The Detroit Free Press reports that the former executive director of the Detroit Public Schools’ risk management department was sentenced to prison for his role in a kickback scheme that cost the school district US $3.3 million. The former executive admitted to accepting US $150,000 in kickbacks from a vendor that overbilled the school district for inadequate work. Specifically, the man admitted to helping the vendor secure a contract with the school
district — without taking any competitive bids — and approving inflated, phony invoices for a student wellness program.

Lessons Learned

Auditors should look for telltale signs of collusion, including allowing employees to “sole source” with outside vendors and approve subsequent payments without requiring an additional review or approval. This combination is a serious fraud risk. It is also important for auditors to compare payments made under the contract with the original bid that was approved, such as by selecting a sample of invoices and performing a detailed review. In particular, auditors should verify that invoices and payments are consistent with the value of goods and services received.

While collusion allows the external fraudster to bypass controls, the fact that an employee is bypassing controls should be a signal to internal audit that a fraud risk is present and requires additional testing. Controls to help prevent collusion between employees and vendors include competitive bidding on contracts, separation of authority to contract from the authority to pay for services received, and a comparison of the contract amount with invoice and payment amounts. Proper controls and vigilance by internal audit can reduce the likelihood of fraud committed by collusion as well as uncover collusion earlier when it does occur.

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