Financial matters Patrick Oki

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Take the initiative to understand fraud schemes and prevent them

This month's sentencing of former state officials and contractors on bid-rigging of repair contracts at the Honolulu Airport has caused increased awareness of a certain type of fraud.

It is one of the most difficult to detect and one of the most expensive white-collar crimes in the nation: procurement fraud.

These former state officials were found guilty of conspiring with certain third-party contractors to manipulate the state bidding process by submitting fraudulent bids, inflating the value of the awarded contracts and receiving kickbacks from the participating contractors.

Procurement fraud enriches the contractor or supplier and/or the procurement official. Like other types of fraud, it involves intentional deception and is designed to give an unfair advantage over other contractors.

The cost of procurement fraud not only involves monetary losses but may, at times, affect safety and service. As such, procurement fraud negatively affects both the public and private sectors.

Unfortunately, procurement fraud can be very difficult to detect and investigate. There are many schemes to commit the fraud, and the fraud itself can occur during any phase of the procurement process. Collusion between the procurement official and contractor adds to the difficulty of uncovering the fraud.

In the Honolulu International Airport fraud case, the fraud that began 16 years ago lasted for almost 11 years and involved collusion between airport officials and contractors. Information of the scheme was first reported in the local news in the middle of 2002.

According to the Association of Certified Fraud Examiners, establishing an effective, proactive procurement fraud detection program is a two-step approach.

Step 1 is to identify the most vulnerable fraud threats to your organization's procurement process.

Start by performing a fraud risk assessment in the procedure process. Identify areas of concern, especially in the areas of segregation of duties and areas involving money.

Step 2 is to tailor the detection program to generate fraud leads/indicators from employees who are in the best position to observe the fraud indicators of those vulnerabilities.

Common sense prevails in this area. Employees should be willing and able to question the procurement of goods and/or services, the process of selecting vendors, the services being rendered, and relationships including nepotism.

Much fraud, waste, and mismanagement can be prevented with some basic internal measures and proactive staff involvement.

Take the initiative to understand fraud schemes and be aware of red flags that could uncover fraud.

Don't be afraid to report fraudulent activities.

In the United States, the Sarbanes-Oxley Act emphasizes fraud hotlines for public companies, but they're still a novel idea for many organizations and government agencies.