Forensic Auditing for Potential Fraud ASMC 2014 PDI Auditing for Potential Fraud ASMC 2014 PDI By: ... Providing Solutions for Army Challenges Forensic Auditing ... hidden in company

Providing Solutions for Army Challenges

Forensic Auditing for

Potential Fraud

ASMC 2014 PDI By:

Mr. Randall Exley

The Army Auditor General 29 May 2014


Agency Locations

Southwest Asia (8 auditors)

Ops Center-Ft. Belvoir

Authorizations:

578 Total/517 On Hand

525 Auditors/473 On Hand

Future ~ 547?

Ft. Hood

Detroit

Ft. Bragg

Ft. Bliss

Ft. Carson

St. Louis

Huntsville

Joint Base Lewis-McChord

Hawaii

Ft. Knox

Germany

Ft. Huachuca

Ft. Meade

Rock Island

San Antonio

Korea

Worldwide Audit Capability

20 Field Offices + SWA

Ft. Belvoir

Aberdeen

TRADOC

Ft. Benning

Kuwait Afghanistan

2 29 May 2014


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 29 May 2014


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 29 May 2014


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 29 May 2014


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 29 May 2014


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 29 May 2014


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 29 May 2014


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 29 May 2014


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 29 May 2014


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 Housing-specific, 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 29 May 2014


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 29 May 2014


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 29 May 2014


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 29 May 2014


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 29 May 2014


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 29 May 2014


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 29 May 2014


U.S. Army Audit Agency

18

Top three last four consecutive years:

2nd of Over 200 Each Year in FYs 2010 and 2011

1st of 292 in FY 2012

3rd of 300 in FY 2013

29 May 2014

Documents

Forensic Auditing for Potential Fraud ASMC 2014 PDI Auditing for Potential Fraud ASMC 2014 PDI By: ... Providing Solutions for Army Challenges Forensic Auditing ... hidden in company