1. The Unique Alternative to the Big Four ® Procurement and Contract Audits Presented by: Bert Nuehring and Mark Maraccini From Crowe Horwath LLP

2. Procurement and Contract Audits 2014 ALGA Annual Conference 2 Outline  Major Risks for Procurements  Major Risks for Contracts  Importance of Audits of Procurements and Contracts  Audit Approaches  Common Findings  Case Study

3. Procurement and Contract Audits 2014 ALGA Annual Conference 3 Objectives 1.Identify risks surrounding Procurement and Contracts 2.Understand the significance of Procurement and Contract audits 3.Identify audit approaches and findings

4. Procurement and Contract Audits 2014 ALGA Annual Conference 4 Fraud Headlines

5. Procurement and Contract Audits 2014 ALGA Annual Conference 5 Major Risks for Procurement  Procurement risks can be summarized as falling under one or more:  Compliance (Financial/Reputational/Legal risk)  Waste (Financial risk)  Abuse (Financial/Reputational/Legal risk)  Fraud (Financial/Reputational risk)  Examples are:  Services not procured following State or Federal guidelines (Compliance)  Goods ordered are not required by the organization (Waste)  Goods ordered do not comply with corporate, environmental, health policies (Abuse)  Goods are not received by the organization (Fraud)

6. Procurement and Contract Audits 2014 ALGA Annual Conference 6 Major Risks for Procurements (Cont.)  Procurement Risk arises from vulnerabilities in organization controls  Understanding Procurement Risk is challenging  Public, authoritative data scarcely available  Preventing waste, abuse, and fraud in procurement is a considerable challenge  Procurement is an area with:  high risks for kickbacks  poorly negotiated deals  contract compliance  employee misuse of funds

7. Procurement and Contract Audits 2014 ALGA Annual Conference 7 Risk Mitigation Through Procurement  These risks may be mitigated through due diligence efforts taken during the procurement process  Design and distribution of an adequate solicitation document (e.g. RFP, RFQ, and ITB)  Selection and utilization of a knowledgeable evaluation committee  For governmental entities, competitive requirements may be prescribed by the Federal Government and/or the state laws and regulations. Requirements may include:  Encouragement of competition to the maximum extent possible  Maintenance of procurement files for all procurement transactions, including justification for sole or single source procurements  Use of or encouraging the use of small, minority, and woman-owned businesses  Identification of the lowest cost and most responsible bidder

8. Procurement and Contract Audits 2014 ALGA Annual Conference 8 Risk Mitigation Through Procurement (Cont.)  Procurement pre-work  Communication between the business owners and procurement staff is essential  Obtain an understanding of the technical requirements and geographic constraints that may impact the project  Have a clear idea of the project schedule and total project cost/size  Take advantage of institutional knowledge and identify where previous projects have gone awry  Assembling the solicitation packet is your opportunity to be proactive  Consider:  Respondents’ experience conducting projects of similar size and scope  Are subcontractors needed and, if so, how have previous teaming arrangements worked between the respondents and their proposed subcontractors  If the project is expected to have a long duration, complete due diligence procedures regarding the respondents’ stability  Make the most of past performance information – tell me the good and the bad!

9. Procurement and Contract Audits 2014 ALGA Annual Conference 9 Major Risks for Contracts  The risks associated with Contracts may include:  Ill-informed buying  Deliberate Contract manipulation  Conflicts of Interest  Cost over-runs  Disconnect between the contract initiator and contract administrator  Lack of monitoring mechanism for Contract compliance  Failure of Contract to meet the business needs

10. Procurement and Contract Audits 2014 ALGA Annual Conference 10 Major Risks for Contracts (Cont.)  Major function of Contracting  Ensure risks to owner and contractor are identified and managed in a way that both the parties are satisfied with project outcome  Factors contributing to an increase in Contract risk:  Increasing trend of outsourcing non-core processes (for example Payroll)  Static nature of contract with ever-changing business environment  Procurement/sourcing departments exploring ways to maximize business relationships

11. Procurement and Contract Audits 2014 ALGA Annual Conference 11 Why Audit Government Procurement and Contracts?  Stakeholders – internal and external – need assurance that goods and services are acquired in line with laid down procedures  Fraud, embezzlement, misuse of taxpayer dollars  Non-compliance with the Local, State or Federal procurement codes  Lack of controls around use of preferred vendors, negotiated contracts  Duplicate payments  Inefficient invoice processing  Lack of or limited segregation of duties involving payments, credits, and reconciliation of vendors/suppliers

12. Procurement and Contract Audits 2014 ALGA Annual Conference 12 Why Audit Government Procurement and Contracts? (Cont.)  Procurement/Contract Frauds:  Where an employee (or employees) conspires with an outside supplier  When an employee (or employees working together) establishes a dummy company or supplier account in the company’s systems and then works to steal from the employer via fraudulent contracts, invoices, and/or payments  Cost plus contracts - procurement fraud includes, but is not limited to, cost/labor mischarging, defective pricing, defective parts, price fixing and bid rigging, and product substitution

13. Procurement and Contract Audits 2014 ALGA Annual Conference 13 Why Audit Government Procurement and Contracts? (Cont.)  Independence from the parties being audited and an objective attitude toward the subject under audit  Use of systematic processes to collect and analyze substantial and appropriate evidence  Comparison to criteria for formulating conclusions. Examples of criteria include standards, goals/targets, benchmarks, and laws  Use of widely accepted professional audit standards

14. Procurement and Contract Audits 2014 ALGA Annual Conference 14 Why Audit Government Procurement and Contracts? (Cont.)  The credibility of the audit activity strengthens public governance by providing for accountability and protecting the core values of the public sector, which it does by assessing whether managers and officials conduct the public’s business transparently, fairly, honestly, and in accordance with laws and regulations.

15. Procurement and Contract Audits 2014 ALGA Annual Conference 15 Audit Approaches  Performance Audit (GAS)  Contract performance  Could be related to specific vendor contracts  Compliance Audit/Examination (AICPA)  Compliance over Local, State or Federal procurement codes  Compliance over agency procurement policies and procedures  Operational Audit (IIA)

16. Procurement and Contract Audits 2014 ALGA Annual Conference 16 Common Findings in Government Agencies  Inadequate or lack of Segregation of Duties  Inadequate or lack of documented Policies and Procedures related to Procurement and Contracts  Inadequate or lack of supporting documentation  Lack of a coordinated approach to purchasing  Authorization of orders by unauthorized individuals  Use of alternative suppliers as opposed to the preferred suppliers catalogue  Inadequate or lack of monitoring mechanism over procurement and contract compliance  Non-compliance with Local, State or Federal procurement codes

17. Procurement and Contract Audits 2014 ALGA Annual Conference 17 For more information, contact: Bert Nuehring Direct 630-706-2071 Bert.Nuehring@crowehorwath.com Mark Maraccini Direct 630-990-4410 Mark.Maraccini@crowehorwath.com