Biting the hand that feeds you: a vendor takes advantage of internal control deficiencies and employee trust to overbill one of its clients by more than US $3.5 million.

Author:Carroll, James
Position:Fraud Findings - Manufacturing USA Inc. - Heavy Duty Movers

Manufacturing USA Inc. (MUI) received three hotline calls within a two-day period indicating that a vendor, Heavy Duty Movers (HDM) was falsifying billings for services provided, hours worked, and materials used. The reports estimated that the losses resulting from this activity were approximately US $250,000.

MUI and HDM had a business relationship that spanned 15 years. HDM s original contract stipulated that it provide one MUI facility with internal moving services for raw materials coming into the plant and other intra-facility services for staging, moving products produced to various onsite inventory storage areas, loading and moving pending shipments into position, and maintaining and repairing various equipment. Over time, based on requests from plant personnel, HDM performed other tasks and services that were not covered by the contract. Additionally, HDM's only local office was a building it had built on MUI's facility site. The investigation revealed that HDM had no other customers in the area or state.

Before initiating a full investigation, MUI assessed the hotline allegations--which were vague--and attempted to contact the whistleblowers to establish rapport, initiate dialogue, and obtain additional details. In the meantime, preliminary inquiries and general information-gathering were under way.

Investigators started with the purchasing department to determine specifics of the vendor relationship, including contract review and assessing the business relationship (e.g., whether there had been many complaints about the vendor's conduct or level of service). This initial inquiry identified several red flags. First, the contract with HDM had not been bid out, or benchmarked, in at least a decade. Second, the most recent contract had two additional line items--one for a service that was unrelated to the vendor's primary purpose and another for miscellaneous charges. Neither item identified a pricing structure or line item value. Lastly, the associated buyer did not have specific knowledge of the services HDM provided at the facility.

There was an onsite MUI employee responsible for contract administration and overseeing HDM's day-to-day activities, which initially appeared to be a good control and mitigating factor in preventing and detecting vendor misconduct. However, he did not have a copy of the most recent agreement and stated that purchasing personnel told him to stay out of administering the agreement. He also did not receive...

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