The following is extracted from: “Modernizing Governance: Leadership, Red Flags, Trust and Professional Power” by Andrew Massey and William Hutton (2006)
Professor Andrew Massey is the Academic Director, International School for Government, King’s College, London. William L. Hutton is a member and Honorary Fellow of the Chartered Institute of Bankers in Scotland and a Certified Fraud Examiner.
“…In the US, where it has been suggested that fraud and corruption may cost the economy in excess of $400 billion a year (Kramer, 2005, p. 1), larger jurisdictions produce handy checklists of red flags and questions for officials to detect the early signs of possible wrong doing. One of the more comprehensive and accessible is that of the attorney general of the State of New York, which identifies different kinds of fraud and conspiracy and then provides illustrations of how officials ought to conduct themselves (Spitzer, 2003). In many instances, good governance and the enforcement of ethical behaviour by professionals would secure value for money in service delivery. Kramer (2005) has identified the types of wrong-doing and then lists the red flags. The following list of red flags is an extensively edited and amended version of Kramer’s list:
The exclusion of qualified bidders is part of pre-solicitation bid-rigging. A variety of tactics are employed to achieve this, including arranging narrow or unduly burdensome pre-qualification criteria; establishing unreasonable bid specifications; splitting purchases to avoid competitive bidding; and making unjustified sole awards. Red flags include:
- Several different consultants employed to advise the government departments, giving rise to a ‘choose and confuse/pick and mix’ situation regarding the eventual award of contracts based on professional advice.
- Lock-out clauses.
- A significant number of qualified bidders fail to bid.
- Unreasonably narrow contract specifications.
- Allowing an unreasonably short time to bid.
- Adopting unreasonable ‘pre-qualification’ procedures.
- The failure to adequately publicize requests for bids, for example using only local publications or failing to publicise the request for bids.
For corrupt payments, such as bribes and kickbacks (which may include non financial as well as financial benefits), the red flags include:
- Improper or non-competitive selection of a contractor.
- Unjustified favouritism of a certain contractor, for example the approval of high prices or the acceptance of low-quality goods.
- Unnecessary broker or middleman involved in transactions (this allows broker’s ‘fees’ to be brought into the bidding process).
- Procurement officials accept inappropriate gifts and entertainment.
This allows pre-selected contractors to win contracts on a rotating basis, or to ‘carve out’ territories. What in the UK used to be known as ‘Buggin’s turn’ can form an element of this. It has the following red flags:
- The winning bid is too high compared to cost estimates, published price lists, similar jobs or industry averages.
- The rotation of winning bidders by job, type of work or geographical area.
- Losing bidders are hired as subcontractors.
- Unusual bid patterns, for example the bids are too high, too close, too consistent, too far apart, round numbers, incomplete, identical or similar to a prior or another bid.
Change of order abuse
The red flags for change of order abuse, where a contractor in collusion with officials can submit a low winning bid and then increase the price and profits at a later stage by submitting change of order requests, include:
- Weak controls regarding the review of the need to change orders.
- Numerous unusual or unexplained changes of orders.
- A pattern of low bid awards followed by changed orders.
- Vague contract specifications followed by changed orders.
- Incomplete or ‘preliminary’ specifications subject to change based on later engineering studies etc.
Conflicts of interest
These arise, or may be perceived to have arisen, if officials responsible for procurement have undisclosed interests in or with a supplier or contractor, or accept inappropriate gifts, favours or subsequent employment or consultancies from a supplier or contractor. Red flags here include:
- Unexplained or unusual favouritism of a particular contractor or supplier.
- Contracting or purchasing officials ‘living beyond their means’.
- Officials have discussions about employment or consultancy with a prospective supplier.
- Close socialization with and acceptance of inappropriate gifts, travel, or entertainment from a supplier.
- Procurement officials or politicians appear to conduct or have an interest in a side business related to suppliers.
Cost mis-charging is done to inflate profits, red flags are:
- The supplier has simultaneous similar cost-type fixed price contracts.
- Transfers of material costs from one contract to another, particularly from a fixed-price or commercial contract to cost-type of government contract.
- Transfer of charges to or from any type of holding or petty cash accounts.
This occurs if contractors fail to disclose accurate, current and complete pricing. The use of inflated costs in proposals for labour and materials, or fictitious price quotations from phantom suppliers. Red flags include:
- The contractor delays or is unable to provide supporting documentation for costs.
- The contractor provides inadequate or out-of-date documentation for cost proposals.
- The contractor fails to record rebates and discounts.
- Unusual variances between estimated or reported costs and actual costs.
Failure to meet contract specifications
The red flags of failure to meet contract specifications are:
- Discrepancies between test and inspection results and contract claims and specifications.
- Failed tests and inspections.
- Low quality, poor performance and high volume of complaints.
- Early failure or high repair rates.
Leaking of bid information
Red flags are:
- Poor controls on bidding procedures, such as failure to enforce deadlines.
- Winning bid just under the next lowest bid.
- Private opening of bids.
- Acceptance of late bids.
- Bid due date extended unnecessarily.
- Late bidder is the low bidder.
The red flags of bid manipulation include:
- Poor controls and inadequate bidding procedures.
- Winning bid voided for ‘errors’ in contract specification and the job is re-bid.
- Acceptance of late bids.
- Bids are ‘lost’.
- A qualified bidder is disqualified for questionable reasons.
The major red flags of rigged specifications include:
- Only one or a few bidders respond to a request for bids.
- Similarity between specifications and winning contractor’s product or services.
- Specifications are significantly narrower or broader than previous requests for bids.
- The purchaser uses a brand name in the request for bids.
- High number of competitive or sole source awards to one supplier.
Here the bidding process is rigged by the inclusion of line item requests for bids on certain works, goods or services that will not actually be called for under the contract and only the favoured bidder is aware of this, enabling them to submit an unreasonably low bid on the line item making them the most competitive overall:
- A particular line item appears to be unreasonably low.
- Subsequent change orders reducing requirements for low bid line item.
- Particular line item bids do not appear to have been performed or purchased as specified in the contract.
- A bidder is close to procurement personnel or participated in drafting contract specifications.
Unjustified sole source awards
Red flags are:
- Sole source awards just above or just below competitive bidding limits.
- Previously competitive procurements become non-competitive.
- No justification or documentation for non-competitive awards.
- Split purchases to avoid competitive bidding limits.
- Awards made below the competitive bid limits that are followed by change orders that exceed such limits…”
Spitzer, E. (2003), Combating Fraud in Public Purchasing (Anti-Trust Bureau, Attorney General’s Office, State of New York, Albany).
Kramer, W. (2005), Corruption and fraud—the basics. See https://web.archive.org/web/20060712161454/http://www.wmkramer.com/info.html