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December 2005
Procurement Ethics: Investigators Band Together Against Contracting Fraud 
Submitted by: Melissa Anderson, CPA, CFE
When a scandal involving the manipulation of a $20 billion contract for Air Force refueling tankers emerged, it inspired more than guilty pleas by two former Boeing executives. The case also served as an impetus for greater coordination between the enforcers charged with ensuring these deals are done aboveboard.
Enters U.S. Attorney Paul McNulty, of the Eastern District of Virginia. In February, he announced the formation of the Procurement Fraud Working Group, an interagency effort to police government deals for abuse and conflicts of interest.
"If we didn't do it, I didn't see anyone else doing it," McNulty told National Defense. "I don't expect every federal district to be as concerned about procurement fraud as we are."
More than 20 federal agencies are involved, and that list is growing at a rate of one or two a week as word spreads, he said. The initiative includes representatives from the FBI, Defense Criminal Investigation Service and Naval Criminal Investigative Service, as well as each respective inspector general office at the departments of Homeland Security, State and Transportation.
"We want to sort of be a clearinghouse for procurement fraud," McNulty said. The group's first meeting was conducted in March, and another occurred at the end of June.
The group will meet every three months to go over cases, review methods and strategies, trade information on promising leads and see if any investigations overlap.
"Historically, the FBI has had the lead on procurement fraud through their white-collar crime program,' McNulty said. "Post 9/11, they had to streamline those resources to expand their anti-terrorism efforts.There was a shift in primary responsibility."
According to a 2004 report from the Government Accountability Office, the FBI's personnel shuffling in response to the 2001 attacks has moved 674 field agent positions permanently from the drug, white-collar and violent crime program areas to counterterrorism and counterintelligence. Even though the bulk of these positions were drawn from anti-narcotics staffs, the number of newly opened FBI white-collar crime investigations declined between 2001 and 2004.
Of all the federal agencies and departments, the FBI refers the greatest number of white-collar crime matters to U.S. attorneys for prosecution. These FBI referrals decreased about 23 percent, from 6,941 in 2001 to 5,331 in 2003, the GAO reported. At the same time, white-collar crime referrals by all other agencies increased by about 15 percent, according to the GAO.
As the onus shifted onto the inspectors general within each federal department, McNulty saw the Eastern District of Virginia was in a perfect position literally and metaphorically to organize a more concerned effort.
McNulty's jurisdiction sits in the heart of the defense industry. As such, there is virtually no contract issued without the Eastern District claiming oversight, either through contractor business offices, the Pentagon or subcontractors. The area also encompasses the Norfolk Naval Base, the largest such facility in the world.
McNulty said that because of its location, the Eastern District staff will prosecute the bulk of the cases. "There's a lot of ways for us to get in," he said.
The Procurement Fraud Working Group was formed initially with defense and homeland security contracts in mind. However, because all procurement oversight officers share the same problems and difficulties, other agencies outside the national security apparatus are expressing interest in the program.
But in an age of war and terrorism, the atmosphere is ripe for abuse in defense and homeland security. McNulty said he has to assume there is more procurement fraud in these areas because the money invested in them is increasing.
Just as a rising tide lifts all boats, the total amount of money lost to fraud also logically will rise with a sudden influx of funding, especially when it is tied to time-sensitive wartime or national security purchases, McNulty said.
Manning the front line of the effort is Jack Hanly, the Eastern District's fraud chief. Hanly is a veteran of defense procurement prosecutions, having won most of the roughly 70 convictions related to 1988's "Operation Ill Wind."
In that two-year effort, more than a dozen major defense contractors, consultants and government officials were charged with malfeasance. The highest-ranking government officials snared were an assistant secretary of the Navy, a deputy assistant secretary of the Navy and a deputy assistant secretary of the Air Force.
McNulty said he hopes the working group will inspire more of an effort within the participating agencies, whose internal investigators he said often are left frustrated by their perception of "slack" in their agencies' internal oversight systems.
McNulty advised officials within the Pentagon and other agencies to keep a close eye on procurement integrity and not short change in-house investigators. "As they see procurement changing . they need to make sure they are adequately staffed to compensate for that growth," he said.
Training is the key to strengthening investigators by helping them better allocate their limited resources, adopt fresh techniques like using software programs to spot suspicious activity in reams of raw data and keep abreast of emerging schemes and trends.
Called "embeds," these investigators would gain familiarity with the purchasing operations by spending months within the offices that handle them. This idea has caused some nervousness because the procurement office workers may have the idea that they are targets, McNulty said, but that was not the intent of the embed program.
"This isn't a case of the federal government being part of a big witch hunt," he said.
The structure and emphasis of the Procurement Fraud Working Group is unique. There is seldom such a concerted effort to craft an interagency cooperative assembled against a broad form of criminal wrongdoing, McNulty noted.
Other task forces combine localized assets, like anti-drug task forces, or are aimed at a particular crisis, such as the group of Dallas based investigators tasked with unraveling the chaos of the savings-and-loan collapses of the 1980's.
But the procurement fraud working group's mandate is broader than these other precedents, reflecting the many forms procurement fraud can take and the assortment of agencies seeking to thwart them.
The crimes, premeditation of those who commit them and the complexity of prosecuting them vary as well.
McNulty outlined several aspects, starting with "classic conflict of interest cases" such as the recent Boeing Company refueling tanker scandal. Air Force principal deputy assistant secretary Darlene Druyun is serving a nine-month sentence in federal prison for illegally negotiating a lucrative job with Boeing as she supervised the lease negotiations. A senior Boeing official, Michael Sears, is also in prison for his role in the hiring of Druyun.
Another common fraud in procurement is kickbacks, where a government official receives money or gifts in exchange for an edge in contracting.
McNulty described kickbacks as relatively easy to investigate and prosecute. Cases involving fraudulent billing, which demand heavy investigations through stacks of paperwork, are harder to pursue, he said. In these cases, bending the rules in a highly competitive business environment escalates into breaking the law.
Other cases, particularly those surrounding illegal sales to foreign nations, involve unraveling intricate plots. "Through their temptation and greed, they concoct some scheme," he said. "There's where you'll see more of your conspiracies."
Minority set-asides-contracts solely reserved for minority-owned firms also had bred fraud, McNulty said. "There have been a lot of problems in that area," he noted.
Until recently, the Defense Department assigned these contracts based on the companies' declarations alone, but now requires more information to deter false or solely cosmetic claims.
As for defense contractors, McNulty noted,"It's in their self-interest to cooperate and self-police. In the end, this is about public support," he said. "The public will not be as supportive if there's opportunism and overreaching at the expense of taxpayer money.We're hoping contractors will be supportive of the enforcement effort so we can strengthen the integrity of the system."
Written by: Joe Pappalardo, National Defense Magazine, August 2005.
Permission to publish article in Monthly Blend granted by National Defense Magazine.
For more information on the above topic, please contact Melissa Anderson at Beason & Nalley, Inc. at 256-533-1720 or email at manderson@beasonnalley.com. Key performance indicators can help determine your company's level of operation
Written by: Donald W. Nalley, Jr., CPA, CFP®, CVA, AM
When it comes to determining the level of your client's performance, what's your method? A key performance indicator (KPI) is a measure designed to provide a quick sign of performance. Many CEOs receive daily or weekly KPI reports that keep their fingers on the pulse of the company, fast and easily.
KPIs, which may be financial or non-financial, should be established based on a company's organizational structure, operating goals and strategies. Not surprisingly, KPIs will vary from company to company because of differences in CEO management styles.
Regardless, for most companies there are numerous performance indicators likely to be part of a KPI report. Perhaps you'll be able to incorporate one or more of the following performance indicators in your current KPI report or as a basis for creating a new one.
Liquidity ratios - The Uniform Company Performance Report lists at least 12 liquidity ratios. Try settling on one or two that deal with the liquidity issues most important to your company.
Uninvested funds - Total uninvested funds minus reserve requirements will provide an ongoing measure as to how well you're doing at keeping the company's funds as fully invested as possible.
Loan commitments - A table showing loan commitments at the beginning of the period, new and funded commitments and the ending balance will illustrate activity and future obligations. Adding average rates for each of these categories will also give a good indication how upcoming loan yields will be affected.
Loans outstanding - A graph demonstrating loans outstanding at the onset of the phase, new loans funded, principal reductions and ending total loans will display loan activity. Viewing the average rate on the loan portfolio at the start and end of the period will present related profitability information.
Early pay-off loans - Loans beyond a certain dollar amount (e.g., large loans) paid off early may mean a lost customer or a potential opportunity.
Changes in large-balance deposit accounts - Every company has a number of customers who maintain significant balances. Considerable increases or decreases in those accounts could mean likely possibilities or problems.
Total number and dollar amount of new deposit accounts - Overall, this information provides a measure of growth. Tracking by type of account (i.e., checking, CD, savings, money market) supplies better data than just using totals.
Total number and dollar amount of closed deposit accounts - Adding new accounts is central, but the net increase is also very substantial. It costs a lot to replace accounts on an ongoing basis.
Changes in loan classifications - Changes in rating classifications or grades of loans larger than a specified dollar amount should be listed individually.
Expenses, other than payroll and interest - You're probably aware of big or unusual items, but it never hurts to have them reported formally. Set a threshold low enough to catch significant items, but high enough that you aren't producing a page-long list. Limits may vary depending on the nature of the expense item.
Average rate on earning assets - This quotient should be contrasted against the prior month or year-to-date. And always watch for trends.
Average cost of interest bearing liabilities - This ratio should also be compared to the prior month or year-to-date results. Once again, observe the trends.
Customer count - The number of customers who physically visited each location may be sizeable. Rising or declining numbers may specify a need to take a look at staffing or service levels.
Finally, you should evaluate your KPIs annually after you have established your plans for the next year. Make sure your KPIs include measurements that will provide early indications as to how well the year's goals are likely to be met.
For more information on the above topic, please contact Donald W. Nalley, Jr. at Beason & Nalley, Inc. at 256-533-1720 or email at dnalley@beasonnalley.com.
Watch out, the Internal Revenue Service toughens penalties!
Written by: Donald W. Nalley, Jr., CPA, CFP®, CVA, AM
It's not entirely proper to put the blame solely on the Internal Revenue Service: Congress has a hand in tougher penalties as well. There are two changes that we would like to bring to your attention, and both are important.
While the days of the old "tax shelters" may be gone, we cannot forget the rules. Because so many professionals, sellers and taxpayers learned the hard way, we don't hear as much in this area. Don't be fooled; what you may not consider a shelter just may be or at least the penalties may be just as severe if you enter into the transaction.
Tax law defines a "tax shelter" as any entity, investment, arrangement or other plan if a significant purpose is the avoidance or evasion of Federal income tax.
Note the word "significant". This is an expansion of the determination of what is a tax shelter. The old definition used the term "principal".
The regulations provide that a transaction will be considered to have a "significant" purpose of tax avoidance or evasion if:
- it is structured to provide tax benefits that are an important part of the intended results, and
- the promoter reasonably expects the same or substantially similar transaction to be presented to more than one taxpayer.
The regulations go on to indicate that these criteria would normally cover all tax planning strategies that work off the same "platform", even if there is some customization for each client.
In addition to the penalties that apply to the taxpayer, Circular 230 has been amended by the Internal Revenue Service to apply penalties to "practitioners" if they provide written advice or sign a return with a position taken in the return that may not be properly deductible. The terminology used in Circular 230 is similar to that used in the tax shelter regulations but expands the possibility of penalties to any "arrangement" that may not be proper.
The rules are very complicated and beyond the scope of a brief article. Suffice it to say, if you are considering a business asset purchase, the hiring of an employee, an advertising expenditure, or other similar purchase that is purely for a business purpose, you have very little, beyond your business budget, to be concerned with.. However, if you are considering an arrangement or transaction to "save taxes", whether deferring or avoiding, you have some work to do. And yes, the IRS is trying their best to put more of the burden directly on the tax professional, making it difficult for a CPA to sign a return if a transaction or arrangement has occurred that may meet the definitions. These changes have made it even more important to carefully evaluate transactions before they are finalized.
For more information on the above topic, please contact Don Nalley at Beason & Nalley, Inc. at 256-533-1720 or email at dnalley@beasonnalley.com. Coffee Talk
Scott Butler taught a "Government Contract Accounting" course in Las Vegas. This event was sponsored by Federal Publications.
Darryl Walker and Scott Butler taught a "Government Contract Accounting" course in New York. This event was sponsored by Federal Publications.
Don Nalley is scheduled to teach "Buying or Selling A Company: A Guide to Surviving an Acquisition" at the Von Braun Center on December 16th. This event is sponsored by the Huntsville Chamber of Commerce.
Beason & Nalley is hosting an "Electronic Invoicing" Seminar on December 6th. Representatives from Deltek will be here to teach the course.
Beason & Nalley held it's Second Annual Chili Cookoff. The Chili Dogs Team (members were Darryl Walker, Denise Miles, Laura Keith, Courtney Edmonson and Bethany King) won for "Best Presentation"; Mandy Kerce won "Best Dessert"; Brett Holt and Jennifer Taylor won for "Best Side Dish" and Courtney Edmonson won for "Best Chili".
Congratulations to Julie and Tim Reeves - they are expecting their first child in May 2006.
Congratulations to Melanie Dunn on her marriage to Stephen Clem. Related Information:
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