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.