Forensic Auditing for Potential Fraud ASMC 2014 PDI By: Mr. Randall Exley The Army Auditor General
Agency Locations Joint Base Lewis-McChord Worldwide Audit Capability 20 Field Offices + SWA Korea Huntsville Ft. Hood Ft. Huachuca Hawaii Ft. Bliss San Antonio Authorizations: 578 Total/517 On Hand Southwest Asia (8 auditors) 525 Auditors/473 On Hand Future ~ 547? Detroit Rock Island Ft. Carson St. Louis Ft. Knox Aberdeen Ft. Meade Ops Center-Ft. Belvoir Ft. Belvoir Ft. Bragg TRADOC Ft. Benning Kuwait Afghanistan Germany 2
Why We Do What We Do! Proudly Serving Soldiers Since 1946! We Proudly Serve Because......defending the security of the US & our Allies is central to protecting our way of life & our freedom....thousands of Soldiers have already sacrificed or are continuing to risk THEIR lives on battlefields like Iraq and Afghanistan and in dangerous training exercises to protect OUR lives and freedoms....army civilians including our own Agency auditors and contractors have also risked, and continue to risk, their lives by deploying to theaters of war to support our Warfighters....our efforts to make programs and policies more effective and efficient, and to fight fraud and save funds benefit the Soldiers, civilians, families, and Army leaders we serve....every dollar of waste and fraud we help Army avoid can be used to better train, equip, logistically support, and protect our Soldiers in combat, give them a technological edge on the battlefield, help keep them safe, and bring them home sooner....every efficiency we help Army achieve helps provide our Soldiers families with the high-quality housing, health care, and other support they deserve while our Soldiers are deployed....our efforts protect the Army s reputation and credibility enabling it to argue more effectively for needed resources....what we do for our Soldiers and our Army, we do for ourselves, our families, and our Nation. 3
Hot Topics Sexual Assault Phone line cold calls Case Management Installation Implementation of Fort Hood Recommendations Followed up on 18 installations were to implement One implemented, 16 in various stages of progress, and one no action Contractor Access to installations Uncleared contractors 21 installations; 82 auditors to be assigned Draft report August 4
FY 2015 Audit Planning Similar approach to Naval and Air Forces Audit Corporate risk assessment Program Director proposals Agency executive review and proposed plan prep Start road show and dialogue with 30+ top leaders culminating with Secretary, Under, CSA, VCSA Secretary approves and signs final plan Many audits will be done across business risk areas A major focus requirements audits Drawing down to 490,000; 450,000, or maybe even 420,000; are we drawing down everything else Procurement, supplies, construction, maintenance, housing, support personnel, etc. 5
Fraud There is no kind of dishonesty into which otherwise good people more easily and frequently fall than that of defrauding the government. Benjamin Franklin 6
Forensic Audit Division Established Forensic Audits Division in 2011 (about 20 people) Performs proactive fraud-focused risk assessments and audits Specializes in fraud detection & data mining Integrates data extraction/mining capability with fraud-audit capability Goal 1: More Audits Focused on Proactive Fraud Detection, Such As: Recruiter Assistance (referral bonus) Programs Army Emergency Relief Defense Travel System Basic Allowance for Housing Reserve and National Guard Drill Pay Civilian Pay and Overtime Goal 2: Other Related Initiatives Continuous systems auditing in high-risk areas (e.g., government purchase cards, etc.) Greater direct access to Army automated systems Generating fraud risk assessments using post case files from investigative agencies 7
Forensic Auditing Explained Forensic Auditing uses investigative techniques and an understanding of accounting principles to proactively seek out suspicious practices hidden in company or individual financial records Data mining sorts through large amounts of data using defined queries to pick out relevant inconsistencies/red flags from one or more databases We are marrying these two approaches to identify fraud risks and conduct audits to proactively identify potential fraud 8
Fraud-Focused Risk Assessments Completed or Ongoing Fraud Risk Assessments: Recruiter Assistance (referral bonus) Program (CID requested) Defense Travel System Civilian Overtime (Army command specific) Civilian Overtime Downrange Government Purchase Cards Basic Allowance for Housing Civilian Pay Contracting (Contractor Specific) Transportation Charges Standard Army Retail Supply System (CID Requested) 9
Designing Fraud-Focused Risk Assessments No single assessment looks like another Tests are built based on applicable laws and regulations and the types, availability and sources of data needed System queries may be focused on one database or involve data matching between multiple databases Some assessments are driven by data mining/matching and others require boots on the ground; many require both Data-mining/matching can only take you so far, further onsite and/or source documentation review is almost always required Red flag analyses often identify proportionately many more false positives than actual fraudulent transactions Execution of a full fraud risk assessment using data-mining can be very time consuming It s like panning for gold most often find nuggets among all the rocks and sand, but occasionally you hit the mother lode 10
Examples of Data-Mining/Matching Tests Ghost Employees (on the payroll but not in employment records) SSN tests (validity, death file, multiples for same individual) Multiple bank accounts Same bank accounts, different individuals Name and Address associations business and personal relationships Dependent status validity (e.g., Basic Allowance for Housingspecific, such as spouse, children, residential location) Positions of trust (system super-users, approving officials, Human Resources personnel, timekeepers) Threshold or Criteria (pay caps, spending authority limits, etc.) Ascending/descending transaction value reasonableness tests; out of expected or authorized control limits (excessive overtime, etc.) 11
Example Civilian Overtime - Downrange Analyzing FY12 overtime pay for deployed Army civilians Identified personnel receiving post differential pay per DFAS pay records (Some personnel missed because on TDY vs. deployment orders) 2,973 individuals worked over 168 hours in at least one pay period (PP) 12 hours a day 7 days a week including 88 hours of just OT OT for these 2,793 individuals totaled over $93 million for one year Increasing threshold to 100 hours OT per PP, identified 620 individuals incurring over $13.9 million OT for one year (average: $22,420 in OT per person) FY 2012; Highest OT amount $124,262 for 2,902 hrs 12
Examples of Frauds Identified 127 Service members were referred to CID concerning improper claims for Basic Allowance for Housing entitlements valued at $1.4 million Army Emergency Relief claims agents falsified claims at two locations to pay approximately $200,000 to themselves and family members 32 Defense Travel System super-users used extensive system access privileges to process approximately $2 million in false travel claims A Program Manager used undue influence through the source selection process to award contracts to contractors and potentially received kickbacks as a result About 1,300 recruiters and recruiter assistants falsely claimed and were paid bonuses for referring candidates for enlistment. To date, CID has recouped approximately $27 million in fraudulent referral bonus payments from fraudsters CID expects to recoup in total from $60 million to $100 million 13
Recruiting Contracts Objective & Conclusion Objective: To verify that Federal Acquisition Regulation (FAR) requirements for solicitation, award, and administration of three recruiting referral contracts were met Tentative Conclusion: FAR requirements for solicitation, award, and oversight of the three contracts were not met. The contracting and requiring offices didn t sufficiently: Perform acquisition planning Implement required contracting processes during the solicitation and award phases Manage and oversee the contracts 14
Audit Results The requiring and contacting offices didn t: Initiate a new contract; awarded a task order outside the scope of an existing marketing services contract to start the recruiting referral program Define the program s parameters until after the contracting officer awarded the first task order Determine whether functions performed on the contracts were inherently governmental Meet FAR requirements for full and open competition and Issued an unjustified sole-source award 15
Audit Results (cont d) The requiring and contacting offices didn t: Properly review and approve contract actions at appropriate levels Define task order requirements with sufficient detail to manage or track performance Didn t manage and oversee contractor performance and execution (contract provisions required the contractor to perform their own oversight) Develop or use a Quality Assurance Surveillance Plan (QASP) Perform oversight of contractor performance or verify invoice accuracy Know the contractor had removed recruiting assistants for program abuse and potential fraud 16
Root Causes and Effect The potential fraud risks and conditions indentified in this audit occurred because: Command leadership used undue influence to direct the contracting office to implement and continue the program The PARC, on behalf of the Head of Contracting Activity (HCA), didn t properly perform the responsibilities of the position The organizational structure of the command s contracting function wasn t optimal to promote proper oversight of the contracting function The contracting division experienced a significant increase in workload between FYs 2002 and FY 2011 without a corresponding increase in staff The lack of oversight resulted in a program laden with program abuse and fraudulent activity Millions in fraud and waste The command may have improperly paid $9.2 million in fees that weren t authorized 17
U.S. Army Audit Agency Top three last four consecutive years: 2 nd of Over 200 Each Year in FYs 2010 and 2011 1 st of 292 in FY 2012 3 rd of 300 in FY 2013 18