Contract Monitoring · 2019-12-08 · Fraudster Details In ___ percent of profiles, the perpetrators did not leave it at one single fraudulent act, but committed repeated acts of

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CONTRACT MONITORING

Jennifer Berrios, Luke Madonna, Stephan Ramcharran,

& Mike Wood

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Why are we here?

We are here because we have a duty and mission to carry out.

Today’s duty and mission:

– Learn about monitoring

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Roadmap

• Monitoring necessity

• Challenges and concerns

• Impact

• Seven‐step process

• Fraud

• Field visits

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Monitoring Necessity

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Why Monitoring is Necessary

• Agency missions

• Billions in State spending

• Risks

– Health & Safety

– Goal Achievement

– Dollars

– Reputation

• Fraud

• Errors

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Challenges and Concerns

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Brainstorming Session

Agency Concerns When Trying to Monitor

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Common Concerns

• Lack of resources (time, funding, staff)

• Staff turnover/Lack of training

• Lack of communication between program and fiscal departments

• Vendor compliance (Reports, timeliness of filings)

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Impact

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Impact

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7 Step Process

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7-Step Process

1. Identify risky contracts

2. Understand requirements

3. Identify risks

4. Prioritize risks

5. Determine risk response

6. Design/execute monitoring activities

7. Follow up

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Step 1:Identify Risky Contracts

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Step 1.Identify Risky Contracts

• What data do you have available?

• How can it help you identify risky contracts?

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Risks

• Health & Safety

• Goal Achievement

• Dollars

• Reputation

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Identify Risky Contracts

Sort contracts by:

• Contract Types

• Contract Amount

• Vendor Name & Contract Count

• Vendor Name & Spending to Date

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Identify Risky Contracts (cont.)

Sort contracts by:

• Contract Start Date

• Contract Description & Contract Count

• Contract Description & Contract Amount

• % Expended ‐ % Life of the contract

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Common Concerns

• Risk basis

• Other factors

– Quality of products and services

– Problems with vendors

– Current events

– Locations

– Etc.

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Filter By ‘Contract End Date” to Eliminate Expired Contracts

Filter By ‘Contract End Date” to Eliminate Expired Contracts

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Consider Eliminating Fully Expended

Contracts

Consider Eliminating Fully Expended

Contracts

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Common Concerns

Contract Type Sum of Current Contract Amount Sum of Spending to Date Count of Contract Type

Commodity 555,001,257.01$ 172,310,150.97$ 99

Community Projects Fund (Member Initiative) 13,156,897.00$ 10,662,947.32$ 509

Consultant 7,305,957,655.67$ 5,043,101,076.48$ 534

Contracts Not Subject to OSC Pre‐Audit 505,364,519.96$ 405,947,165.41$ 1,767

Equipment 46,320,955.22$ 40,967,498.77$ 38

Grant 14,225,068,221.14$ 9,538,591,439.48$ 7,412

Inter‐government ‐ Other 71,797,233.54$ 33,596,984.98$ 4

Land Purchase 30,000.00$ 30,000.00$ 1

Lease 438,011,159.03$ 305,212,152.89$ 80

Printing 273,464,215.00$ 219,468,473.12$ 9

Repayment to State 990,969,897.00$ ‐$ 5

Revenue Generating 1,263,254,569.75$ ‐$ 898

Service 309,972,036,478.61$ 12,791,498,708.82$ 521

Grand Total 335,660,433,058.93$ 28,561,386,598.24$ 11,877

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Filter on Risky Contract Type and Current Contract Amount

Filter on Risky Contract Type and Current Contract Amount

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Payment SizePayee/Vendor Total Amount Payments Average Payment

CENTERS FOR MEDICARE & MEDICAID SERVICES 264,471,731.40$ 2 132,235,865.70$

EXCELLUS ‐ DSH‐ BLUE CROSS BLUE SHIELD 86,947,204.78$ 1 86,947,204.78$

NEW YORK QUALITY HEALTHCARE CORPORATION 23,704,473.69$ 1 23,704,473.69$

DS600 OFFICE OF MENTAL HEALTH 45,237,119.08$ 3 15,079,039.69$

NEW YORK EHEALTH COLLABORATIVE INC 12,515,947.64$ 1 12,515,947.64$

MONTEFIORE HEALTH SYSTEM INC 23,887,296.00$ 2 11,943,648.00$

MAXIMUS INC 21,212,748.10$ 2 10,606,374.05$

HEALTHPLUS HP LLC 10,123,589.20$ 1 10,123,589.20$

ONE BROOKLYN HEALTH SYSTEM INC 10,000,000.00$ 1 10,000,000.00$

UNITEDHEALTHCARE OF NEW YORK INC 9,871,323.37$ 1 9,871,323.37$

HEALTH FIRST PHSP INC 16,997,203.77$ 2 8,498,601.89$

EXCELLUS ‐PGP‐ BLUE CROSS BLUE SHIELD 30,177,188.27$ 4 7,544,297.07$

ROSWELL PARK CANCER INSTITUTE 88,856,488.69$ 17 5,226,852.28$

LONG ISLAND JEWISH MEDICAL CENTER 7,358,670.59$ 2 3,679,335.30$

MVP HEALTH PLAN 5,024,512.42$ 2 2,512,256.21$

EXCELLUS HEALTH PLAN INC 7,370,331.88$ 3 2,456,777.29$

ST JOSEPHS HOSPITAL 4,616,442.00$ 2 2,308,221.00$

NEW YORK CITY SCHOOL DISTRICT 5,570,959.47$ 3 1,856,986.49$

ST JAMES MERCY HOSPITAL 3,406,746.12$ 2 1,703,373.06$

CENTERS PLAN FOR HEALTHY LIVING LLC 1,608,694.46$ 1 1,608,694.46$

HEALTH INSURANCE PLAN OF GREATER NEW 3,108,638.32$ 2 1,554,319.16$

MAXIMUS HEALTH SERVICES INC 9,226,155.40$ 6 1,537,692.57$

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Monitoring

• You’ve selected a contract, now what?

• MONITOR!

• (Yeah, but what is that, really?!)

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Monitoring

Ongoing activities, special evaluations or a combination of both used to ensure that controls are operating as intended.

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Controls Purpose

• Compliance with laws, rules, and regulations

• Accomplish goals and objectives

• Relevant and reliable data

• Efficient and effective operations

• Safeguarding assets

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Internal Controls Pyramid

Control Environment

Risk Assessment

Control Activities

Monitoring

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Monitoring

Ongoing activities, special evaluations or a combination of both used to ensure that contractors are operating as intended.

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Operating as Intended

How do agency employees and contractors know what’s intended?

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Step 2:Understand

Contract Terms

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Step 2. Understand Contract Terms

• Intuition

• Conversation

• Purchase order details

• Contract specifications

• Laws, rules & regulations

• Guidelines

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Requirements

• Understand

• Assess quality

• Ask this:

– How can I verify whether something has occurred, based on how the contract specification is written?

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Specifications

• Specific

• Measurable

• Achievable

• Relevant

• Time‐Bound

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Specific

• Clear, detailed, easily understood

• Deliverables

– Description

– Benchmarks

• Location

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Measurable

Performance measures

• Quantities

• Timing

• Expertise

– Licenses

– Degrees

– Certifications

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Achievable

Payment provisions

• Payment triggers

• Invoice formats

– Description of deliverables

– Services

• Names of workers

• Hours for each worker

• Client names (SSN and/or address)

• Dates of service

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Relevant

• Requirements

– Is the vendor able to meet specific terms set forth?

• Reasonableness

– Producing Records

– Reports

– Electronic/Paper

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Time Bound

• Set forth time frames

• Right to audit

– Specify monitoring in contract language

– Consequences for non‐compliance

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Specification Example

The vendor shall submit a properly executed application for payment, together with appropriate backup supporting the amount billed.

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Improved Specification????

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SpecificationAdminister the pre‐tax transportation program for eligible employees.

Auto‐answer customer service calls within 7 seconds (99% annual compliance), with a representative on the line within 2 minutes (90% annual compliance).

Fares mailed to recipients to use by the first of the month.

Monthly billing rate on a sliding scale based on the number of enrollees.

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Step 3:Identify Risks

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Step 3. Identify Risks:What can go wrong?

• Programmatic

–What can prevent the goal accomplishment?

• Fiscal

– How can the contractor get money they didn’t earn?

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What is Fraud?

• Misstatement

–Mistake vs. Fraud

• Knowledge of falsehood/intent

• Reliance by victim

• Damage

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What is Fraud?

Fraud is any intentional act or omission designed to deceive others, resulting in the victim suffering a loss and/or the perpetrator achieving a gain.

Source: “Managing the Business Risk of Fraud: A Practical Guide” ‐ IIA, AICPA, ACFE

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What is Occupational Fraud?

The use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’sresources or assets.

Source: 2018 Report to the Nation on Occupational Fraud & Abuse

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How Much Is Lost?

• 5% of annual revenues

• Median loss of $130,000

– $200,000 for small businesses

– $75,000 for not for profit

– $118,000 for government

• 22% had losses of at least $1 million


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Frequency and Median Loss Based On Duration of Fraud


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How Is It Committed?

CorruptionAsset

MisappropriationFinancial Statement

Fraud

Bribery• Bid Rigging• Invoice Kickbacks

Fraudulent Disbursements• Check & Payment Tampering• Billing

Asset/Revenue Over‐ and Understatements• Improper Disclosures

Conflict of Interest• Purchasing Schemes

Noncash•Larceny

Most Common

Least Common

Most $$$ Least $$$



5757


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Where Does It Happen?

More than 77% of the frauds in the study were committed by individuals in 1 of 8 departments, including:

• Accounting – check tampering, billing

• Operations – corruption, noncash theft

• Executive/upper management – corruption, billing, financial statement fraud, expense reimbursement

• Sales – corruption, noncash theft


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Internal Control Weaknesses Contribute to Fraud


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How Does Fraud Happen?

Rationalization

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Motive Flags

High debt

Significant financial losses

Excessive alcohol, drugs or gambling

Extramarital affair

Perceived organizational inequities

Job frustration or resentment

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Opportunity Flags

Familiarity with operations

Ability to override controls

No periodic rotation of key employees

No uniform personnel policies

Lack of strong internal controls

Management does not prosecute or punish fraud perpetrators

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Rationalization Flags

They owe me

I’m overworked

I do the work of two people

They’ll never miss it

I’ll just borrow it; I’ll pay it back

I’m not really hurting anyone

Everyone is a little dishonest

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Capability Flags

Position/function

Brains

Confidence/ego

Coercion skills

Effective lying

Immunity to stress

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Profile of the Worst Occupational Fraudster

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Age


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Education


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Criminal History


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Occupation


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Tenure


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Gender


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

World Middle Eastand North Africa

United StatesMale Female

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Profile of the Occupational Fraudster?

Typical Worst

Age 31‐50 56+

Education University Degree Postgraduate Degree

Criminal History None None

Occupation Employee/Manager Owner/Executive

Tenure 1‐5 years 6+ years

Gender Male Male

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12% 24% 33% 52% 68%77% 84% 93% 99%

Fraudster Details

In ___ percent of profiles, the perpetrators did not leave it at one single fraudulent act, but committed repeated acts of fraud.

Source: KPMG Global Profile of the Fraudster Survey 2013

93%


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Fraudster’s Motivation

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How Long Does Fraud Go Undetected?

A one‐year study conducted by the Association of Certified Fraud Examiners (ACFE) consisting of 2,690 cases world‐wide of occupational fraud found the typical fraud continued for __ months before being detected.


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6 months 10 months 12 months 16 months 18 months 22 months 24 months


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How Long Does Fraud Go Undetected?


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Fraud Detected By:

Source: 2018 & 2016 Report to the Nation on Occupational Fraud & Abuse

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Source of Tips:

Source: 2018 & 2016 Report to the Nation on Occupational Fraud & Abuse

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Red Flags

A warning or sense that something isn’t right

Should lead you to take a closer look at the transaction

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Document Flags

Inadequate, copied or apparently altered documents

Invoice figures do not add up

No letterhead

Misspellings on document

Vague information

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Document Flags

Hand written endorsement

No phone number or fake phone number

Altered payee name

PO Box, suite number, mail drop address

Company name includes initials or personal name

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Document Flags

Round amounts or amounts under approval levels Large dollar payments made with cash Vendor address is not local, but check is cashed locally

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Bid Rigging Flags - Vendors

Fake Vendors

Agency staff created bids in some cases

Real Vendors

No knowledge of bid submission

Shared owner with favorable vendor

Rescind bid

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Contracting Flags

Restrictive or vague specifications

Bids/quotes received from the same fax

Similar letterheads of bidders

Unreasonable bid amounts (prevailing wage)

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Contracting Flags (cont)

Unable to confirm bids with losing vendors

Lowest bidder does not receive award

Lack of vendor contact information on bids

Signature on bid is the company name

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Conflict of Interest Flags

Relationships between awardee and agency staff

Address or identification number match

Unexplained or unusual favoritism of a particular vendor

Close socialization with or acceptance of gifts from the awardee

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Bribes and Kickbacks Flags

Unjustified favoritism of a certain vendor

Unexplained increase in wealth of employee

Close socialization with or acceptance of inappropriate gifts from a vendor

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Additional Red Flags

Billed for services – more difficult to verify

No supporting documentation submitted with payment request

Relationships between the sponsoring legislator and NFP Executive(s)

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Finding Relationships• Check the Financials

– NFP’s 990 ‐www.guidestar.org

– For Profit – Published

• Google

• Google Maps

• White pages

• SeeThroughNY

– www.seethroughny.net

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Why Don’t People Report Their Suspicions?

• Fear of repercussion

• Feel like nothing will be done

• Inconvenience

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Civil Service Law §75-b –“Whistleblower Law”

Prohibits a public employer from taking disciplinary action against a public employee because that employee reveals information to a governmental body regarding a violation of a law, rule or regulation which presents a substantial and specific danger to public health and safety or reveals information which the employee reasonably believes is an impropergovernmental action (i.e., violation of Federal, State or Local laws, rules or regulations).

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Civil Service Law §75-b –“Whistleblower Law”

To be protected by this law, you must make a good faith effort to inform your employer and give them reasonable time to take appropriate action.

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Specification What can go wrong?Administer the pre‐tax transportation program for eligible employees.

Program services provided to ineligible employees.


Calls answered outside these time periods on average, with some exceeding the 2 percent penalty variance in the contract.


Employees don’t receive their fares –have to pay retail.


Vendor bills at a higher rate than entitled to, either by inflating the rate or by charging a rate for a higher strata of number of enrollees.

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Step 4:Prioritize Risks

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Step 4. Prioritize Risks: So What’s The Big Deal?

IVArea of

Most Concern

IIArea of

Minimal Concern

IIIArea of

Moderate Concern

IArea of

Least Concern

HIGH

LOW

Impact

Likelihood

LOW HIGH

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IVArea of

Most Concern

IIArea of

Minimal Concern

IIIArea of

Moderate Concern

IArea of

Least Concern

HIGH

LOW

Impact

Likelihood

LOW HIGH

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Step 5:Determine Risk

Response

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Step 5. Determine Risk Response

IIArea of

Minimal Concern

IIIArea of

Moderate Concern

IVArea of

Most Concern

IArea of

Least Concern

HIGH

LOW

Impact

Likelihood

LOW HIGH

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Determine Agency’s Response To The Risks

• Mitigate

– Revise administrative procedures

– Improve control systems

– Increase auditing

– Other

• Accept

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Step 6:Design/Execute

Monitoring Activities

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Step 6. Design and Implement Monitoring Activities

Design steps to mitigate risks

• Who is going to do it?

• How are they going to document it?

• Whom are they going to give the documentation to?

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Monitoring

Objective

• Gather information to determine whether or not things are happening the way they are supposed to be.

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Evidence

• Enough information (Sufficient)

• The “right” information (Appropriate)

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Evidence

• Three types of evidence:

• Thomas P. DiNapoli

– Testimonial

– Physical

– Documentary

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EvidenceDegree of Reliability

Evidence Type

More reliable Less reliable

More reliable

Physical

• Evidence obtained through direct physical examination, observation, computation and inspection

• Evidence obtained through indirect means

Less Reliable

Documentary

• Original documentation received from independent parties

• Photocopies of documents• Documents received from

the contractor

Testimonial

• Statements obtained from unbiased persons with direct knowledge under conditions in which the persons may speak freely

• Statements obtained from persons who• Are biased or have

only indirect knowledge

• May feel intimidated

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Specification What can go wrong? How agency can monitor?Administer the pre‐tax transportation program for eligible employees.

Program services provided to ineligible employees.

Compare vendor’s monthly employee registry to OSC report of eligible employees. Review all variances with vendor.


Calls answered outside these time periods on average, with some exceeding the 2 percent penalty variance in the contract.

Review monthly and annual reports of system performance to identify anomalies. Based on variances, determine the need to assess penalties.


Employees don’t receive their fares – have to pay retail.

Obtain database of vendor incoming calls to identify complaints of not receiving fares timely.


Vendor bills at a higher rate than entitled to, either by inflating the rate or by charging a rate for a higher strata of number of enrollees.

Verify number of enrollees based on item 1 above, compare rate charged to the rate in the contract based on the appropriate volume strata.

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Contractor Concerns

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Who Should Monitor?

• Program staff

• Finance staff

• Consultants

• Agency auditors

• OSC auditors

PP PP PP

FF

PP

FF

FF

CC

FF

AA

OO

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Monitoring Process

• Timing

• Extent

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Human Communication

• ___ % communicated through words

• ___ % communicated in hidden messages

• ___ % communicated through nonverbal behavior

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Human Communication

• 3.5 % communicated through words

• 3.5 % communicated in hidden messages

• 93 % communicated through nonverbal behavior

– 55% body language/facial expressions

– 38% tone/voice

Source: Mehrabian, Albert (1971). Silent Messages (1st ed.)

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Facial Expressions

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Before You Go…….

• What do you already know?

• What do you still need to know?

• What do you need to see?

• Who can tell you?

• Who can show you?

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At the Contractor

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Professional Skepticism

An attitude that includes a questioning mind and critical assessment of information.An attitude that includes a questioning mind and critical assessment of information.

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Questioning Mind

• Why?

• Show me!

• Does this make sense?

• How can I verify it?

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• Prepare

• Rapport

• Use open‐ended questions

• Use list?

• Leave business card

The Interview

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Desk Audit

• Phone calls

• Documentation

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After the Road Trip or Desk Audit

• What did you learn?

• Was everything “O.K.”?

• Were there any red flags?

• Who needs to know?

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Qualities of an Effective Monitor

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Step 7:Follow‐Up

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Step 7. Follow UpDegree of Compliance

Agency Response

High • Re‐evaluate and possibly reduce monitoring frequency

Moderate

• Direct the contractor to correct identified deficiencies

• Facilitate development of a corrective action plan

• Advise accounts payable employees

• Identify and recover any overpayments

• Increase scrutiny of contractor reports and invoices

• Increase frequency of follow‐up monitoring activities

Low

• Facilitate development of a corrective action plan (where practical) and increase the frequency of follow‐up monitoring activities


• Terminate contract where corrective action is not practical



• Consider referral for prosecution

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Review

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Review:

The 7 Step Process

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6

5

4

3

2

1

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Step 1. Identify Risky Contracts

• What data do you have available?

• How can it help you identify risky contracts?

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Step 2. Understand Contract Terms

• Intuition

• Conversation

• Purchase order details

• Contract specifications

• Laws, rules & regulations

• Guidelines

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Step 3. Identify Risks:What can go wrong?

• Programmatic

–What can prevent the goal accomplishment?

• Fiscal

– How can the contractor get money they didn’t earn?

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IIArea of

Minimal Concern

IIIArea of

Moderate Concern

IVArea of

Most Concern

IArea of

Least Concern

HIGH

LOW

Impact

Likelihood

LOW HIGH

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Step 5. Determine Risk Response

• Mitigate

– Revise administrative procedures

– Improve control systems

– Increase auditing

– Other

• Accept

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Step 6. Design and Implement Monitoring Activities

Design steps to mitigate risks

• Who is going to do it?

• How are they going to document it?

• Whom are they going to give the documentation to?

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Step 7. Follow UpDegree of Compliance

Agency Response

High • Re‐evaluate and possibly reduce monitoring frequency

Moderate

• Direct the contractor to correct identified deficiencies

• Facilitate development of a corrective action plan




• Increase frequency of follow‐up monitoring activities

Low

• Facilitate development of a corrective action plan (where practical) and increase the frequency of follow‐up monitoring activities


• Terminate contract where corrective action is not practical



• Consider referral for prosecution

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For Future Reference

Guide to Financial Operations

‐ XI.11.F Contract Monitoring

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Final Thought

Margaret Mead