for Federal agencies, to comply with
GAO standards (which arc based on generally
accepted auditing standards). The responsibility
of the auditor for failure to detect fraud arises
only when such failure clcariy results from failure
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to comply with generally accepted auditing stan-
dards. This fact is affirmed by the professional
standard for auditors regarding the detection of
errors or irregularities, promulgated by the
Amencan Institute of Certified Public Accoun-
tants (AICPA). The AICPA uses the term irreg-
ularsties to refer to intentional distortions of
financial statements, such as deliberate misrep-
rescntauons by management, sometimes referred
to as management fraud or misappropriation of
assets, sometimes referred to as defalcanons.
The AICPA ’s standard states that:
The subsequent discoverj that errors or
irregularities existed during the period cov-
ered by the independent auditor’s examina-
tion does not, in itself, indicate inadequate
performance on us part. The auditor is no:
an insurer or guarantor; if his examination
was made in accordance with generally
accepted auditing standards, he has fulfilled
his professional responssbthty.”
This is not to say that the role of auditors is such
that they have no responsibilities whatsoever for
detecting and preventing fraudulent acts, but that
their responsibilities ate Limited to the adherence
of minimum standards and due professional care,
both of which are often vague or abstract. With
the passage of the Inspecu)r General Act of 1978
and Congress’ concern with fraud detection and
prevention in Federal programs, the role of audi-
tors in the Office of Inspector General of the
Environmental Protection Agency, for example,
has taken on new dimensions as it has for most
auditors in Federal Offices of Inspector General.
Highly vulnerable Federally assisted projects are
now being identified by EPA’s 010 and audits
are being performed which concentrate on fraud-
prone areas or areas which are susceptible to
being abused. OIG auditors are now better trained
to detect fraud and have considerably more
knowledge of a project’s vulnerability to fraud or
abuse. Thus, prior to commencing a given audit,
OIG auditors are alert to the fact that fraud and
program abuse may indeed be disclosed during
the audit. The use of computers such as in match-
ing projects and cooperative effects with criminal
investigators force are being used regularly by
010 auditors to do re to assist them to detect
fraud.
However, this has not always been the case.
It is important to keep in mind that the current
emphasis on detecting fraud in Federally funded
programs and Federal auditors’ increased aware-
ness of fraud detection techniques nit f recent
ongin—corning about with the Inspector General
legislation, and Congressional hearings on fraud
in HHS programs and the earli rl SA contractor
scandals. However, even today, while there is a
growing “awareness” on the pars of all Federal
auditors regarding fraud detection, the auditor is
not responsible for detecting all fraudulent acts,
but, as always has been the case, is merely
responsible for exercising “due professional care”
in the conduct of the audit and preparation of the
audit report. If an objective of audits was the
detection of all fraud, then the cost of conducting
audits would be prohibitive, and even then, one
would not be assured of detecting all types of
fraud, especially such matters as unrecorded
transactions and collusive acts. But through the
help of more aggressive training in fraud detec-
tion, expanded applications of computers and a
close collaborative relationship with criminal
investigators made possible by the Inspector
General Act of 1978,010 auditors are committed
to significantly increasing their level of “due
professional care.” While this commitment does
not change the auditor’s responsibility for detect-
ing fraud, it significantly improves the odds.
By introducing the use of new techniques, the
OlOs could have a profound effect in establishing
venter applications of “due professional care.”
Thus the OIGs may be responsible for expanding
the auditor’s role in detecting fraud throughout
the profession.
Ml 4”. J. BInder Is an auditor with EPA’s Office of Inspector General La W chI , gton,
A member of AGA’s PrInce George’s Chapter, be holds BBA and MBA degrees from
The George WashIngton UniversIty.
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