Property Management fraud controls and audit checks

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					Technical Bulletin 97/36

Property Management fraud
controls and audit checks


Assistant Director Estate Works Services
Operations and Client Services Directorate
Sutton COldfield Mu extn 2180
Direct Dialling 0121 311 2180


September 1997

If missing copies are required, please contact your TLBH distribution point. A
full lisl of DEO, MOD and PSA publications which are relevant to works
activities on the Defence Estate are contained in the DEO Technical Publication
Index (TPI) for MOD employees. Copies of the TPI are available through your
TLBH Works focal point. Consultants and contractors should obtain copies fron
the Stationery Office.

Serial   Title

97/01    Authorising Engineers appointment procedures

97/02    Health and Safety Audit & Monitoring of MOD Safety Rules and Procedures

97/03    Implementation of new MOD Safety Rules and Procedures
97/04    Work equipment regulations
97/05    Requirements for the professional inspection of fuel facilities and flammable
         dangerous goods stores
97/06    The assessment of underground tanks
97/07    Standard report for the inspection of fuel facilities and flammable dangerous
         goods stores
97/08    Issue of MOD Electricity Safety Rules and Procedures SRP 01        -

97/09    Buried steel fuel pipelines: coating condition and cathodic monitoring
97/10    Withdrawn please destroy

97/11    Ventilation, flues and installation of heating appliances
97/12    Accommodation Scales and Reference Costs Reviews       -

97/13    Updating Cost Estimates using Tender Price Indices
97/14    Fuse Pillars Specification 039

97/15    Junior Ranks’ Single Living Accommodation (JRSLA) DMG 04       -

97/16    Policy and practice on the use of hydroflurocarbons (HFCs) as refrigerants in
         works air conditioning and refrigeration
97/17    Environmental Protection the Montreal Protocol on substances that deplete the

         ozone layer Amended EC Reg 3093/94

97/18    The role ofDEO(TSD) Technical Authorities and Authorising Authorities
97/19    Water supply reducing consumption, losses and costs

97/20    Safety Rules and Procedures 01 Electricity Issue of Correction Slip
                                                        -       -

97/21    Uninterruptible power supply requirements for closed circuit television security
97/22    Installation of alarms for automatically controlled steam and hot water boilers
97/23    Health & Safety Polychlorinated biphenyls (PCBs) and related compounds

97/24    Property Management of the Rural Estate
9 7/25   List of Health & Safety Warning Notices issued by DWSIDEO(W) from 1993 to
97/26    Not yet issued
97/27    Not yet issued
97/28    Not yet issued
97/29    Not yet issued
97/30    Not yet issued
97/31    Asbestos based materials
97/32    Issue of MOD Safety Rules and Procedures 02 Boilers and Pressure Systems

97/33    Safety Rules and Procedures 02 Boilers and Pressure Systems Issue of
                                                        -                       -

         Correction Slip
97/34    Grounds maintenance Long.grass management on MOD (RAF) aerodromes

9 7/35   Asbestos based materials DMG16 Issue of amended page

97/36    Property Management fraud controls and audit checks
Property Management fraud controls
and audit checks


1.   The contents of this Technical Bulletin are MANDATORY. No work
     in’v~o1vingexpenditure on an MOD account is to be entered into without
     authority from the Property Manager (PROM) or appropriate MOD officer for
     that location or facility.

2.   This Bulletin is to be distributed and read by PROMs, Top Level Budget
     Holders (TLBH), Establishment Works Consultants (EWC), Works Services
     Managers (WSM) and Defence Land Agents.

3.   For MOD Establishments occupied by United States Visiting Forces (USVF),
     the responsibilities of Property Manager, EWC and WSM are jointly held by
     the USVF and DEO(USF). At base level this jointly managed organisation is
     to take appropriate action to implement the contents of this Bulletin. Where
     this Bulletin contains procedures which differ significantly from USVF
     practice, a DEO(USF) Code of Practice section will be issued.


4.   Works services associated with Property Management are considered to be a
     particularly high risk area for fraudulent practices.

5.   PROMs have a personal responsibility for the prevention of fraud and must
     ensure that arrangements are in place to deter fraud and maximise its early

6.   This Bulletin provides PROMs with the mandatory framework necessary to
     ensure that the appropriate checks and controls are put in place.


7.   Fraud is a criminal offence and can be defined as the false representation of
     facf.s with an intention to deceive or enable some person in an organisation to
     gain an unfair advantage. Historically, fraud has been endemic in the
     construction industry and the works services associated with Property
     Management is a particularly high risk area for fraudulent practices.
     PROMs need to be continually aware of these risks, and must accept a
     personal responsibility for fraud prevention.

8.   The only way to deter fraud is to have in place arrangements which maximise
     detection. A risk assessment undertaken by the National Audit Office (NAO)
     ideptifled the factors associated with the high risks involved in Property
     Management. These are reproduced at Annex A.

Property Management fraud
controls and audh checks

                            9.   Arrangements to deter fraud and irregularity are set out in the NAO Review
                                 of~ropertyManagement (Dec 93), Section 10 of JSP434 and, more recently,
                                 DAO(GEN) 17/96 and DCI GEN 190/97. These are briefly summarised as

                                 •    clear separation of duties, eg. those who decide what work needs to be
                                      done (PROMIEWC) and those responsible for its execution (WSM)

                                 •    supervisory and management checks, some of which are unannounced
                                      by the PROMS, EWC and Top Level Budget (TLB) staff, are important
                                      to ensure that key contracts are in place and complied with

                                 •    consistent application of controls, particularly in dealing with low cost
                                      minor maintenance work

                                 •    financial information and controls should be in place to ensure financial
                                      management information is available in order to detect trends in unit
                                      costs or to identifSr unusual increases in expenditure that may represent
                                      a potential irregularity; such controls should also include checks on
                                      contracts and payments

                                 •    Code of Ethics; the rules of conduct for Civilian and Service staff are set
                                      out in MOD Manual 11 and Queens Regulations respectively; these are
                                      supplemented by appropriate Defence Council Instructions (DCIs) that
                                      provide further guidance on gifts, hospitality and fraud, eg. DCI
                                      Gen 7/1997.

                                 •    the EWC is contractually required to carry out a range of checks under
                                      the conditions of contract, including random physical and financial
                                      checks on WSM’s works ordered which are considered to be the
                                      necessary controls to ensure value for money is being obtained from the
                                      work undertaken and to check for signs of fraud or irregularity

                                 •    details of the PROM’s Audit Check list is contained within Annex B.

                            10. DCI 190/97 Early Reporting of Fraud and Theft sets the procedure for

                                 reporting suspected or proven fraud.                .

                                                                   Bulletin Authorised By:

                                                                     H LAWRENCE

2                           September 1997
Property Management traud
controls and audit checks

                            Annex A Extract from NAO Report
                                                         -                                                                             -

                            a Review of Property Management in
                            the Ministry of Defence Appendix 3                                      -

                            Fraud Indicators

                            APPENDIX 3 FRAUD INDICATORS

                            1.    The presence of factors which indicate fraud or an enhanced potential for
                                  fraud do not establish the actual existence of fraud. They should, however,
                                  be used to alert PROMs to the possibility of fraud and so allow them to take
                                  appropriate action to maintain propriety.

                            2.    The National Audit Office, based on their risk assessment in eleven
                                  establishments, suggest that there are a number of areas where PROMs need
                                  to be specifically alert. In particular, as WSMs have most direct influence on
                                  the use of maintenance funds in appointing Sub-Contractors, the adequacy of
                                  controls that they exercise is extremely important and this is a key area
                                  wl~erePROMs should seek regular assurance.

                            3.    The National Audit Office suggest that the following fraud indicators are

                                     Indicator                  Potsnttal Fraud Rlak              Prevention           Monitored By
                             Approvil and
                             Authorisation                   Goods and services can be      Adequate separation of     Budget Holder
                             PROM or any other               procured for personal use;     duties.
                             indMdu*l can approve            payment can be made for
                             work and authorise              goods not received orwork
                             payment, ie. inadequate         notcompleted and
                             separation of duties,           unnecessary work may be
                             Eatimating Wort
                             The WSM regularly               Favoured firms can over-       Refer to EWC to check         PROM
                             requests increases to the       charge or there may be         reasons for the
                             Limit ot Liability,             collusion between the WSM      increase in costs.
                                                             and Sub-Contractors.
                             EWC consistently over-          Contractors have access to     PROMs should bring
                             estimates costs of work.        cost estimates enabling        this to the attention of
                                                             them to match bids to          the EWC and it this
                                                             Limits of Liability and thus   persists refer to the
                                                             over-charge.                   Defence Estate

                            September 1997
Property Management fraud   Annex A Extract from NAO Report

controls and audit checks

                                       Indintor               Potential Fraud Risk                                    Monitored By
                             Award ol Contract
                             Low or decreasing            Over-charging for work          The PROM should           PROM arid Budget
                             amount of work put out       done; Contractor rigging’       scrutinise and review     Holder
                             to competitive tender.       to inflate prices and           with the EWC, the
                                                          collusion between the WSM       WSMs procurement
                                                          and Sub-Contractors,            strategy and monitor
                                                                                          the level of work let
                             Increasing amounts of        Potential Contractor             Monitor the number of    Budget Holder
                             work awarded to a small      rigging’ to inflate prices       Contractors asked to
                             number of Contractors or     and collusion between           tender and their
                             the same Contractors are     WSM and Sub-Contractors,        success rate in winning
                             consistently re-appointed,                                   contracts. If
                                                                                          necessary, seek
                                                                                          justification from the
                                                                                          WSM as to why
                                                                                          favoured Contractors
                                                                                          are consistently used.
                             Large amounts of urgent      Time constraints may be         Budget Holders should     Budget Holder
                             work are regularly           used to justify                 set and agree
                             undertaken,                  circumventing standard          objectives for reducing
                                                          control including               the level of urgent
                                                          authorising excessive           work.
                             Tender pnces appearto        Tender rigging’ or              EWC should review the          PROM
                             drop whenever a new          collusion,                      reasonableness of
                             tenderer submits a bid.                                      charges.

                             High percentage of work      Over-charging for work          Agree and set limit on         PROM
                             awarded to directly          done or collusion between       amount of work to be
                             employed labour.             the WSM and the labour          done by directly
                                                          force,                          employed labourand
                                                                                          monitor compliance.
                             Contracts awarded to         Unjustified favouring of        Ensure Contractors are         PROM
                             firms with poor              unsuitable Contractors;         removed from the
                             performance record,          potential collusion between     WSMs Approved List
                                                          WSM and Sub-Contractors         of Contractors.
                                                          resulting in inflated prices.
                             Contract awardedto           Favouring of unsuitable         PROM attends or is             PROM
                             Contractorwho is not the     Contractors leading to          represented at the
                             lowesttenderer,              over-charging or tender         opening of tenders.
                                                          rigging may be taking

4                           September 1997
Properly Management fraud   Annex A Extract from NAO Report
controls and audit checks

                                     Indicator              Potential Fried RIsk              Prevention            Monitored By
                             Management Checks
                             EWC checks are not          Potential collusion between    Monitor regularly EWC          PROM
                             carried out regularly.      the EWC and WSM. No            progress in carrying
                                                         assurance on WSM               out checks in
                                                         procedures and controls        compliance with their
                                                         resulting in over-charging,    contract
                                                         non-completion ofwork, or
                                              -          sub-standard work.
                             ‘Inadequate or              Funds used for purposes        EWCs to review the             PROM
                             insuflic~entmonitoring of   not intended, potential        justification for
                             Contractors charges for     over-charging, and work        work and the
                             low value maintenance       not justified or not           reasonableness of
                             work.                       completed.                     charges in their live
                                                                                        percent checks.
                             High percentage or          Over-charging, poor Sub-       Raise with WSM and it          PROM
                             increasing number of        Contractors performance,       poor performance
                             claimst)y WSM re~cted       or work not completed to       persists referto
                             for payment.                specification.                 Defence Estate
                             Quality of Service
                             Growing user                Work not carned out,           Setup system for          Budget Holder
                             dissatisfaction with the    incomplete, or of poor         monitoring complaints,    and PROM
                             work of Sub-Contractors.    quality.

                             Requested work not          Checks on quality or work      Ensure that the EWC       PROM and Budget
                             undertaken or not           not being carried out by the   identifies poor           Holder
                             completed within            EWC with the result that       performance in their
                             reasonable time period,     work is incomplete or of       quarterly reports or if
                                                         poor quality,                  more urgent brings
                                                                                        cases to the PROM’s
                                                                                        attention who should
                                                                                        seek redress from

                            Note:        *Tender or Contractor rigging is where a group of Contractors work in
                                         unison to agree inflated prices and thus through collusion there is no
                                         real competition.

                            Septembei~1997                                                                                          5
Property Management fraud
controls and audit checks

                            Annex B Property Manager’s Audit

                            Check List

                            1.    Audit Checks and Controls

                                  A series of checks and controls must be in place to monitor Signs offraud or
                                  irregularity, quality of work, value for money and procedures. The list of
                                  checks is not comprehensive and PROMs should carry out any other checks
                                  which they feel appropriate. The risk of fraudulent activity still remains
                                  where all procedures have been followed, thus, risk can be minimised by
                                  undertaking surprise or ad hoc checks or, from time to time, investigating
                                  fur~ther, hen the initial inspection appears satisfactory. Where procedures
                                  and controls are not followed, inefficiencies and increased costs can result
                                  even where there is not evidence of fraud. However, such situations only
                                  seek to exacerbate the potential for the development of fraud as they create
                                  an environment where the perpetrators of fraud see the scope for

                            2.    Works Audit Checks

                                 A minimum of 5% of all Works Orders should be checked by the EWC as

                                 3% random selection of Works Orders; either electronically generated or on
                                 the basis of a random digit associated with all 1097 orders finally billed.

                                 The remaining 2% of works orders selected by the PROM should ensure the
                                 following are included in the check.

                                  •    All methods of execution

                                  •    All value bands, in particular larger value works £20K plus

                                  •    Works in progress, in particular works which will subsequently be
                                       covered up/buried

                                  •    Works in remote locations or facilities

                                  •    Works of a sensitive nature, eg in secure areas, unlisted buildings etc

                                 •     Works activities that pose the greatest fraud risk, eg grounds
                                       maintenance, low value minor works, dayworks etc.

                            3.   The PROM must ensure, during each calendar month, that all checks have
                                 been completed including:

                                 •     the Check Register is up to date

                                 •     follow-up action has seen initiated

6                            September 1997
Property Management fraud   Annex B Property Manager’s Audit Check List

controls and audit checks

                                  •       follow-up action from previous month has been completed.

                            4.           Procedure

                                  4i. Tender Boards

                                  PROMs or a member of the PROM’s staff should attend all Tender Boards.

                                  4.2 Tender Register

                                  A Tender Register should be kept and reviewed quarterly by the PROM/EWC.

                                  The PROMIEWC should ensure that:

                                  •       the Tender Register shows an unbroken, sequentially numbered and
                                          dated list of all tenders received

                                  •       all entries are signed by the Chairman of the Tender Board plus the
                                          PROM or EWC

                                  •       Tender Lists show no evidence of patronage or incestuous relationships

                                  •       firms which persistently Fail to Tender are excluded from subsequent
                                          Tender Lists

                                  •       relevant approval is obtained before accepting any tenders which exceed
                                          the PROM’s delegation or where lowest compliant tender is not accepted

                                  •       relevant approval is obtained where number of tenders received do not
                                          demonstrate value for money

                                  •       PROMs/EWCs should be alert to signs of tender rigging/ringing

                                  •       there is not excessive use of single tender action/single sources of supply

                                  4.3 Tender Box

                                  The PROM/EWC should confirm:

                                  •       Does the WSM place all tenders in a locked Tender Box prior to

                                  •       Who has access to the Tender Box keys?

                                  •       If no Tender Box is available, what is the procedure for dealing with

                            5.    EWC Checks

                                  5.1 For each Works Order checked the EWC should state:

                                          •    whether the task was necessary

                                          •    the type of order

                                          •    the Order Number

                                          •    the recommended method of procurement and whether that method
                                               was used

                                          •    whether it was by Single or Competitive action.

                            September 1997                                                                          7
Properly Management fraud   Annex B Property Managers Audit Check List

controls and audit checks

                                  5.2 For all Works Orders checked the EWC should consider:

                                        •     was the work properly requested/authorised by the PROM on a 1097
                                              Works Order?

                                        •     was the work included in the Pre-planned Maintenance Programme

                                        •     does the contract make commercial sense?

                                        •     is the Job Description/Specification adequate?

                                        •     have other orders related to the same job been considered? eg. split
                                              ordering to circumvent contract conditions

                                        •     have the Pre-CommitmentlPre-Tender procedures been followed

                                        •     was the Limit of Liability exceeded and, if so, was it approved by the
                                              PROM with a satisfactory explanation, did the Sub-Contractor have
                                              knowledge of the Limit of Liability?

                                        •     are there any unexplained changes after award?

                                        •     was the target date or response time met and did the specification
                                              and workmanship meet quality requirements?

                                        •     has handover documentation been provided to the EWC?

                                        •    was the Customer/User satisfied?

                                       •     was the Cost Code correct?

                                       •      was the Account cleared in a reasonable time?

                                       •     was probity sacrificed for speed?

                                       •     does the Work represent Value for Money?

                                       •     if “Covering Order” was the order raised after the work was

                                             completed? If so was this action necessary and was it stated on the

                                 5.3~ For each Single Tender checked, the EWC should consider:

                                       •     was the use of Single Tender justified?

                                       •     was the appropriate approval obtained?

                                 5,4 For work procured by Specialist Term Contract, the EWC should consider:

                                       •     was this method of procurement appropriate?

                                       •     is the work within the scope of the contract?

                                       •     is there adequate monitoring of the Contract Works (especially call-

                                       •     has a sample of relevant Log Books work sheets been checked and

8                           September 1997
Property Management fraud    Annex B Properly Manager’s Audit Check List

controls and audit checks

                                            •   have Log Books or other suitable recording documents been
                                                completed at Contract frequencies where required?

                                   5.5 For work procured by Lump Sum Contracts, the EWC should consider:

                                            •   was the contract documentation/quality of design satisfactory?

                                            •   were there any subsequent variations to the contract?

                                            •   were these approved by the PROM?

                                            •   was the lowest Tender accepted and if not, was a suitable case made
                                                and approved?

                                            •   is the work covered by Construction Design and Management (CDM)
                                                and if so have the Planning Supervisors comments been received?

                                         •      for work over £20K, has design been competitively tendered, where
                                                design let on term commission do the fees represent value for
                                                money? (commercialised sites only)?

                                         •      is there a change order procedure in place for variations and have
                                                the variations been approved by the PROM?

                                         •      for work under £20K, was the design work undertaken at the WSM’s

                                  5.6 For work procured by Repair of Plant Contracts, the EWC should

                                         •      is this the correct procurement method for the work carried out?

                                         •      were documents issued prior to inspection being undertaken?

                                         •      if repair was completed, did the repair provide Value for Money
                                                compared to the cost of replacement?

                                         •      was the Single Tender element of this contract effectively used?

                                  5.1 For work procured by MTClSchedule of Rates, all orders should be
                                      remeasured by the EWC. The EWC should consider:

                                         •      is the use of this method of procurement appropriate in terms of
                                                value for money?

                                        •       is the value of the work within the maximum and minimum single
                                                order limits set out in the WSM’s contract documentation and local
                                                delegations set by the PROM?.

                                        •       is the scope of the work contained within the Schedule of Rates?

                                        •       is the MTC undertaking the design responsibility of the WSM?

                                        •       is the WSM re-measuring the work on completion?

                                        •       is there an excessive amount of work undertaken by daywork for
                                                which scheduled items exist?

                                  5.8 For MTC Specialist Work, the EWC should consider:                    .

                                        •       were three quotes obtained using Tender Box procedures?

                            September 1997                                                                           9
 Properly Management fraud   Annex B Property Manager’s Audit Check List

 controls and audit checks

                                             •   was an instruction raised to accept the lowest quotation?

                                             •   were materials paid on invoice and, if so, was the value of the
                                                 materials incorporated fair/reasonable?

                                         •       were trade discounts included in the invoice and, if so, were they
                                                 passed on?

                                   5.9 For work procured under Daywork Arrangements, the EWC should

                                         •       is this procurement method appropriate for the work in terms of
                                                 value for money?

                                         •       is the hourly rate fair and reasonable, has it been obtained in

                                         •       what are the arrangements for charging for materials, are they fair
                                                 and reasonable and Value for Money, do the arrangements include
                                                 handling charge and traders discount?

                                         •       are timesheets available to support the invoice?

                                         •       do the number ofhours claimed reflect the scope of work?

                                         •       has the labour been effectively utilised?

                                         •       are the names on the time sheets bona fide employees of the Sub-

                                         •       do any names appear on more than one labour return for the same

                                         •       is the grade of employee appropriate for the task?

                                         •       have travel time and lunch breaks been included within the labour
                                                 costs and, if so, are the times appropriate?
                                         •       has the correct type of plant been used and are the charges in line
                                                 with commercial hire companies?
                                  5.10 For each Store Order checked, the EWC should consider:

                                         •       were the Stores properly requested by the Client?

                                         •       is the Description/Specification adequate?

                                         •       was the correct Method of Purchase used for these Stores and has
                                                 MOD received benefit of stores trade discount?

                                         •       were the Stores received as specified?

                                         •       was the Cost Code correct?

                                         •       was the Account cleared in a reasonable time?

                                         •       have the Stores been incorporated?

                                         •       has the relevant work been checked?

10                            September 1997
Property Management fraud   Annex B Property Managers Audit Check List

controls and audit checks

                                          •    for Direct to Service Stores is the Order cross referred to the Work
                                               Docket or Job Order and was there any trade discount?

                            6.    Final Payments (as part of random selection)

                                  For orders that have been financially completed the EWC should check:

                                  •       is the total amount paid in accordance with the contract?

                                  •       are there any unauthorised amendments on the payment document?

                                  •       was payment made within thirty days for sites under commercial
                                          arrangements only?

                            7     S~fety

                                  In undertaking the checks the EWC must ensure the following:

                                  •       the appropriate safety equipment and safe working practices were
                                          employed, particularly when checking work in progress
                                  •       Line Managers understand and accept their Health and Safety

                                  •       the appropriate permits to work were issued

                                  •       Contractors safety plans and risk assessments were available and
                                          adequate for purpose

                                  •       that where CDM Regulations apply, they were complied with.

                            8.    DOcuments

                                 Any amendments to documents, use of correcting fluid, photocopies, certified
                                 true copies, ‘rubber stamp’ signatures, unrecognisable signatures, obliterations
                                 or missing documents are to be treated with suspicion until verified. All may
                                 possibly conceal a fraud.

                            9.   PROMsIEWCs should maintain a register of all checks undertaken including

                                 •        date check undertaken

                                  •       details to demonstrate the check was adequately undertaken

                                  •       observations of check

                                  •       follow-up action, if required

                                 •        date follow-up action completed.

                            10. Trends

                                 PROMsIEWCs should not consider individual order checks in isolation but
                                 remain vigilant in detecting adverse trends. Examples of potential adverse

                                 •        excessive patronage of individual contractors for low value work

                                 •        Tenders and/or Final accounts unrealistically very close to the Limit of
                                          Liability on 1097 Works Orders

                            September 1997                                                                           11
Property Management fraud   Annex B Properly Manager’s Audit Check List

controls and audit checks
                                  •       Limit of Liability frequently exceeded on 1097 Works Orders without

                                          satisfactory explanation

                                  •       late admissible lower tenders and retrospective tenders

                                  •       adjustments during Tender period

                                  •       the extensive use of methods of procurement outside the agreed contract

                                  •       completion dates or response times seldom met

                                  •       vague specification and orders

                                  •       low or decreasing amounts of work put out to competitive tender

                                  •       an increasing amount of work being put out to tender to the same firms.

12                            September 1997

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