Through the end of Fiscal Year 2011, the United States Congress appropriated $51.4 billion for the relief and reconstruction of Iraq. Congress also commissioned the Special Inspector General for Iraq Reconstruction (SIGIR) to perform an audit of the expenditures.
SIGIR released a final forensic audit report last Friday. The extent and nature of some of the frauds and waste encountered make it appropriate that the report was released on Friday the 13th. You can access the full report here. My reading of the report suggests a mixed signal. On the one hand, SIGIR finds relatively effective controls over the payment process. On the other hand, SIGIR found several prevalent and serious control weaknesses in the procurement process.
To quote the report:
Although controls over the payment process are important, they cannot substitute for effective controls over the entire procurement process because weak controls earlier in the process provide no assurance that the payments were for goods and services that (1) were received, (2) met contractual specifications, (3) were in accordance with the contract prices, or (4) were competitively priced. (pg. 19)
To make matters worse, those weaknesses are areas that cannot be effectively audited. Detective measures simply aren’t effective at identifying and correcting for fraud and waste resultant from poor pricing and quality. SIGIR has questioned over $635 billion of costs so far, but has identified billions more that were susceptible to waste, and to which SIGIR cannot effectively attest.
I don’t have room to discuss all of the fraud, waste, and abuse identified in the report, but a few highlights are below:
- $2.5 billion in expenditures were signed off by a single contracting officer representative regarding narcotics law enforcement affairs. These invoices were not reviewed according to procedure. The entire amount was vulnerable to fraud and waste. The Bureau of International Narcotics and Law Enforcement Affairs is attempting to recover some of the money lost to fraud and has recovered more than $60 million to date.
- The U.S. Army has a service contract with AECOM. SIGIR selectively reviewed invoices and found that 14% ($4.2 million) of them were the result of overbilling or unsupported bills.
- One contractor submitted a number of invoices that were never reviewed before payment. The contract allowed for reasonable reimbursements, but the audit revealed a number of unreasonable charges including $80 for a PVC elbow that a competitor was selling for $1.41.
- In general, the number and training of oversight personnel was inadequate, resulting in insufficient and untimely review of expenses.
- Numerous accounts of inadequate physical controls of inventory, kickbacks, and bribes.
The SIGIR report makes an excellent case for increased use of preventive internal controls not only for government contracting but also for companies. To quote the final paragraph of the report,
Overall, audits of programs and activities and investigations of individuals and companies can help uncover wasteful practices and the possibility for fraudulent activities, but they are far less effective than preventive measures. Further, proving and prosecuting fraud is difficult, costly, and time consuming. As such, proactive measures such as enhancing internal control procedures and carefully reviewing contractor and grantee business systems and practices are the key to establishing a climate where fraud, waste, and abuse is not the norm.Jeremy Bentley is a PhD student at Cornell University. His research extends findings in psychology and economics to understand how decision-makers use accounting information in a managerial setting.
I understand the frustration and myself am appalled at the waste and abuse of the current system. But are you advocating for more government regulations and levels of bureaucracy? I think systems of preventative internal controls are appropriate but I'm not convinced about adding to government. I don't believe any form of controls will hold water in these situations. Too much lack of control in places too far away. Not to get political but the real solution is not to open the cookie jar by entering into situations like this.
ReplyDeleteNice post though Jeremy. I enjoyed seeing your name attached.
Rob, you raise an excellent question: what is the best way to deal with fraud and waste? Personally, I took two things away from the SIGIR report:
ReplyDelete(1) Some things can't be audited after-the-fact. Quality control, pricing checks, contract compliance, etc. are extremely difficult to audit but are vitally important from a managerial perspective. Detective controls are not an adequate substitute for preventive controls. The appropriate level of each is a heavily debated question, but I think we can all agree that pouring all our resources into detective controls isn't as effective as having some detective and some preventive controls.
(2) Fraud and waste are real problems. A while ago I saw the ACFE "Report to the Nations on Occupational Fraud and Abuse." Fraud, theft, and waste occurs all the time, often at small companies and by regular people. The items found in the SIGIR report weren't financial statement fraud or a single person stealing a billion dollars. In fact, an external auditor wouldn't care about most of the items on the SIGIR report for purposes of the financial statement audit. Rather, they were a large number of small things that could happen at anywhere, not just in government. So often I see students glaze their eyes over when we talk about internal controls. This is just another example of how often fraud exists in the real world.