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Contract and procurement fraud – an update

Graham Newton, Partner, ForensicSome concerning trends have continued to plague major contracts in the Australian resources and heavy industry sectors. Recent examinations of contract and procurement arrangements by Deloitte Forensic has identified further insights that have enabled clients to either realign current contract and procurement procedures or, in some instances, claw back cost overruns.

Deloitte Forensic Partner Graham Newton: “We were not surprised with some of the findings. There has been a renewed focus on delivery timeframes with some projects running the risk of outlaying tens of millions of dollars should deadlines not be met. In some instances, this has drawn attention away from sound procurement process that has then increased the potential for fraud and other operational risks”.

In 2010 Deloitte Forensic developed a methodology designed to interrogate large volumes of transactions, combining advanced analytics with traditional forensic examinations of supporting documents to provide answers to the how, what, why and, importantly, at what cost.

Deloitte Forensic Partner Frank O’Toole:  “The approach is usually prompted by an underlying concern by a company relating either to a specific contract with unexplained cost overruns or a broader worrying trend within a procurement framework where a number of gaps and/or oversights have begun to appear over a period of time.”

Recent contract examination engagements completed by Deloitte Forensic have revealed some interesting insights into what is driving these risks. When considering 33 contract and/or procurement arrangements examined over a six-month period, findings included:

  • Only 36 percent had current contracts in place, while 64 percent were at risk (14 percent had expired, and 50 percent had no contract in place at all which brings with it increased risk in additional concerns such as public liability and professional indemnity insurances) (Chart 1)   

 Procurement arrangement

  • Of the arrangements that were subject to current or expired contracts, 8 were found to have had costs applied by suppliers that were not compliant with agreed schedules of rates (with 4 relating to current contracts and 4 relating to expired contracts)
  • 9 percent of all invoices approved for payment were of a value that was only marginally below a financial delegation level e.g. $99,000 or $49,000 (Chart 2). This was representative of the time pressures projects and procurement staff were under where there was potentially intentional overriding of the control to reduce the time to process transactions
Invoices paid (by value) that were complaint with financial delegations Invoices paid (by value) that were complaint with financial delegations
  • When measuring this risk by invoice value, 20 per cent of all invoice values were potentially processed to override this financial delegation control (Chart 3)
  • Duplicated invoices were not identified as a significant risk, with only 6 invoices identified as having been duplicated (largely due to multiple vendor entries being set up where the identifying supplier particulars had either changed slightly or had been entered incorrectly, thus creating the gap).

As the pressure mounts to meet tight deadlines and budgets in an environment where skilled resources are at a premium, there is little doubt that outsourcing of major contract components will continue to be a fundamental business strategy.

The monitoring and/or examination of contract costs at various stages is now considered an integral financial control measure by a number of major companies. The approach adopted by Deloitte Forensic provides coverage across an entire population of accounts payable and other data using advanced analytics to identify higher risk transactions or those that display characteristics that require further examination.  A ‘deep dive’ into the supporting documentation can then provide the answers that can often support an approach to claw back costs considered to be charged outside the terms of the contract schedules.

While many organisations are still relying on the traditional approach of sampling in audits to identify anomalies, combining analytics with the forensic approach provides layers of detail to enable immediate action should it be required.

Graham Newton: “Audits have a role to play but a forensic contract examination utilising the power of data analytics up front not only provides the detail about where and how cost overruns are occurring, in many cases it can also quantify these costs and provide solutions and options in dealing with or reducing any potential losses”.

Five phases of fieldwork

A typical contract examination engagement will involve five phases of fieldwork:

Phase 1 - risk identification

This initial phase involves meeting with people in procurement and commercial roles to understand the contracts and/or risks they consider to be of significance and those that will be focused on throughout the engagement.

This phase also involves discussion around the types of analytics tests that will be applied to the data on hand so that transactions and arrangements in line with the risks initially profiled can be identified.

It will also incorporate the request for, and review of, all process and policy documents considered relevant to contracts and procurement arrangements so that any non-compliance can be considered.

Phase 2 - data analytics                                                                                                        

This phase involves the application of data analytics tools across accounts payable and other related information for a specific period to identify patterns of unusual or suspicious transactions and arrangements with suppliers and contractors.

A significant benefit of this phase is to enable a more focused approach and maximise efficiencies in the examination of higher risk transactions and arrangements.

It will typically deliver results identifying specific transactions that have been identified as anomalous, unusual or potentially suspicious. These transactions, and the procurement arrangements they form a part of, then forms the basis of a more focused consideration in the phases to follow.

Phase 3 – analysis and focus

At the conclusion of the analytics phase, results are analysed to then identify those contract or procurement arrangements that require further detailed examination.

This phase also incorporates the identification and request for all supporting documentation in relation to agreed transactions that will be examined e.g. contracts, quotes, purchase orders, invoices, variation orders, time sheets etc.

Phase 4 – document examination ‘deep dive’

The ‘deep dive’ phase of the engagement is critical in identifying and providing the documentary support to the initial analytics results. Having narrowed the focus in the early stages,  this phase identifies the necessary source documents that can be relied on to consider cost recoveries or other remedies.

This phase also contributes significantly to any quantification of potential losses and usually provides answers as to where things have gone wrong.

Phase 5 – site meetings and interviews

Having identified those transactions and/or arrangements to focus on, the right people have to provide oversight and manage these arrangements. The objective of this phase is to gain insight and information into the nature of the arrangements in place and, where necessary, seek to clarify reasons or explanations as to why there may have been any deviation from proper process or policy.

While this approach has been seen as a means to responding to concerns identified at the back end of projects, this methodology is now also being applied throughout project lifecycles at various stages as an efficient means to quickly identify issues before they can become potentially terminal.

Frank O’Toole: “It’s not uncommon to have this approach embedded in a project lifecycle providing ongoing insights into concerning trends that can therefore be corrected at an earlier stage”.

So with boards and audit committees seeking ongoing assurances on how significant investment is being managed, the challenge in monitoring these arrangements is becoming more and more complex.

Being on top of that mountain of data, and unlocking its power at an early stage, is far safer than being at the bottom of it when things go wrong.

Authors

Graham Newton, Partner, Forensic

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