​Kickbacks in the News

Close relationships between clients and contractors make construction projects a prime target of fraud.

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​Investigators from the New York State Police and Manhattan district attorney allege that executives of media company Bloomberg L.P. and interior construction firm Turner Construction received bribes and kickbacks from subcontractors working on projects at Bloomberg's offices, The New York Times reports. According to investigators, the "pay-to-play" scheme bypassed the two companies' computer and budget systems. Among those implicated in the scheme was Bloomberg's global head of construction, who has since been fired. Individuals close to the investigation say it is part of an ongoing probe of bribery and bid-rigging in New York's $9.4 billion-a-year industry of designing and building office interiors. Bloomberg is no stranger to such fraud. Its previous interior construction contractor, Structure Tone, pleaded guilty in 2014 to charges of encouraging subcontractors to inflate costs on invoices.

Lessons Learned

According to Kroll Corp.'s 2017/2018 Global Fraud & Risk Report, fraud continued to climb in 2017. Overall, 84 percent of surveyed executives report their organization fell victim to at least one instance of fraud in the past 12 months, up from 82 percent in 2016. This represents a continuous, year-over-year rise since 2012, when the reported incidence was 61 percent. Furthermore, the construction, engineering, and infrastructure sector had the greatest year-over-year increase in fraud incidents. More than four in five (83 percent) respondents in that sector report some fraud, which is 13 percentage points higher than in 2016. While information theft, loss, or attack is the most reported type of fraud (33 percent), regulatory breaches and vendor/supplier fraud are close behind at 30 percent each.

Although investigators have not implicated Bloomberg, itself, of fraud in this case, the company's relationship with its general contractors may lack effective oversight and monitoring. In fact, Bloomberg may have overlooked several warning signs indicating potential fraud committed by internal personnel, including:

  • Too close relationships with vendors.
  • A "wheeler-dealer" attitude among senior managers, who deliberately worked outside of control procedures to pursue their own interests.
  • Other broad control issues.

What can be done? Here are some steps organizations can take to minimize fraud and its impact in construction contracting:

  • Establish controls. Active controls that seek out fraud can significantly limit the losses incurred through illegal activity. Controls include a range of activities, from surveillance and monitoring to internal audits and management reviews. When selecting contractors through a noncompetitive bidding process, organizations should use an evaluation committee with objective members. They should segregate duties to ensure that access to sensitive information or the level of approval authority is limited, as appropriate. And, senior management of the parent company should regularly oversee and monitor compliance with contracting policy.

    Controls also should address appropriate corporate structures to separate different companies, their authorities, accountabilities, and actions. Corporate arrangements while working on multiple projects can cause contractors and owners to develop too close a relationship. These interactions can lead to agreements ― regardless of the intentions of any party involved ― that are executed outside of established controls or that lead to change orders that are not reviewed through a procurement process.
     
  • Enforce controls. The most effective way to minimize fraud losses is to prevent them from occurring. An anti-fraud culture means communicating the importance of prevention, enforcing the procedures, and providing the support and training needed to do so. Management should test the company's internal control system regularly for possible holes. In addition to an external audit of controls and financial reporting, if a company suspects or becomes aware of potential fraudulent activity, management should launch an internal investigation or hire an outside firm to handle the task.
     
  • Define the cost of work to limit the opportunity for abuse. Often, a fraudulent contractor invoices for costs that are not allowed in the contract. Agreements should include a provision that clearly defines all costs of work that will be compensated for by the owner, including what is allowable and what is not. These definitions should include benchmarking of costs across a comparable cross-section of potential bidders within the industry. The New York Times story notes that Bloomberg and Turner are defendants in a bid-rigging lawsuit filed by a subcontractor, Nastasi & Associates. The suit alleges that Bloomberg and Turner employees altered Nastasi's bid on a work contract — raising it by $100,000 — to prevent the firm from being selected as the low bidder.
     
  • Audit contractors throughout the project. External audits may not detect irregularities, so management should make sure all negotiated costs and contracts include a right-to-audit clause to allow the organization to conduct internal audits. Internal audits should be conducted by experienced staff members or outsourced to auditors with backgrounds in construction audits. The scope of these audits should include information-management and record-keeping practices.

    As this story points out, records for jobs were supposed to be kept at Turner's offices, as part of the company's compliance requirements. However, in this case, employees did not use Turner-issued devices and kept job records at Bloomberg work sites. The absence of records such as contracts, budgeting data, and related emails should have been a red flag to overseers at both Bloomberg and Turner that something was going on to avoid in-house rules and bypass the companies' computers and systems.

    As past stories have shown, filtering software can help organizations scan seemingly massive amounts of email and other computer records to detect illegal activity. This software can ferret out irrelevant and duplicate information from much larger databases than the two computer hard drives involved in this story.
     
  • Set up a hotline and pay close attention to credible complaints about contracting practices. Tips gathered through a hotline or similar method can have a substantial impact on fraud detection. Bloomberg's global head of real estate warned management about allegedly illegal actions by its head of construction and other executives, but the company apparently did not act on the information.
Art Stewart
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About the Author

 

 

Art StewartArt Stewart<p>​Art Stewart is an independent management consultant with more than 35 years of experience in internal audit, financial management, performance measurement, governance, and strategic policy planning.​​​</p>https://iaonline.theiia.org/authors/Pages/Art-Stewart.aspx

 

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