What you need to know as DOD ramps up procurement fraud investigations

The Defense Department is beginning to ramp up its scrutiny of procurement fraud and government contractors need to look at their own processes and practices to determine their level of exposure.

Fraud, waste and abuse risks are making headlines again in Department of Defense contracting. On Sept. 20, 2021, the Government Accountability Office (GAO) released its report “DOD Fraud Risk Management: Actions Needed to Enhance Department-Wide Approach, Focusing on Procurement Fraud Risks” (GAO-21-309) to congressional committees. To summarize, GAO concluded that DOD needed to take additional actions to enhance its approach to procurement fraud risks. However, considering the publicity the report is generating on Capitol Hill, this report may have implications well beyond the specific recommendations presented.

DOD procurement is inherently vulnerable to fraud

GAO was asked to review issues related to DOD's fraud risk management. DOD generally accounts for roughly two-thirds of federal contracting activity, obligating more than all civilian federal agencies combined. From fiscal 2016 to 2020, DOD obligations increased by about $122 billion on contracts for goods and services – including major weapon systems and information technology – to roughly 47,000 contractors. The scope and scale of this activity makes DOD procurement inherently susceptible to fraud.

GAO has long reported that DOD's procurement processes are vulnerable to fraud, waste and abuse. Additionally, the DOD Inspector General has reported contracting fraud as a major challenge. In fiscal 2020, the DODIG identified acquisitions and contract management as a major management challenge. In fiscal 2021, the IG reiterated that fraud and acquisition reforms continue to be enduring management challenges. Though the oversight community has issued many reports over the years, GAO’s most recent report confirms that the risks of fraud waste and abuse in procurement stubbornly persist.

Enduring evidence of DOD fraud, waste and abuse

In the report, GAO presented compelling realities regarding the scope of enduring DOD procurement and contract management challenges:

  • In 2020, the IG reported roughly one-in-five of its ongoing investigations were related to procurement fraud.
  • 72 percent of contractor disclosures from fiscal years 2015-2019 were for labor mischarging on DOD contracts
  • In 2018, the DOD reported to Congress that, from fiscal years 2013-2017, over $6.6 billion had been recovered from defense contracting fraud cases.
  • Procurement and contract management was one of the top five categories of complaints received through DOD Hotline.

Finally, the GAO reported that Defense Contract Audit Agency auditors submitted 229 Suspected Irregular Conduct Referral forms to the DODIG between fiscal years 2015 and 2019. Reports contained an estimated loss to the government and classifications of the irregularities, including accounting, billing, labor, pricing, materials, false claims, small business fraud and ethical violations such as kickbacks, gratuities and bribery.

Recommendations for improving procurement fraud risk management

The report’s overall conclusion was that DOD’s risk management program to assess and report fraud risks could be enhanced and improved. GAO made recommendations designed to strengthen DOD’s fraud risk management:

  • DOD should fill all the positions on its Fraud Reduction Task Force, a cross-functional team of subject matter experts from across the department established to prioritize fraud risks and identify solutions.
  • The DOD Comptroller should enhance its policies and handbook instructions to clarify that all fraud risks should be identified in the assessment process.
  • The DOD Comptroller should establish fraud risk management roles and responsibilities of all oversight officials within the department.

Increased visibility to fraud issues may fuel oversight and audit attention

GAO’s report and its findings and recommendations have brought the fraud issue to the forefront for lawmakers, some of whom have expressed dismay and concern. For instance, lawmakers have expressed skepticism that DOD will finally get serious about combating the fraud, waste and financial mismanagement. They have also urged the current administration to implement GAO’s recommendations quickly and fully, because failure to safeguard taxpayer dollars is completely unacceptable.

It has been our experience that this type of increased visibility and emphasis by congressional members will raise the awareness and sensitivity to potential fraud throughout the department. DOD oversight and audit agencies – the IG, DCAA and the service audit agencies – are likely to put additional emphasis on fraud reviews and devote more resources in their annual programs to high-risk fraud areas. For DCAA specifically, this will likely mean a continued focus on Truthful Cost or Pricing Data Act compliance and business systems audits. It may prompt a renewed strategic emphasis on identifying weak or non-existent system controls which are indicative of high-risk fraud areas.

Government contractors urged to refresh their risk profile and programs

Although the precise extent of DOD’s increased future oversight in the fraud area is yet to be determined, contractors would be well served by reexamining their risk profile and internal control environment. Contractor acquisition programs should be reassessed to determine the likelihood and impact of inherent fraud risks on the program’s finances, reputation and compliance. Fraud is arguably the one instance where materiality doesn’t apply because the disclosure of fraud will impact the contractor’s reputation regardless of the dollar amount misappropriated. Reviewing the suitability of the program’s existing internal controls to mitigate the fraud risks would also be wise. Given their customer’s challenges, it’s time for DOD contractors to increase vigilance in managing program fraud risks and the corresponding internal controls.