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Contract Procurement Irregularities and Forensic Accounting Investigations Jamaican Bar Associationʹs Continuing Legal Education Weekend Conference Prem Lobo, CPA CA CBV CPA (Illinois) CFE CFF, Principal, Cohen Hamilton Steger & Co. Inc. November 18, 2017 Montego Bay, Jamaica

CONTRACT PROCUREMENT IRREGULARITIES AND FORENSIC ACCOUNTING INVESTIGATIONS DISCLAIMER

The views expressed in this presentation are those of the presenter and do not necessarily reflect the views of Cohen Hamilton Steger & Co. Inc. The analyses, comments and considerations contained herein must be considered as a whole and in context of what is being discussed. Selecting portions thereof could lead to a misleading view of the conclusions reached.

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CONTRACT PROCUREMENT IRREGULARITIES AND FORENSIC ACCOUNTING INVESTIGATIONS INSPIRATION – PART 1 All truths are easy to understand once they are discovered; The point is to discover them.

Galileo Galilei

So tell me what I see When I look in your eyes Is that you baby Or just a brilliant disguise.

“Brilliant Disguise” by Bruce Springsteen

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CONTRACT PROCUREMENT IRREGULARITIES AND FORENSIC ACCOUNTING INVESTIGATIONS PRESENTATION OVERVIEW 1.

2.

3.

4.

5.

Introduction – Contract procurement fraud/irregularities The contract procurement process Detecting and investigating procurement fraud/irregularities Case study illustration Conclusion & questions

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CONTRACT PROCUREMENT IRREGULARITIES AND FORENSIC ACCOUNTING INVESTIGATIONS

The beginning is the most important part of the work Plato

1. INTRODUCTION – CONTRACT PROCUREMENT FRAUD/IRREGULARITIES

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CONTRACT PROCUREMENT IRREGULARITIES AND FORENSIC ACCOUNTING INVESTIGATIONS 1. INTRODUCTION – CONTRACT PROCUREMENT FRAUD/IRREGULARITIES •

A few recent headlines relating to contract procurement investigations/probes: ‐ “Procurement board silent on contract to controversial T&T company” – August 23, 2017 – Stabroek News (procurement of pharmaceuticals). ‐ “De‐bushing mess – Selection of contractors for programme lacked transparency, accountability, OCG reports” – June 30, 2017 – Jamaica Observer (awarding and implementation of de‐bushing contracts). ‐ “Land probe! – Lack of valuation forces OCG to intensify investigation of Chinese property deal” – May 5, 2017 – Jamaica Gleaner (awarding of highway construction contract). ‐ “Contractor General says St Ann probe findings worse than Hanover PC” – September 12, 2016 – Jamaica Observer (awarding of government contracts). ‐ “OCG reports disturbing breaches at Hanover PC” – May 16, 2016 – Jamaica Observer (awarding of government contracts).

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CONTRACT PROCUREMENT IRREGULARITIES AND FORENSIC ACCOUNTING INVESTIGATIONS 1. INTRODUCTION – CONTRACT PROCUREMENT FRAUD/IRREGULARITIES •

• •

•

The procurement of goods and services is a key function of government, and important for such projects as construction of schools, hospitals, roads and infrastructure.

The provision of goods and services in such cases is usually carried out by private contractors, but funded by public funds.

The price and quality of the goods and services provided by the private contractors are important for the greater good of the public. Therefore, an effective system of public procurement is of paramount importance.

Note that procurement processes are important for private sector procurements as well.

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CONTRACT PROCUREMENT IRREGULARITIES AND FORENSIC ACCOUNTING INVESTIGATIONS 1. INTRODUCTION – CONTRACT PROCUREMENT FRAUD/IRREGULARITIES •

•

The United Nations Office on Drugs and Crime (UNODC) estimates that the cost of public procurement can account for up to 30% of gross domestic product (“GDP”) making it the largest single area of government spending.

As such, given the size of the procurement market in relation to GDP and the fact that procurement necessitates interaction between various parties in the public and private sector, the procurement process is inherently susceptible to corruption and fraud.

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CONTRACT PROCUREMENT IRREGULARITIES AND FORENSIC ACCOUNTING INVESTIGATIONS 1. INTRODUCTION – CONTRACT PROCUREMENT FRAUD/IRREGULARITIES •

•

Procurement fraud/irregularities are any fraud/irregularities relating to a company or entity purchasing goods or services (such as construction contracts) from third parties, which occurs when the tender process has not been followed, where there is bid rigging, where changes are made to the vendors or the amounts originally bid, or where there are irregularities following the issuance of a contract.

Procurement fraud/irregularities can occur before a contract is procured, during the procurement process and after the procurement is completed, i.e., when the contract is being performed.

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CONTRACT PROCUREMENT IRREGULARITIES AND FORENSIC ACCOUNTING INVESTIGATIONS 1. INTRODUCTION – CONTRACT PROCUREMENT FRAUD/IRREGULARITIES •

Examples (note – not an exhaustive list): ‐ There is a single tender where only one bidder is invited to bid. ‐ Specifications for the bid are tailored to favour a particular bidder. ‐ Inside information provided to a bidder to give them an advantage. ‐ Bidder bids low to obtain a contract, then seeks compensation for purported contingences not known at the time of the bid (“post contract contingencies”). ‐ Bidder bids low to obtain a contract, then procuring entity changes the scope or timing of the project (“variations”) to provide more compensation to the bidder. ‐ Over‐billing quantities, over‐charging, fake invoices. ‐ Set up of fictitious vendors (often subcontractors to the bidder) to provide fake services.

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CONTRACT PROCUREMENT IRREGULARITIES AND FORENSIC ACCOUNTING INVESTIGATIONS 1. INTRODUCTION – CONTRACT PROCUREMENT FRAUD/IRREGULARITIES •

In 2016, corruption, which includes contract procurement fraud, accounted for approximately 45.5% of total reported fraud cases in Latin America and the Caribbean (Source: 2016 Global Fraud Study by the Association of Certified Fraud Examiners) Scheme Types by Region ‐ Latin America and the Caribbean Scheme Corruption Non‐Cash Billing Financial Statement Fraud Expense Reimbursements Check Tampering Skimming Payroll Cash on Hand Cash Larceny Register Disbursements

Number of Cases 51 26 23 17 16 14 10 9 7 3 1

Percent of Cases 45.5% 23.2% 20.5% 15.2% 14.3% 12.5% 8.9% 8% 6.3% 2.7% 0.9%

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CONTRACT PROCUREMENT IRREGULARITIES AND FORENSIC ACCOUNTING INVESTIGATIONS

I have climbed highest mountains I have run through the fields Only to be with you Only to be with you “I Still Haven’t Found What I’m Looking For” by U2

2. THE CONTRACT PROCUREMENT PROCESS

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CONTRACT PROCUREMENT IRREGULARITIES AND FORENSIC ACCOUNTING INVESTIGATIONS 2. THE CONTRACT PROCUREMENT PROCESS •

The contract procurement process can overall be broken down into the following phases: Phase I: Presolicitation Phase II: Solicitation and Negotiation Phase III: Performance and Administration Phase IV: Completion Phase

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CONTRACT PROCUREMENT IRREGULARITIES AND FORENSIC ACCOUNTING INVESTIGATIONS 2. THE CONTRACT PROCUREMENT PROCESS

Phase

Description

I: Presolicitation Phase

Recognition of a need for a good or service to be provided via procurement; Development of specifications for good or service; Development of award criteria; Prospective vendors are identified.

II: Solicitation and Negotiation Phase

Prospective vendors are invited to submit qualifications and/or bids; Bids are received pursuant to deadline specified; Technical evaluation of bids; financial evaluation of bids (pricing); identification of successful bidder; Negotiation of final terms of contract with bidder; Signing of contract.

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CONTRACT PROCUREMENT IRREGULARITIES AND FORENSIC ACCOUNTING INVESTIGATIONS 2. THE CONTRACT PROCUREMENT PROCESS

Phase

Description

III: Performance and Administration Phase

Implementation/execution of contract; Vendor retains services of subcontractors as necessary; Submission of invoices by vendor for payment; Monitoring of contract specifications with actual work done; Evaluation and approval of variations (procuring entity initiated changes the scope or timing of the project); Evaluation and approval of post‐contract contingencies (adjustments to price of contract for unforeseen contingencies).

IV: Completion Phase

Contract achieves substantial completion; Evaluation of contract specifications with actual work done; Contract achieves final completion.

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CONTRACT PROCUREMENT FRAUD AND FORENSIC ACCOUNTING INVESTIGATIONS

Everything is not what it seems When you can have what you want by the simplest of means Be careful not to mess with the balance of things Because everything is not what it seems “Everything is Not What it Seems” by Selena Gomez

3. DETECTING AND INVESTIGATING CONTRACT PROCUREMENT FRAUD/IRREGULARITIES

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CONTRACT PROCUREMENT IRREGULARITIES AND FORENSIC ACCOUNTING INVESTIGATIONS 3. DETECTING AND INVESTIGATING CONTRACT PROCUREMENT FRAUD/IRREGULARITIES I: Presolicitation phase: •

Some examples of procurement fraud/irregularities at the presolicitation phase: ‐ Creating a requirement for a procurement (of goods or services) when a need does not exist (collusion between buyer and vendor). ‐ Vague specifications for the goods or services (allow for discretion to award contract to a particular vendor – collusion between buyer and vendor). ‐ Tailored specifications (designed to favour a particular vendor, but not technically relevant to the product or service being procured). ‐ Identifying a limited pool of vendors (designed to provide a specific vendor with an advantage).

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CONTRACT PROCUREMENT IRREGULARITIES AND FORENSIC ACCOUNTING INVESTIGATIONS 3. DETECTING AND INVESTIGATING CONTRACT PROCUREMENT FRAUD/IRREGULARITIES I: Presolicitation phase (continued): •

Investigating procurement fraud/irregularities arising at the presolicitation phase: ‐ Was the need for the procurement analyzed by the procuring entity and duly authorized by proper level(s) of management? ‐ Were similar goods or services procured in the past, and, if so, were they on similar terms? ‐ Were the specifications for the goods or services duly analyzed by the procuring entity and duly authorized by proper level(s) of management? ‐ Was the pool of vendors for the procurement duly analyzed by the procuring entity and duly authorized by proper level(s) of management? ‐ Are there any relationships/conflicts of interest between employees at the procuring entity and the vendor?

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CONTRACT PROCUREMENT IRREGULARITIES AND FORENSIC ACCOUNTING INVESTIGATIONS 3. DETECTING AND INVESTIGATING CONTRACT PROCUREMENT FRAUD/IRREGULARITIES II: Solicitation and negotiation phase: •

Some examples of procurement fraud/irregularities at the solicitation phase: ‐ Bid submission irregularities (collusion between buyer and vendor): ‐ Premature opening of bids. ‐ Altering of bids once received. ‐ Acceptance of late bids (once pricing details on other bids provided by procurer to a specific vendor). ‐ Bid‐rigging irregularities (collusion between vendors): ‐ Vendors take turns submitting the low bid. ‐ Vendors take turns submitting a bid or not. ‐ A single vendor submits multiple (but fictitious) bids.

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CONTRACT PROCUREMENT IRREGULARITIES AND FORENSIC ACCOUNTING INVESTIGATIONS 3. DETECTING AND INVESTIGATING CONTRACT PROCUREMENT FRAUD/IRREGULARITIES II: Solicitation and negotiation phase (continued): •

Some examples of procurement fraud/irregularities at the solicitation phase (cont’d): ‐ Defective technical or financial evaluation of bids (collusion between buyer and vendor) ‐ Deficient technical or financial criteria are ignored by the buyer in favour of a specific vendor. ‐ Contract negotiation irregularities (collusion between buyer and vendor): ‐ Vague pricing terms written into contract to allow for higher price adjustments. ‐ Vague product or service specifications written into contract to allow for substitutions with lower quality products/services.

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CONTRACT PROCUREMENT IRREGULARITIES AND FORENSIC ACCOUNTING INVESTIGATIONS 3. DETECTING AND INVESTIGATING CONTRACT PROCUREMENT FRAUD/IRREGULARITIES II: Solicitation and negotiation phase (continued): •

Investigating procurement fraud/irregularities at the solicitation phase: ‐ Bid submission irregularities (collusion between buyer and vendor): ‐ Evidence of premature opening of bids, alteration of bid and pattern of acceptance of late buds. ‐ Pattern whereby a specific bidder submits late bids and always wins. ‐ Bid‐rigging irregularities (collusion between vendors): ‐ Identify any “rotating pattern” whereby the same group of vendors bids each time and the winning bidder “rotates” each time. ‐ Investigate why qualified bidders did not bid – is there a pattern where some bidders do not bid and the non‐bidders rotate. ‐ Investigate whether bids are from legitimate entities.

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CONTRACT PROCUREMENT IRREGULARITIES AND FORENSIC ACCOUNTING INVESTIGATIONS 3. DETECTING AND INVESTIGATING CONTRACT PROCUREMENT FRAUD/IRREGULARITIES II: Solicitation and negotiation phase (continued): •

Investigating procurement fraud/irregularities at the solicitation phase (cont’d): ‐ Defective technical or financial evaluation of bids (collusion between buyer and vendor) ‐ Investigate technical or financial criteria evaluation documents and identify any defects which were ignored by the buyer. Interview members of the evaluation team to understand why such defects were ignored. ‐ Contract negotiation irregularities (collusion between buyer and vendor): ‐ Investigate whether terms and specifications were duly authorized by proper level(s) of management, and consistent with prior contracts. ‐ Investigate complaints with respect to higher prices or lower quality products/services being provided by vendor.

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CONTRACT PROCUREMENT IRREGULARITIES AND FORENSIC ACCOUNTING INVESTIGATIONS 3. DETECTING AND INVESTIGATING CONTRACT PROCUREMENT FRAUD/IRREGULARITIES III: Performance and administration phase: •

Some examples of procurement fraud/irregularities at the performance and administration phase: ‐ Use of substandard/defective materials. ‐ Use of fictitious/related‐party subcontractors who provide fictitious/overpriced/substandard products and services and whose charges are passed on to the procuring entity. ‐ Procuring entity issues unnecessary scope changes (variations), asks vendor to undertake the scope changes, and charge additional amounts for such. ‐ Vendor identifies additional costs as “post contract contingencies” (purported contingences unknown at bidding stage) but these are attempts to bill extra.

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CONTRACT PROCUREMENT IRREGULARITIES AND FORENSIC ACCOUNTING INVESTIGATIONS 3. DETECTING AND INVESTIGATING CONTRACT PROCUREMENT FRAUD/IRREGULARITIES III: Performance and administration phase: •

Investigating procurement fraud/irregularities at the performance and administration phase: ‐ Analytical review of total project costs to compare budget to actual and identify specifically where cost overruns have occurred, and why. ‐ Investigation of complaints with respect to substandard materials/services being provided. ‐ Analysis of subcontractors to identify related parties and any fictitious ones. ‐ Review variation documents to identify documented reasons for the variations, proper authorization, and proper review of additional cost. ‐ Review post contract contingency documents to identify documented reasons for such, proper authorization, and proper review of additional cost.

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CONTRACT PROCUREMENT IRREGULARITIES AND FORENSIC ACCOUNTING INVESTIGATIONS

Instead of saying that man is the creature of circumstance, it would be nearer the mark to say that man is the architect of circumstance. It is character which builds an existence out of circumstance. From the same materials one man builds palaces, another hovels; one warehouses, another villas; bricks and mortar are mortar and bricks until the architect can make them something else.

Thomas Carlyle

4. CASE STUDY – ISLAND INFRASTRUCTURE

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CONTRACT PROCUREMENT IRREGULARITIES AND FORENSIC ACCOUNTING INVESTIGATIONS 4. CASE STUDY – ISLAND INFRASTRUCTURE •

•

•

Island Infrastructure (“Infrastructure”) is a government‐owned corporation mandated to procure and implement large public infrastructure projects in the sovereign island nation of Niarhab.

When a hospital, post‐secondary education institution, road or similar structure needs to be built, the appropriate ministry contacts Infrastructure to initiate the procurement for the project and to manage the construction.

Infrastructure meets with the relevant ministry to determine the specifications and technical details, and then assembles a project team lead by a team leader to develop the contract award criteria and identify bidders to invite. The team undertakes a technical and financial evaluation of bids received. A contract is negotiated with the successful bidder. Infrastructure then assembles a separate implementation team to oversee the construction and completion of the project.

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CONTRACT PROCUREMENT IRREGULARITIES AND FORENSIC ACCOUNTING INVESTIGATIONS 4. CASE STUDY – ISLAND INFRASTRUCTURE •

•

In 2016, it came to light that an executive at Infrastructure, Mr. X, had various side‐business dealings with Bricks and Mortar Inc. (“BMI”) one of Infrastructure’s largest vendors for construction projects. BMI had either won, or was in the process of implementing, various construction projects. There were suggestions of a conflict of interest, or, fraudulent/irregular procurements, favouring BMI. Given the high profile public scrutiny with respect to this case, Infrastructure initiated an internal investigation and also retained a forensic accounting firm to undertake an independent forensic accounting analysis. The independent forensic analysis was to identify any financial improprieties in respect of Infrastructure projects involving: ‐ Mr. X, on project procurements that he was in charge of, and, ‐ BMI, on projects for which it was the successful bidder.

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CONTRACT PROCUREMENT IRREGULARITIES AND FORENSIC ACCOUNTING INVESTIGATIONS 4. CASE STUDY – ISLAND INFRASTRUCTURE • •

Mr. X was in charge of 15 infrastructure project procurements between 2012 and 2016 (the relevant time period), including 5 in which BMI was the successful bidder.

BMI was successful in 10 bids between 2012 and 2016, as follows: Invited to Bid on Projects:

50

Bids Submitted

25

Successful

10

% of Success

•

40.0%

In total, including overlapping projects, there were 20 projects that Mr. X was in charge of, and/or which BMI was the successful bidder on (the “Identified Projects”).

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CONTRACT PROCUREMENT IRREGULARITIES AND FORENSIC ACCOUNTING INVESTIGATIONS 4. CASE STUDY – ISLAND INFRASTRUCTURE •

• •

As with all investigative cases, the mandate was potentially expansive (the 20 Identified Projects together represented over US $5 billion in total contract value), but the forensic accounting budget was ‐ not surprisingly ‐ limited.

Moreover, given public scrutiny and the need to prevent any further potential improprieties, time was of the essence.

How would one devise an investigative mandate that would provided the respective level of assurance, while maintaining cost and timing efficiency?

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CONTRACT PROCUREMENT IRREGULARITIES AND FORENSIC ACCOUNTING INVESTIGATIONS 4. CASE STUDY – ISLAND INFRASTRUCTURE •

A two‐part approach was devised, as follows:

•

Primary testing: ‐ Analytical review of total project costs. ‐ Substantive (detailed) testing of variations and PCCs. ‐ Analytical review of soft costs.

•

Secondary testing: ‐ Review of internal controls. ‐ Review of supplementary reports.

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CONTRACT PROCUREMENT IRREGULARITIES AND FORENSIC ACCOUNTING INVESTIGATIONS 4. CASE STUDY – ISLAND INFRASTRUCTURE •

Analytical review of total project costs: ‐ Purpose to examine, in an overall manner, certain components of the total cost of implementing the Identified Projects in order to identify any anomalous trends suggesting that financial improprieties may have occurred, thereby warranting further investigation. ‐ Obtained data from Infrastructure for each Identified Project and compared budget versus actual amounts for variations, PCCs, soft costs and total project costs, noting any excess over budget and the reasons for the same. ‐ Discussion of any over‐budget costs with project executives as well as on‐the‐ground managers.

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CONTRACT PROCUREMENT IRREGULARITIES AND FORENSIC ACCOUNTING INVESTIGATIONS 4. CASE STUDY – ISLAND INFRASTRUCTURE •

Analytical review of total project costs (continued): Project

Budget to Actual ‐ Total Project Costs

Issues Noted from Analytical Review

Budget:

Actual:

Excess:

Excess:

Total Contract

Total Contract

Actual v. Budget

% of Budget

$

$

$

$

I:

Mr. Xʹs Projects

10

3,500,000,000

3,000,000,000

‐

n/a

None

II:

Mr. X and BMI Projects

5

1,300,000,000

1,000,000,000

‐

n/a

None

5

2,500,000,000

2,000,000,000

‐

n/a

None

20

7,300,000,000

6,000,000,000

‐

III: BMI Projects

Total ‐ All Identified Projects

n/a

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CONTRACT PROCUREMENT IRREGULARITIES AND FORENSIC ACCOUNTING INVESTIGATIONS 4. CASE STUDY – ISLAND INFRASTRUCTURE •

Analytical review of total project costs (continued): ‐ Forensic accounting team noted that overall across all 20 projects, actual project costs were below budget. ‐ There were individual cost excesses over budget due to circumstances that were unanticipated and beyond the control of Infrastructure but were implemented in the normal course of business. ‐ Various project executives and managers indicated that, to the best of their knowledge, they had no any reason to believe that Mr. X or BMI engaged in any possible financial improprieties with respect to the implementation of their respective projects. ‐ Overall, no issues noted from analytical review.

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CONTRACT PROCUREMENT IRREGULARITIES AND FORENSIC ACCOUNTING INVESTIGATIONS 4. CASE STUDY – ISLAND INFRASTRUCTURE •

Substantive (detailed) testing of total project costs: ‐ Purpose to examine, in a specific manner, selected individual cost items comprising the total amounts for PCCs and variations with respect to the Identified Projects in order to verify that the relevant cost items agreed to supporting documentation, related to the project in question and were property authorized ‐ Selected largest individual amounts and unusual items for testing. ‐ Selected for testing at least 25% of total dollars of PCCs and variations. ‐ Discussion of each item with project executives as well as on‐the‐ground managers.

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CONTRACT PROCUREMENT IRREGULARITIES AND FORENSIC ACCOUNTING INVESTIGATIONS 4. CASE STUDY – ISLAND INFRASTRUCTURE •

Substantive (detailed) testing of total project costs (continued): Project

Issues Noted from

Testing Summary

Substantive Sample Testing

Total Tested

Total Variations

Percentage Tested

and PCCs $

$

10

40,000,000

80,000,000

50%

None

II: Mr. X and BMI Projects

5

5,000,000

7,000,000

71%

None

III: BMI Projects

5

6,000,000

15,000,000

40%

None

20

51,000,000

102,000,000

50%

I:

Mr. Xʹs Projects

Total ‐ All Identified Projects

$

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CONTRACT PROCUREMENT IRREGULARITIES AND FORENSIC ACCOUNTING INVESTIGATIONS 4. CASE STUDY – ISLAND INFRASTRUCTURE Visual example of substantive testing of total project costs (demonstration only – not meant to be legible):

• Pr oject

Natu r e of

Iden tifier

Date

Expenditur e

(Su mmar y

(Su mmar y

Tested

Log)

Log)

Amou n t (Su mmar y

Descr iption

$

14

PCC/Other

CO‐0053

26‐Aug‐12

Su bstan tive Testin g ‐ Su mmar y

Su bstan tive Testin g ‐ Details

(Su mmar y Log)

Log) 1a. S upporting Documents Available? (variation/change confirm ations, invoices, quotes etc.)

(577,024)

RS T Adjustm ent Paym ent

Yes

1b . Notes

1c. Discussed Nature / Context of Expenditure with IO Project M anager?

2a.

Authorization Present on S upporting Documents?

2b . Verified with IO Project M anager if Proper Authorization Received?

3. Conclusion with Respect to Expenditure Tested.

Dollar Amount Reconciles to support

Description Reconciles to S upport?

Authorization Provided for Expenditure?

Authorizing Party ‐ Nam e

Authorizing Party ‐ Entity

Expenditure Related to Project?

Parties Involved in Carrying out Work

Any Parties of Interest?

S pecify.

Yes (Project M anager ‐ M ar 17, 2016). No issues.

Yes

Yes. (PM verified that proper authorization was received).

Amou n t

Yes

Yes

Yes

DK, KM

Architects

Yes

XYZ

No

Yes

Yes

Yes

DK, KM

Architects

Yes

XYZ

No

Yes

Yes

Yes

DK, KM

Architects

Yes

XYZ

No

Yes

Yes

Yes

DK, KM

Architects

Yes

XYZ

No

Yes

Yes

Yes

DK, KM

Architects

Yes

XYZ

No

Yes

Yes

Yes

DK, KM

Architects

Yes

XYZ

No

suppor ted.

Expen ditu r e auth or ized.

Au th or izer con fir med.

PCC

CO‐0066

13‐Jan‐12

109,436

Provide New S tructural studs for Perimeter walls on levels 2, 3 and 4

Yes

Yes. No issues.

Yes

Yes. No issues.

Amou n t suppor ted.

Expen ditu r e auth or ized.

Au th or izer con fir med.

PCC

CO‐0070r1

15‐Jun‐12

107,566

Tower Ground Floor M echanical Room ‐ Unforeseeable Condition

Yes

Yes. No issues.

Yes

Yes. No issues.

Amou n t suppor ted.

Expen ditu r e auth or ized.

Au th or izer con fir med.

PCC

CO‐0071

08‐M ar‐12

164,945

Rem oval of piping and drains on Tower S econd Floor

Yes

Yes. No issues.

Yes

Yes. No issues.

Amou n t suppor ted.

Expen ditu r e auth or ized.

Au th or izer con fir med.

PCC

CO‐0073r1

08‐M ar‐12

431,842

M ove Unforeseeab le Costs to PCC

Yes

Yes. No issues.

Yes

Yes. No issues.

Amou n t suppor ted.

Expen ditu r e auth or ized.

Au th or izer con fir med.

PCC/Other

CO‐0077

09‐S ep‐13

(621,777)

Delete Unused Cash Allowance from contract

Yes

Yes. No issues.

Yes

Yes. No issues.

Amou n t suppor ted.

Expen ditu r e auth or ized.

Au th or izer con fir med.

S ub total Tested (excluding ʺotherʺ) Total PCC (excluding ʺotherʺ) % Tested

813,790 1,453,321 56%

Total Tested (excluding ʺotherʺ) Total PCC and Variation

813,790 1,453,321

% Tested Total PCC and Variation (including ʺotherʺ)

56% $254,520

Sum m ary Observations: 1 2 3

Availability of Supporting Docum ents: Able to obtain supporting documents for all expenditures selected for testing.

Suppor t for Expendit ure Dollar s Able to agree the expenditure dollars to supporting documents in all instances.

Authorization for Expenditures All documents provided authorization signatures.

4

Proper Authorizat ion for Expendit ures Able to verify all expenditures were authorized by the proper individuals and at the proper level of authority.

5

Evidence of Financial Improprieties Based on the sample testing procedures set out above, and discussions with PM, nothing has come to attention to suggest that Mr. X engaged in any financial improprieties with respect to this project.

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CONTRACT PROCUREMENT IRREGULARITIES AND FORENSIC ACCOUNTING INVESTIGATIONS 4. CASE STUDY – ISLAND INFRASTRUCTURE •

Substantive (detailed) testing of total project costs (continued): ‐ Verified that the expenditures in the supporting documents related to the respective project in all instances. ‐ Where supporting documentation was obtained, discussed the nature and context of each sample item with the respective project executive or manager, and confirmed that each expenditure was reasonable and incurred in the normal course of business. ‐ Verified that an authorizing signature was present on the supporting documentation in most instances. Where an authorizing signature was not present, discussions with the respective executives or managers indicated that the documentation was incomplete, and, due to the passage of time further documentation was unavailable. ‐ Overall, no issues noted from substantive testing.

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CONTRACT PROCUREMENT IRREGULARITIES AND FORENSIC ACCOUNTING INVESTIGATIONS 4. CASE STUDY – ISLAND INFRASTRUCTURE •

Analytical review of soft costs: ‐ Soft costs are a component of total project costs that are non‐ construction related, such as transaction advisor costs, ancillary costs, furniture and fixtures, services etc. ‐ Purpose of analytical review to understand the composition, nature and context of individual components of soft costs (where such details were available/known) and to verify from discussions with personnel that such soft costs were reasonable in amount and incurred in the normal course of business. ‐ Discussion of each item with project executives as well as on‐the‐ground managers.

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CONTRACT PROCUREMENT IRREGULARITIES AND FORENSIC ACCOUNTING INVESTIGATIONS 4. CASE STUDY – ISLAND INFRASTRUCTURE •

Analytical review of soft costs (continued): Project

Testing Summary

Issues Noted from Analytical Testing

Soft Costs Tested

Total Soft Costs

Percentage Tested

$

$

$

10

100,000,000

150,000,000

67%

None

II: Mr. X and BMI Projects

5

50,000,000

70,000,000

71%

None

III: BMI Projects

5

60,000,000

75,000,000

80%

None

20

210,000,000

295,000,000

71%

I:

Mr. Xʹs Projects

Total ‐ All Identified Projects

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CONTRACT PROCUREMENT IRREGULARITIES AND FORENSIC ACCOUNTING INVESTIGATIONS 4. CASE STUDY – ISLAND INFRASTRUCTURE •

Analytical review of soft costs (continued): ‐ Discussed the nature and context of soft cost items with the respective project executive or manager, and confirmed that each expenditure was reasonable and incurred in the normal course of business. ‐ Discussed the vendors involved in providing services and the types of expenditures involved. No unusual vendors were noted, and, to the best of their knowledge, all identified vendors/contractors were performing work for Infrastructure on various projects in the normal course of business. ‐ Overall, no issues noted from analytical review.

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CONTRACT PROCUREMENT IRREGULARITIES AND FORENSIC ACCOUNTING INVESTIGATIONS 4. CASE STUDY – ISLAND INFRASTRUCTURE •

Secondary testing: ‐ Review of internal controls: Discussion and assessment of Infrastructure’s internal controls relevant to the input of vendor names into the accounting system, the approval of vendor invoices for payment and internal testing of such controls. Conclusion: Various internal controls existed and were in operation. Some exceptions noted but were reconciled or caught by other controls in place. ‐ Review of supplementary reports: Review and discussion of findings from office of the Auditor General of Niarhab. No issues noted. ‐ Overall, no issues noted from secondary testing.

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CONTRACT PROCUREMENT IRREGULARITIES AND FORENSIC ACCOUNTING INVESTIGATIONS 4. CASE STUDY – ISLAND INFRASTRUCTURE •

Surprise!

Notwithstanding the suggestions of a conflict of interest, or, fraudulent/irregular procurements, favouring BMI, a forensic accounting investigation revealed no suggestion of financial improprieties having occurred with respect to the procurement and implementation of the Identified Projects.

•

A forensic accounting investigation is independent, and does not always conclude that there is a financial impropriety/fraud…..value can be added by proving that such suspicions were investigated and no impropriety was found. On the other hand, if improprieties have occurred, an independent forensic analysis will potentially help detect these.

•

The forensic accounting analysis was used by Infrastructure to reassure the government and the public that independent due diligence had been undertaken, and helped end further speculation on the subject.

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CONTRACT PROCUREMENT IRREGULARITIES AND FORENSIC ACCOUNTING INVESTIGATIONS INSPIRATION – PART 2 A forensic accounting or damages assessment ought to be conducted like the army of Alexander the Great at Gaugamela*.

Vastly outnumbered by the army of Darius III of Persia, Alexander chose be nimble and unconventional in his attack. Attacking, at one point, at an angle instead of frontally, Alexander’s much smaller force threw the army of Darius into disarray, negating Darius’ advantage of size, and exploiting the ensuing confusion for one of Alexander’s finest victories.

An accounting analysis that espouses nimbleness, efficiency and purpose will tend to be more effective than a conventional analysis that deploys resources but is not responsive to changing circumstances on the ground.

Prem Lobo *331 BC 43

CONTRACT PROCUREMENT IRREGULARITIES AND FORENSIC ACCOUNTING INVESTIGATIONS 5. CONCLUSION AND QUESTIONS

Tell me your secrets And ask me your questions Oh, let’s go back to the start “The Scientist” by Coldplay •

Questions?

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CONTRACT PROCUREMENT IRREGULARITIES AND FORENSIC ACCOUNTING INVESTIGATIONS PRESENTER Prem Lobo, CPA CA CBV CPA (Illinois) CFE CFF  plobo@cohenhamiltonsteger.com 416‐304‐7020  Principal, Cohen Hamilton Steger & Co. Inc., Toronto  Business Valuations, Damages Quantification, Forensic Investigations

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