On Guard Against Procurement Fraud By Michael Smigocki The Justice Department’s Criminal Division has announced formation of a National Procurement Fraud Task Force. Its goal is to promote the early detection, prevention and prosecution of procurement fraud. While the detection and prosecution of procurement fraud has always been a goal of the government and its agencies, the coordinated approach that Justice is taking, by involving the offices of inspectors general in most agencies, the FBI, as well all the defense-related investigative agencies, should make for a more focused and effective effort. This article is meant to provide the reader with some insights as to what might be looked at within your company as well as some suggestions for reducing procurement fraud risk. Generally, these types of task forces are formed whenever news hits of large procurement frauds occurring in the marketplace. During the late ‘80s and early ‘90s, Operation Ill Wind prompted an investigation of the procurement practices of many companies. With the high profile instances of procurement fraud in the Iraq reconstruction, the Katrina effort, as well as the Boeing scandal, the administration has been forced to address these matters and restore public confidence in the procurement system. With the objective of criminal enforcement, the task force will be focusing on the following areas: •Defective pricing; •Other contractual pricing irregularities; •Product substitution; •Misuse of classified procurement sensitive information; •False claims; •Grant fraud; •Labor mischarging; •Accounting fraud; •Fraud involving military sales; •Ethics and conflicts of interest violations; •Public corruption associated with procurement fraud. These are the typical areas that the government has always focused on in its investigations of procurement fraud. However, with the objective of criminal enforcement, contractors should take notice of the possible ramifications to their company’s actions as well as their inactions. So what can a contractor do to prepare for possible investigations such as those described above? 1. Implement a strong system of internal controls. Management cannot be everywhere at all times. The best way to ensure that fraud is not occurring and that management’s objectives are being adhered to is to implement a strong system of internal controls. Publicly traded companies are finding this out as they implement the provisions of Sarbanes-Oxley within their organizations. Privately held companies should take a similar initiative in implementing these provisions. 2. Get an independent assessment of the effectiveness of your internal control structure. Most small to mid-sized companies have not encountered these types of audits and investigations before, so they are unaware of the proper controls to put into place to ensure that no problems arise. Those companies should consider hiring an independent firm to analyze the existing control structure and its effectiveness in eliminating the possibility of fraud. 3. Establish a Code of Ethics. A corporate code of ethics is the heart of any effective compliance program. It must convey your commitment to compliance and integrity as well as detail the disciplinary actions for any violations. 4. Conduct internal training of employees. Educational programs teaching employees of the various areas of procurement fraud and its prevention, as well as compliance awareness will help ensure that procurement fraud does not occur within the company. Even before the announcement of this task force, our firm has been seeing an increase in the number of investigations by DCAA, inspector general’s offices, as well as the US attorney’s offices. In each of the instances where we were retained to assist, the matters probably would have never arisen to the level of a criminal investigation if a proper compliance and prevention program such as that described above been in place. Doing business with the federal government is very different from business with commercial companies. Civil penalties and even criminal prosecution are some of the risks that contractors take by not taking procurement compliance seriously. (Michael Smigocki, CPA, CVA, ABV is the senior managing director of Federal Strategies Group, LLC. He provides government contract and management consulting, M&A advisory, litigation support and expert testimony. He can be reached at MikeS@FedStrat.com.)