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Waste, Fraud and the Federal Budget

by: Matthew Potter
September 26, 2011

Category: Alabama, Business Line, Companies, crime, Department of Defense, development program, Events, Federal Budget Process, IT, logistics, production program, Restructuring, Services, States | RSS 2.0

Some of the issues that are going to be faced by Congress and its “Super Committee” when it comes to reforming Federal spending are those of waste and corruption. Governments spend a lot of money each year on everything from salaries, aircraft, social programs and even muffins. This leads to those who want a piece of the money without necessarily working for it or providing what is required. It also means that without layers of expensive audits and review which do exist there is always a chance the money is not spent correctly or properly. As The Washington Post once said (perhaps apocryphally) “The Government doesn’t buy things efficiently but ethically.”

Some recent cases only highlight the issues faced by procurement and contracting officials. One that got a great deal of publicity was an Inspector General’s investigation of conference costs from the Department of Justice. Their analysis found hotels charging the agency $16 for a muffin. Now of course it turns out the hotel invoiced improperly but it still looks bad that the government at this time of large deficits would be spending money on such items. The result, predictably, is another layer of review and approval for conferences.

Another issue that is more important due to the amount was that the Government is unable to track its retired work force properly and this has led to payments of over $120 million a year to deceased persons. Sometimes this is due to fraud by the relatives of employees but most of the time it is because they don’t know that person is dead. Now $120 million in a budget of $3.5 trillion is a small amount but again it illustrates how hard tracking all of the expenditures is.

Then there is just outright contractor greed and crime. There are lots of ways for corrupt companies and Federal employees to take advantage of the procurement business.

Two recent examples illustrate this problem. In the first a small defense contractor has been charged with paying bribes to two contracting officials to get them to award his company a contract for a security vehicle to be used in Afghanistan. The bribes only totaled $20,000.00 and the contract was for $200,000.00. Reportedly they all knew each other from service together in the Army. Then to make it worse he didn’t deliver the product. Direct bribes like this are not common and the Federal government has been cracking down on this in the last few years. In 2010 the Justice Department got a settlement from the British defense contractor BAE Systems (BAE:LSE) for bribes to gain a major Saudi contract. There have been other recent cases involving KBR (KBR) and the Dutch company Siemens as well.

In another example a company in Alabama paid a settlement with the Justice Department over charges that it pretended to be located in a Historically Underutilized Business Zone (HUBZONE) when it was not to gain a competitive advantage. HUBZONE’s are for areas, predominantly minority, that haven’t received a great deal of Federal contracts. To spur investment in these areas the Government weights contract evaluations or sets aside contracts for these companies to help them gain work. The company here said its offices were in the HUBZONE when they were actually located in a nearby major office park. The company was able to win a set aside contract through this deceit.

The Federal and State Governments have a great deal of programs like this to help disadvantaged groups and companies. These include special programs for businesses owned by Native Americans, minorities and women. There is a temptation to take advantage of these to gain work by companies that shouldn’t qualify. For smaller business one or two contract may make a big difference in their bottom line and the compensation of their executives which leads to temptation. The chance of audit and review seem low leading to these cases.

When you are spending billions each year it can sometimes be hard to keep track of the little things. This is one of the reason there is fraud and waste with government spending. The Government needs to do a better job of following their spending and the contractors they use. At the same time layers of review and regulation may not fix the problems. Another way would be to reduce the number of special and set aside programs to limit temptation. This would also improve the ability to award contracts in a timely fashion. Every layer of review and audits delays processing of the contract and payment of the contractor.

As the Federal Government shrinks spending there will be more cases of fraud and crime as the temptation for contractors to keep the work they have and fight over the smaller pie of contracts will increase. That means companies will potentially use bribes, falsified status or other means to win them. The Government will also have to do a better job of eliminating problems to maximize the value of their remaining dollars. There will be a whole sale shift in some practices in theory such as eliminating things like conferences and travel in order to economize. Changes such as this will take time and to be honest may never happen leading to more deficit spending and waste.

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