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Iraq reconstruction fraud: Where are your tax dollars going?

By: dmc-admin//March 26, 2007//

Iraq reconstruction fraud: Where are your tax dollars going?

By: dmc-admin//March 26, 2007//

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Coenen
Tracy L. Coenen

Whether you agree with the Iraq War or not, one thing is certain: There is fraud going on and your tax dollars are being spent. Of the approximately $350 billion (give or take) spent so far by the United States on the war and rebuilding effort, there have been plenty of cases of fraud, waste and abuse found.

Congress is currently investigating the work done by contractors in Iraq, and it looks like the project may widen in scope in the near future. As recently as last fall, the Government Accountability Office reported to Congress that Pentagon auditors had identified approximately $3.5 billion in contractor charges as questioned or unsupported costs.

However, Defense Contract Audit Agency chief William Reed recently stated that unsupported and questionable costs from Iraq reconstruction contractors exceed $10 billion. The payments were for things like delayed work, inflated expenses, substandard work, and work never done.

The $10 billion figure is the result of an audit of $57 billion in Iraq contracts, making almost one out of every six dollars questionable. This new figure is almost three times the previous estimate of contractor waste and abuse. Naturally, the Pentagon has been criticized for its lack of oversight in the process of awarding and overseeing contracts.

Although the Defense Contract Audit Agency can point out the fraud and mismanagement of funds, it does not have the authority to enforce any corrective actions. Reed has said that his agency identified contractor dollars that were improper or questionable, but that only 25 percent to 37 percent of those dollars were withheld from the contractors. The decision to pay the Iraq contractors rests with the military and other officials, who apparently did little to hold back funds for inappropriate items.

The most common type of fraud and abuse occurring with contractors doing reconstruction in Iraq comes in the form of overcharges. Some contractors are overpricing services, billing for services never rendered, and performing and charging for goods and services that were not authorized. Duplicate charges have been submitted, and questionable or missing documentation is running rampant as well.

Fighting the Fraud

Congress created the Special Inspector General for Iraq Reconstruction (SIGIR) as a temporary agency to look after American tax dollars, and this agency reports to the Secretary of State and the Secretary of Defense. Specifically, the agency is to look for fraud, waste, and abuse of funds that are specifically intended to be used to rebuild Iraq. Prior to SIGIR was the Coalition Provisional Authority Inspector General (CPA-IG), which was meant to oversee the Iraq Relief and Reconstruction Fund (IRRF).

The SIGIR engages in independent audits, field inspections, and criminal investigations related to the Iraq reconstruction, under the leadership of Stuart W. Bowen, Jr. Bowen started as the CPA-IG in January 2004, and continues today as the Special Inspector General for Iraq Reconstruction. His job is to provide quarterly reports to Congress on the reconstruction effort, the management of funds, whether or not fraud and abuse are occurring, and recommendations for improvement.

The January 2007 audit report produced by SIGIR noted some disturbing items. The agency completed 8 audits in this quarter, with 82 total audits completed to date. The current audits have looked at things like funding for Iraqi police training, medical equipment purchases, and property management.

For example, the current audit report details procedures related to DynCorp International, a company that received a contract that included providing police training services and constructing a police training camp at a cost not-to-exceed $188.7 million. The audit found that $43.8 million had been paid to DynCorp over a two-year period, toward the construction of a training camp which has never been used. The audit also found that $4.2 million was paid to DynCorp for unauthorized services, including construction of an Olympic-sized training pool and 20 VIP trailers. Another $36.4 million was paid to DynCorp for weapons, body armor, and equipment that cannot even be located.

Also completed in the most recent quarter were 15 on-site project assessments, bringing the total completed assessments to 80. These assessments were aimed at verifying quality control standards and meeting contractual specifications. One of the problem sites identified was Baghdad Police College, at which plumbing deficiencies were found. Contractors later reported that the problems were repaired. In fact, a follow-up assessment found that problems still existed in the plumbing, and that faulty concrete and electrical wiring also existed at the facility.

Twenty-seven investigations were opened in the most recent quarter, and 43 were closed, leaving 78 investigations open. These investigations are of a more serious nature than the regular audits that SIGIR is doing. Some of the investigations will undoubtedly lead to prosecutions by the U.S. Department of Justice. Some contractors engaging in fraud or other corrupt practices in the Iraq reconstruction are also being suspended or disbarred, but as mentioned above, the enforcement of this has probably been insufficient so far.

Moving Forward

As with any type of audit or enforcement action, the powers-that-be must weigh the costs and benefits. It is likely that some level of fraud will occur, no matter how good the controls and supervision are. So any examiner of the reconstruction effort in Iraq must be prepared to find that there is indeed fraud, waste and abuse. The government's resources are stretched thin, and the auditing of such a large project is time-consuming and personnel-intensive.

It is clear that a war-torn country like Iraq does not provide an ideal situation for good accounting controls and oversight. However, even when records may not be in pristine condition, it is still reasonable to expect that charges be authorized and supported with documentation. It is easy to see how contractors can abuse the system, especially when they see that those who are caught with inappropriate charges are not even punished.

Some legal action has been taken, and it is the hope of many that there will be more prosecution
s to come. In January Robert Stein, a former Pentagon contractor, was sentenced to nine years in prison for bribery, money laundering conspiracy, and other related charges. He conspired with several high-ranking Army officers and a businessman to rig contracts worth more than $8.6 million. In exchange, Stein received airline tickets, jewelry, alcohol, cigars, and more. Additionally, he stole money that was laundered by the businessman and then kicked back to Stein and the officers.

It is a shame that the reconstruction of a country that was lacking in electricity, fresh water, educational systems, and some of the basic necessities is seen by some as an opportunity to line their pockets. It is unfortunate that these types of cases may be more common that we were lead to believe, even six months ago. With one in every six dollars (or more) at risk of fraud in the Iraq reconstruction, it is clear that more prosecutions are surely on the way.

Tracy L. Coenen, CPA, MBA, CFE, is the president of Sequence Inc., a forensic accounting firm with offices in Milwaukee and Chicago. Coenen can be reached at [email protected] or 414-727-2361.

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