FRAUDIT – A Case Study

Term Contract Audit for National Health Service

We know we have to be careful on how we use the ‘F word’ and we need to be sensitive regarding how it may be perceived. What we initially regard as intentional fraud may not be considered such by those instigating it and in business; we should consider if the situation is recoverable.

In this case study, a National Health Service Trust governing two major hospitals, clinics and staff accommodation units were almost at the end of a contract for planned maintenance, reactive maintenance and small capital works projects to a contractor over a period of five years covering all their capital assets.

Reactive maintenance and capital works were instigated using work orders intended to be measured on completion by quantity surveyors appointed by the trust and valued using a schedule of rates for building; mechanical and electrical work adjusted using tendered percentages together with an escalation formula.

Audits were carried out on randomly selected work orders using Audit guidelines set by organisations, such as the International Standards on Auditing (ISA) using recommended factors to set effective sampling schedules.

In this case, the audit committee had estimated that orders placed were over-valued by £10 million warranting a 100% audit on every order placed through site measurement and valuation with a view to recovering the over-spend.

All orders had been returned to the quantity surveyor who then appointed me as an independent quantity surveyor skilled in the valuation of term contract orders for the ministry of defence military establishments and my total brief was to audit each order with a view to retrieving the £10 million in a period of twelve months.

The contractor had initially responded to the demand for audit and re-evaluation of orders saying there was no facility in the contract for it to pay money to the authority. However, it was my consideration that the accounts submitted against the orders were interim and until totalled as a final contract value with all the conditions of the contract satisfactorily met, then the contract could be closed out and difference settled.

I then invited the contractor to attend all audit measurement checks on a pre-set and regular basis and invited comment on my adjustments to their submitted accounts.

Initially, the Contractors representative attended and witnessed my measurement of the work orders. In the measuring, I found many measurements had been grossly exaggerated using the contractors material issue lists from their store.

Additionally rates against items in the schedule were ignored and valued using sample invoices with no officially certified copies of invoices being provided.

Most of the measurement delinquencies were found to be on older properties, particularly on electrical and mechanical works. By example, the measurement of cable was by far the most abused and I found many instances such as a 9 metre run of twin and earth having been measured at 900 metre as per the stores material issue records.

On investigation, it emerged that on issue of a whole drum of cable to individual self-employed electricians by their stores on the morning of the job execution, they installed 9 metre of cable before going on to a private job where the balance of the drum would be installed and charged to their private client.

The contractor never picked up this racket as the material issue sheets where then used to work up the quantities for invoicing stating the measurements reported for issue to the quantity surveyor.

Another example applying to rates rather than measurement was the installation of wax element thermostatic valves to the hot water supply on patient sinks where the schedule allowance was slightly less than the market price. Term contract schedules are designed to be balancing values and the contractor accepts losses as well as gains, his tender percentage being deemed to balance out marketplace deviations.

The contractor took advantage of the naivety of young quantity surveyors assigned to the measurement and valuation of works, convincing them that the valves used were “specials” required by the NHS and regarded as betterment against the schedule of rates. As such, the surveyors should accept a sample invoice rate priced five times higher than the schedule rate.

I completed my commission in ten months rather than the twelve I was contracted for and I returned £14 million to the NHS in addition to training two junior quantity surveyors.

As the contract had not been finalised and no overall final account was agreed until the adjusted account was accepted, fraud was not considered. Had the work under the contract not been audited and had the contractor accepted the original final account before an audit check, they may very well have been found to be guilty of fraud?

Having worked for contractors, I had dealt with similar occurrences to the “labour only” contractors stealing, which had resulted in custodial sentences being passed where theft had been proven. In this case, I was not made aware of the contractor’s actions.

Whether or not the quantity surveyor was paid for my services by the NHS is a question I am unable to answer although I suspect they weren’t paid extra and had fraud been established, would there have been a claim against the Quantity Surveyors professional indemnity insurance?

The end message is – DO NOT TRY IT ON. YOU WILL BE FOUND OUT.

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