©2014

REAL-TIME SOLUTIONS TO REAL-TIME PROBLEMS INTEGRITY OVERSIGHT MONITORS: PREVENTION VERSUS INTERVENTION

An integrity oversight monitor can help government agencies and private entities ensure their

program and project funds are used as originally intended—by providing audit, investigative,

monitoring, and anti-fraud services while ensuring compliance with relevant laws, regulations,

and contract terms and conditions. This session will describe how, when implemented correctly,

an integrity oversight monitoring program can pay for itself. This session will also include a case

study from Superstorm Sandy, when New Jersey’s Department of Community Affairs enlisted

CohnReznick to serve as the internal integrity oversight monitor for their disaster recovery funds.

FRANK BANDA, CFE, CPA, PMP

Partner

CohnReznick

Bethesda, MD

Frank Banda has more than 30 years of fraud prevention, audit, accounting, and consulting

experience with a special emphasis on managing complex, large-scale engagements and assisting

organizations with accounting, financial reporting, and business process management

improvement. He is currently one of the CohnReznick Partners serving as an integrity oversight

monitor for the Superstorm Sandy funds and has served as a project manager for CohnReznick’s

disaster housing recovery engagements with the states of Texas, Mississippi, and Louisiana.

THE HONORABLE KENNETH M. DONOHUE

Director and Senior Advisor

CohnReznick

Bethesda, MD

The Honorable Kenneth M. Donohue is a Senior Advisor with CohnReznick focusing on

compliance issues, fraud and abuse, and prevention and protection of internal controls. Donohue

was appointed by George W. Bush and served for nine years as Inspector General for the U.S.

Department of Housing and Urban Development and was a pivotal player in the federal

government’s effort to investigate fraud in the mortgage industry. His involvement in “Operation

Stolen Dream” resulted in more than 1,500 arrests and more than $198 million in recoveries.

“Association of Certified Fraud Examiners,” “Certified Fraud Examiner,” “CFE,” “ACFE,” and the

ACFE Logo are trademarks owned by the Association of Certified Fraud Examiners, Inc. The contents of

this paper may not be transmitted, re-published, modified, reproduced, distributed, copied, or sold without

the prior consent of the author.

A CohnReznick Presentation Paper for the 25th Annual ACFE Global Fraud Conference

JUNE 2014

Integrity Monitors: A Strategy for Preventing, Detecting, and Remediating Fraud, Waste, and Abuse

Overview..................................................................................1

A History Lesson..................................................................1

Vulnerability of the Construction Industry....................2

Why So Much Corruption?.................................................3

Past Failures and Recommendations for the Future...5

Best Practice: Integrity Monitoring Program................5

Developing an Integrity Monitoring Program..............8

Conclusion.............................................................................11

About the Authors...............................................................12

About CohnReznick............................................................12

Table of Contents

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OVERVIEWAn Integrity Monitor is an independent third party retained by a company or organization to minimize opportunities for fraud, waste, and abuse as well as to assure compliance with legal and regulatory requirements. The concept arose from a recognition that the construction industry in and around New York was susceptible to systemic fraud and corruption by unscrupulous government officials, union representatives, contractors, and organized crime. Further, traditional methods of combatting it were ineffective. As the role of an Integrity Monitor has evolved, it has expanded to include not only fraud prevention, but also the protection of public funds and private investments from fraud, waste, and abuse in various programs and industries. An Integrity Monitor works to create a culture of legal and regulatory compliance and accountability by providing training, monitoring controls and activities, and performing compliance audits. There are many benefits of an Integrity Monitoring Program, most notably the protection of an organization’s assets, business reputation, and operations. Also referred to as “Project Integrity Consultants” or “Independent Private Sector Inspector Generals,” Integrity Monitors have been implemented in various parts of the U.S., but are used most extensively on construction projects in the New York metropolitan area.

A HISTORY LESSONCorruption has long plagued construction activity in the New York metropolitan area.1 In the early 1800s, political organizations would exchange financial support for votes so that they could put candidates in office. One such organization was Tammany Hall (“Tammany”), a fraternal society for “pure Americans.” Tammany helped Thomas Jefferson win New York electoral votes and thus the 1800 election. The Tammany organization produced one of New York’s most notorious corrupt public officials, William M. “Boss” Tweed, a native New Yorker born in Manhattan in 1823. Tweed was part of the Democratic Party that, in 1851, helped him get elected as a New York City official and to the House of Representatives in 1852. In 1858, Tweed was appointed to the New York County Board of Supervisors and in his first noted act of corruption, Tweed and his fellow Board members began charging companies a 15% fee to do business with the City. In another example of corruption, Tweed appointed himself Deputy Street Commissioner, giving him considerable access to the City’s contractors and funds. He purchased the New York Printing Company and Manufacturing Stationers Company and made them the official printing and stationery suppliers for New York City, respectively. He directed both companies to drastically overcharge for their goods and services, thus providing him with substantial profits.

Tweed began investing the funds from these corrupt activities in real estate, making him New York City’s third-largest landholder for much of the 1860s. It appears that Tweed and his network of fraudsters were the forefathers of organized crime as they siphoned money from every project in which they were involved. One of the most notorious examples of Tweed’s corruption involved the construction of the New York County Courthouse. In 1858, the Board of Supervisors budgeted $250,000 for the project. In the decade between the start of construction in 1861 and when the Tweed ring was finally stopped in 1871, the project was only 75% complete and cost more than $13 million in public funds, twice the amount paid for the Alaska purchase in 1867. Among the investigators’ findings: a carpenter was paid $360,000 ($4.9 million today) for one month’s labor in a building with very little woodwork; a plasterer received $133,000 ($1.8 million today) for two days’ work; eight different contractors were paid to whitewash a single room; and 22,000 square yards of carpeting (enough to carpet a two-lane highway from Manhattan to Albany) was paid for but never delivered. Tweed was finally brought to justice and tried in an unfinished courtroom in 1873. He eventually lost his fortune and agreed to provide information to authorities about the City’s corruption rings in exchange for his release from prison, although he was never released. Tweed died of pneumonia in prison on April 12, 1878. It is estimated that in today’s dollars, Tweed stole between $1 billion and $8 billion.

1Keith York City, “Boss Tweed: New York’s Corruption King,” WordPress Blog, September 29, 2012. (http://keithyorkcity.wordpress.com/2012/09/29/boss-tweed-new-yorks-corruption-king/).

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VULNERABILITY OF THE CONSTRUCTION INDUSTRYIn 1922, the New York State Joint Legislative Committee on Housing (the “Lockwood Commission”) studied corruption in New York City’s building trades. The report stated that: “Scandalous corruption pervades almost every branch of the many activities that enter into building construction. We found these unseemly practices rampant:

• Union extortion of “tribute payments” from builders and contractors;• Collusive agreements among builders and suppliers; • Competition was completely throttled by all manner of devices, from the flagrant matching of

bids, the apportionment of territories and fixing of prices, ostensibly among competitors, to the diversion of funds from the public trust and the payment of bribes.”

While corruption and racketeering have thrived in New York City construction projects for over a century, there is no single influence to blame, as it appears to be the nature and structure of the industry itself that invites racketeering and corruption. No one is immune―contractors, developers, government agencies, workers, and of course, taxpayers―have all be victimized by it.

In his article titled “Control of Corruption and Racketeering in the Construction Industry: The Use of the Independent Private-Sector Inspector General,” Ronald Goldstock identifies the following examples of integrity issues and the related corruption and racketeering that have plagued the industry over the years.2

Extortion and BriberyPayments squeezed from contractors by union or public officials to avoid direct or implied threats are generally characterized as extortion. Extortion is usually the result of union officials demanding payments from contractors by threatening to cause labor problems through a disruption of schedule, sabotage to the project, or physical harm to the contractor’s employees. When payments are made to officials to gain an unfair advantage in winning contract awards, these payments are considered bribes. Bribes given to or solicited by government officials are usually paid in exchange for contracts and building permits. Additionally, public officials have accepted bribes from contractors who commit legal and regulatory violations and want officials to “look the other way.” With respect to union officials, bribes can be in many forms such as favorable union labor contracts or the lack of enforcement of collective bargaining provisions.

TheftConstruction equipment and material theft and vandalism account for $1 billion a year in losses and other costs to contractors, a number that has risen 10% since 1996 and is expected to continue to increase. The impact of construction job site theft also includes the costs contractors incur to replace or rent equipment to finish the job, the costs of downtime, and the costs of project overruns resulting from project delays.3

FraudConstruction fraud occurs in a variety of ways, but one of the most prevalent schemes involves submitting invoices for work not performed and materials not used.

2Ronald Goldstock, “Control of Corruption and Racketeering in the Construction Industry: The Use of the Independent Private-Sector Inspector General,” International Association of Independent Private Sector Inspectors General, October 4, 1994. (www.iaipsig.org/media/article_14.html).3Kimberly Hegeman, “8 Steps to Prevent Construction Site Theft,” For Construction Pros Blog, October 10, 2012. (www.forconstructionpros.com/blog/10811757/8-steps-to-prevent-construction-site-theft).

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Intimidation and ViolenceThreats by organized crime elements have often been used to attempt to exact payments from contractors to avoid problems on their projects.4

SabotageContractors and developers are subject to the purposeful destruction of materials, fixtures or structures by corrupt union workers, or so-called "coalitions" or "community activists". Sabotage can occur either as punishment to a contractor or developer or to serve as a means for creating more work for union workers. In either case, the contractor must incur additional costs to address threats and acts of sabotage.5

Collusive Bidding/Bid RiggingIn its Guidelines for Fighting Bid Rigging in Public Procurement, the Organisation for Economic Co-operation and Development (OECD) states that “bid rigging (or collusive tendering) occurs when businesses, that would otherwise be expected to compete, secretly conspire to raise prices or lower the quality of goods or services for purchasers who wish to acquire products or services through a bidding process. Public and private organizations often rely upon a competitive bidding process to achieve better value for money. Low prices and/or better products are desirable because they result in resources either being saved or freed up for use on other goods and services. The competitive process can achieve lower prices or better quality and innovation only when companies genuinely compete (i.e., set their terms and conditions honestly and independently). Bid rigging can be particularly harmful if it affects public procurement. Such conspiracies take resources from purchasers and taxpayers, diminish public confidence in the competitive process, and undermine the benefits of a competitive marketplace.6 As noted below, organized crime has most often been identified as the source behind much of the anti-competitive practices plaguing the industry.

WHY SO MUCH CORRUPTION?In its 1989 report, the New York State Organized Crime Task Force found “despite constant prosecutions, organized crime continues to be, by far the most damaging and pervasive plague on the construction industry in New York City.” So why was there so much corruption? There are two primary reasons: a high degree of susceptibility and numerous incentives.

Susceptibility The construction industry is susceptible to corruption and racketeering for a variety of reasons that include:

Multiple Parties Typically, there are multiple parties (e.g., owners, representatives, construction managers, general contractors, subcontractors, consultants, suppliers) moving on and off of a project, aggregating thousands of workers.

4, 5Ronald Goldstock, “Control of Corruption and Racketeering in the Construction Industry: The Use of the Independent Private-Sector Inspector General,” International Association of Independent Private Sector Inspectors General, October 4, 1994. (www.iaipsig.org/media/article_14.html).6Organisation for Economic Co-operation and Development, “Guidelines for Fighting Bid Rigging In Public Procurement: Helping governments to obtain best value for money.” (www.oecd.org/competition/cartels/42851044.pdf)

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Multiple Critical ComponentsMultiple critical components are subject to control by corrupt actors, such as union officials who can control labor, material costs, and schedule.

High Government RegulationMany public projects are highly regulated at each layer of the project making them susceptible to corrupt public officials.

Time is MoneySince disruptions to a construction schedule equate to increases in project costs and delays in the project owner’s return on investment, time delays and anything or anyone (e.g., contractors, suppliers, union officials, and inspectors) that can interrupt the sequencing or timing of construction makes a construction project more susceptible to corruption.

Low Bid ContractsGovernment agencies are often required to award contracts to the lowest bidder. Low bid contracts entice unscrupulous contractors to “recover” their profits in some manner. Many times they will employ a fraud scheme such as billing for work not performed or materials not used.

Illegal PaymentsCrooked contractors will include bribes in the cost of doing business as they may help in obtaining favorable labor contracts with corrupt unions.7

Numerous IncentivesThere are numerous financial incentives that make construction projects susceptible to corruption. Some of these include:

Construction Projects Involve Enormous Sums of Money Huge dollar value contracts make even a small skim very profitable. For example, One World Trade Center is a $4 billion construction project. A skim of 1% equates to $40 million.

Costs of Illegal Payments Can Be Easily Acquired and Disguised Because of the large number of contractors usually working on a construction project, it is very difficult to prevent illegal payoffs during the construction process and just as difficult to discover them after the project is completed.8

Ancillary IncentivesThe market for illicit goods/services such as gambling, drugs, and loan sharking can attach themselves to a construction site. In some instances, the funds generated from such activities are laundered through the construction company. In addition, the sale of ancillary services such as food vendors, trash removal, and security can find their way onto a construction site.

Valuable Nonmonetary Rewards ExistLabor racketeers can obtain political power through their control of political action committees and their ability to deliver votes.9

7,8,9Ronald Goldstock, “Control of Corruption and Racketeering in the Construction Industry: The Use of the Independent Private-Sector Inspector General,” International Association of Independent Private Sector Inspectors General, October 4, 1994. (www.iaipsig.org/media/article_14.html).

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PAST FAILURES AND RECOMMENDATIONS FOR THE FUTUREWhy Individual Prosecutions Do Not WorkThe history of problems in the construction industry and the continued issues that exist today are the result of inadequately designed reform efforts. The history of law enforcement focused on individual prosecutions. When you have susceptibility and lucrative incentives, a single prosecution cannot control the tide.

“Systematic corruption must be addressed not only by the criminal law, but by the systematic changes in regulatory oversight. Once law enforcement has done its job, there must be a new regulatory scheme in place with sufficient muscle behind it to ensure that systemic corruption does not continue to thrive at the public’s expense.”

– Manhattan District Attorney Robert Morgenthau

There is an absolute necessity in not only prosecuting wrongdoers for their actions, but also taking civil action to return ill-gotten gains to the victims, which, in many cases, are taxpayers.

Comprehensive Crime Prevention: An Integrity Monitoring Program Can Be the SolutionBecause of the complexity and sophistication of construction projects and the potential for various levels of corruption and racketeering, the industry needs to design, develop, and implement crime prevention and detection strategies using non-traditional approaches. An effective strategy requires the development of a crime prevention program that analyzes the elements of the problem and presents a practical solution. An effective Integrity Monitoring Program is the solution.

BEST PRACTICE: INTEGRITY MONITORING PROGRAMReal-Time Monitoring Prevents Errors and Improprieties The best way to address corruption, fraud, waste, and abuse is to prevent it from happening in the first place. A system is needed to create synergies among agencies; one that leverages government resources and utilizes private sector capabilities to oversee activities, define accountability, and capitalize on the sizeable resources devoted to public construction as a means to directly and indirectly influence the conduct and integrity of construction projects.

An Integrity Monitoring Program can be an effective way of addressing problems before they occur. An Integrity Monitoring Program utilizes the skills of multiple disciplines such as auditing, legal, investigative, engineering, project management, and loss prevention. An Integrity Monitoring Program can be employed by an entity on either a voluntary or compulsory basis to ensure compliance with laws and regulations and to deter, prevent, uncover and report unethical and illegal conduct by, within, and against an organization. Additionally, an Integrity Monitoring Program can be used as a strategy in any industry or organization that has problems related to unethical behavior. Integrity Monitors have been used in the construction, financial, environmental, aircraft, gambling, pharmaceutical, insurance, and garment industries, just to name a few. Even police departments have been subject to an Integrity Monitor. In fact, there are few industries that have not been subject to an Integrity Monitor since the concept first came into use in the early 1990s.

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Inspector General Act of 1978 Provides the Framework for Integrity Monitoring The Integrity Monitor concept was developed and mandated at the federal level with the passing of the Inspector General Act of 1978, which centralized audit and investigative activities in a single independent office within each of the major federal agencies. The purpose of the Act is to:10

• Conduct and supervise audits and investigations relating to programs and operations of agencies;

• Provide leadership and coordination and recommend policies for activities designed to promote economy, efficiency, and effectiveness in the administration of, and to prevent and detect fraud and abuse in, such programs and operations; and

• Provide a means for keeping the head of the establishment and the Congress fully and currently informed about problems and deficiencies relating to the administration of such programs and operations and the need for corrective action.

The Inspector General Act of 1978 serves as the framework for creating an Integrity Monitoring Program. With the passage of the Inspector General Reform Act of 2008, the independence of the Inspectors General has been enhanced and the Council of the Inspectors General on Integrity and Efficiency (CIGIE) was formed.

An Effective Strategy for Preventing and Detecting Fraud, Waste, and AbuseAn Integrity Monitor is responsible for assessing the project, program, or organization and determining the potential for corruption, fraud, waste, abuse, and violations of laws and regulations. An Integrity Monitor’s responsibility includes developing an Integrity Monitoring Program that considers the current internal control environment of the subject being monitored. Using the information from its initial assessment, the Integrity Monitor identifies weaknesses or vulnerabilities in the current internal control environment and makes recommendations on how to address these shortcomings and monitors the implementation of the recommended solutions.

If done correctly, the Integrity Monitor can utilize the work of various professionals such as auditors, investigators, legal professionals, and loss prevention professionals to create an integrated monitoring program and approach. For example, legal and loss prevention professionals will identify violations of laws and regulations and develop policies, procedures, and strategies to prevent these violations from occurring in the future. The implementation of these activities then becomes the responsibility of the auditors and investigators.

An Integrity Monitor serves to make a good organization better or change the ethical culture of an entity in need of that change. Corporations may use Integrity Monitors to ensure that they are not defrauded or exploited by others, particularly in industries that have had a history of corruption and racketeering. The Integrity Monitor can provide services that prevent a corporation from being extorted by commercial entities and corrupt public officials and to ensure that it receives the goods and services for which it has contracted.

A Solution for Government-Funded Programs—Oversight and Transparency Government agencies are using Integrity Monitors to oversee federal and state program funds; provide transparency of these programs and their outcomes; and prevent and detect fraud, waste and abuse. For example, on March 27, 2013, the state of New Jersey enacted The Integrity Oversight Monitor Act (P.L.2013, Chapter 37), authorizing the deployment of oversight monitors

10Inspector General Act of 1978, [Public Law 95–452; 5 U.S.C. App.], [As Amended Through P.L. 112–239, Enacted January 2, 2013]. (www.ignet.gov/pande/leg/igact_1978_asof_0413.pdf).

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in the implementation of recovery and rebuilding contracts, resulting from Superstorm Sandy and other major storms in New Jersey, in order to prevent, detect, and remediate waste, fraud, and abuse. Any state agency administering a contract in excess of a certain dollar threshold is required to use an Integrity Monitor to oversee its administration of these federal funds.

The Integrity Monitor’s work includes: monitoring the agency’s compliance with federal and state laws and regulations in administering the federal funds; monitoring the activities of contractors conducting work on behalf of the agency; monitoring whether the programs are operating accurately, efficiently, and effectively; monitoring the effectiveness of the agency’s internal controls; and monitoring the agency’s fraud prevention and detection activities. For example, for a state grant program, the Integrity Monitor may test grant recipients’ eligibility while monitoring the contractors approving the grants, as well as state employees providing the grants to help ensure fraud is not committed at any level.

The Integrity Monitor is responsible for reporting the results of its monitoring activities to various state and federal government stakeholders and for referring any potential instances of fraud or wrongdoing to the State Comptroller, Attorney General, and the Sandy Fraud Task Force. In short, federal and state governments are turning to Integrity Monitors as a way of managing the risks associated with overseeing federal and state program funds.

A Solution for Dealing with Organizations Challenged by Integrity IssuesIntegrity Monitors have been utilized to promote organizational integrity in organizations under court decrees resulting from civil or criminal prosecution; by companies unable to pass rigorous pre-qualification requirements; by those who face public relations difficulties; and as part of a deferred prosecution agreement, which serves as an alternative to a corporate indictment resulting from the illegal activities of the corporation’s employees.11 Integrity Monitors have been required as a condition of performing certain exclusive government contracts and as a means of fulfilling the monitoring requirements of federal sentencing guidelines.12 The Integrity Monitors’ objectives are to deter and detect misconduct by the monitored firm; rehabilitate the vendor in both fact and perception; and assure corporate adherence to high ethical standards. Integrity Monitors serve as compliance monitors and assure the adequacy of internal controls and the adherence to business ethics. Integrity Monitors fulfill their roles by conducting monitoring activities that include monitoring ethics compliance through systems compliance audits, fraud prevention hotlines, and if necessary, investigations and financial audits.

A Solution for Companies Working InternationallyIntegrity Monitors can be effective in helping companies operating internationally by protecting the domestic organization from illegal activities by its employees, other corporations, and extortive demands by foreign corrupt public officials. They can also provide assurance to domestic and foreign governments that the company is free from organized crime ownership and influence, and that is has appropriate controls to insure its operations conform to local laws and regulations.13

Project Integrity ConsultantsAn Integrity Monitor may be hired as an owner’s representative in certain instances. The Integrity Monitor works closely with the project owner and their operations; operates as part of the owner’s management team (but assumes no operational responsibilities); has a project-wide/site-wide focus; and is paid directly by the owner. In this role, the Integrity Monitor is focused exclusively on assuring that integrity breaches do not derail project budgets, operations, or reputations.

11,12,13Ronald Goldstock, “Control of Corruption and Racketeering in the Construction Industry: The Use of the Independent Private-Sector Inspector General,” International Association of Independent Private Sector Inspectors General, October 4, 1994. (www.iaipsig.org/media/article_14.html).

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DEVELOPING AN INTEGRITY MONITORING PROGRAMAn Integrity Monitoring Program should be tailored to the scope and objectives of the particular Integrity Monitoring engagement. However, an Integrity Monitoring Program typically will include the following five major phases in some shape or form:

Phase 1: Gain an Understanding of the Scope and Primary ObjectivesThe first phase is focused on obtaining a clear understanding of the business environment, organizational structure, company culture, key objectives, communication channels, points of contact, and how the internal control structure is designed to operate in order to mitigate risk. This phase is accomplished by meeting with key management and other necessary stakeholders and reviewing appropriate documentation such as top-level corporate policies and procedures, codes of conduct, contracts, funding mechanisms, financial plans, budgets and schedules. This scoping exercise will provide a solid foundation for gaining a comprehensive understanding of the internal control environment, conducting the integrity risk assessment, and preparing the Project Work Plan (PWP).

Phase 2: Conduct an Integrity Risk AssessmentA proactive risk management program is a key element that contributes to the successful management of large complex projects or programs. As projects grow larger and more complex, it is becoming common practice for the project team to establish a risk management process that is able to identify, track, manage, and mitigate potential risks. It is also important to recognize that risk management is an ongoing project management function that is imperative given the fact that risk drivers evolve over the lifecycle of a project requiring new strategies to manage and mitigate the threats.

In this phase, the Integrity Monitor will conduct risk assessments and workshops, and develop a well-defined and integrated risk management process that provides the project team the tools and procedures needed to manage risk. Depending on the project risk profile, the project team may decide to use a relatively simple and straightforward qualitative approach or a more rigorous quantitative assessment using modeling and simulation techniques. In either case, the process involves identifying and categorizing potential risks, assessing the likelihood of occurrence and magnitude of risk impacts and prioritizing and managing risks (i.e., avoid, mitigate, transfer, insure, or accept). Typically, a risk register (matrix or spreadsheet) is developed to document, monitor, and control risks during the project.

Risk workshops require the project team to develop qualitative risk assessment matrices for al-locating contractual risks to the party best able to control and manage them. Other risk exercises involve assessing risk impacts to budget, schedule, and project integrity.

Risk is defined as an internal or external force that could impact the achievement of an entity’s business objectives. The use of a risk assessment methodology allows risks to be more efficiently targeted and controlled, while providing senior management assurance that the internal audit plan has been properly designed to assist in mitigating risk.

To perform an integrity risk assessment, the Integrity Monitor will interview key internal management personnel and review policies and procedures, and other relevant information obtained from the organization’s staff and management. The Integrity Monitor will seek to determine whether the internal controls are operating as represented by management and are working effectively to protect critical business processes and mitigate integrity risks. Based on the information obtained from the business functions interviewed, the Integrity Monitor will prepare a summary and ranking of important risk areas.

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Integrity Risk Assessment ProcessAn integrity risk assessment is a collaborative process intended to analyze risk exposure and the controls that mitigate such risk. The Integrity Monitor will work with the stakeholders to address the primary areas of concern with regard to integrity risk exposure―irrespective of functional boundaries― and identify the controls in place to mitigate the risks. Where controls are weak or absent, the Integrity Monitor will brainstorm ways to efficiently and effectively remediate the control deficiencies and improve the overall fraud prevention program. The diagram below depicts the key steps in this approach.

The integrity/risk assessment process utilizes a standardized, qualitative, and quantitative methodology to evaluate the integrity risk exposure of each relevant business process, and is designed to provide the organization’s management with a tool to quantify the relative risk of specific business processes and functions.

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The purposes of the risk assessment are to:

• Identify the threats and vulnerabilities from both internal and external forces that could create opportunities for fraud, waste, corruption, and abuse

• Identify integrity risk items that should be addressed by management• Provide the foundation for developing the Integrity Monitoring Program • Provide assurance that the Integrity Monitoring Program has been properly designed to assist in

mitigating risk• Identify key areas of risk and make recommendations for improvement and for future audit priorities

An example of potential integrity risk areas on a typical construction project include, but are not limited to:

• Vendor selection/bidding • Charge back fraud• Payroll fraud • Lien releases• Fraudulent/inaccurate requisitions • MBE/WBE/DBE fraud• Fraudulent billing for equipment and/or materials • COI mitigation• Insurance and bonding fraud • Bribing of oversight personnel• General conditions • QA/QC material substitutions and workmanship• Other direct costs and reimbursable expenses • Schedule manipulation• Change order fraud • Environmental compliance• Site security

Phase 3: Develop a Project Work Plan for the Monitoring Activity Once the integrity risk assessment is complete, the Integrity Monitor will develop a PWP based on the finalized audit universe and corresponding integrity risk audit and mitigation plan. The PWP will identify each integrity risk area, along with an assigned risk rating, mapping of the risk to key controls and recommended audit cycle. During this phase, the Integrity Monitor will communicate closely with the stakeholders to ensure that the plan will meet their goals and objectives. During the project, the Integrity Monitor will continue to review the PWP and update it as necessary to address evolving conditions.

Phase 4: Execute the Project Work PlanIn accordance with the PWP, the Integrity Monitor will monitor selected areas of concern throughout the various phases of the project. Based on the initial assessment of the business under review and discussions with stakeholders, the Integrity Monitor will execute the planned monitoring activity. The graphic on page 11 is an example of procedures that can be implemented to prevent and mitigate integrity risks.

Phase 5: Report on the Results of the Monitoring ActivityDuring the development and implementation of the Integrity Monitoring Program, the Integrity Monitor will deliver status reports and key documents, such as the risk assessment and PWP, to the stakeholders. During the course of any Integrity Monitoring Program, however, issues will surely arise that were not anticipated. When such issues arise, the Integrity Monitor should communicate these issues to the stakeholders as well as its progress through each phase of the Integrity Monitoring Program. If requested, a report concerning such issues can be prepared. At the conclusion of monitoring activity, the Integrity Monitor will prepare and submit to the stakeholders a monitoring, audit, or investigative report describing the scope of the activity, background information, procedures, findings, conclusions, and recommendations.

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CONCLUSIONTo combat fraud, waste, and abuse, government agencies and private companies are reducing their risk of exposure by utilizing the services of Integrity Monitors. Since the introduction of the concept to the New York construction industry in the early 1990s, monitors have been used successfully on a number of major disaster recovery efforts, including the cleanup of Ground Zero in the aftermath of the terrorist attacks, and the recovery following hurricanes Sandy, Katrina, Rita, Gustav, and Ike. These independent advisors serve as stewards of program and project funds, ensuring funds are used as originally intended. As evidenced by the daily headlines, the imagination of the criminal mind is limitless. Consequently, fraud, waste, and abuse will continue to challenge even the most fortified of projects. However, by employing the services of an Integrity Monitor, companies and agencies can save significant project or program dollars by preempting and/or uncovering fraudulent behaviors. Moreover, Integrity Monitors can help private and public entities avoid the consequences of a tarnished image and breach of trust that threaten organizations tainted by fraudulent practices. When implemented correctly, an Integrity Monitoring Program can be cost effective.

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CohnReznick LLP © 2014This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy of completeness of the information contained in this publication, and CohnReznick, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you and anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

Circular 230 Notice: In compliance with U.S. Treasury Regulations, the information included herein (or in any attachment) is not intended or written to be used, and it cannot be used by any taxpayer for the purpose of i) avoiding penalties the IRS and others may impose on the taxpayer or ii) promoting, marketing or recommending to another party any tax related matters.

ABOUT THE AUTHORSThe Honorable Kenneth M. Donohue, Director and Senior AdvisorThe Honorable Kenneth M. Donohue is a Senior Advisor with CohnReznick focusing on compliance issues, fraud and abuse, and prevention and protection of internal controls. Ken was appointed by George W. Bush and served for nine years as Inspector General for the U.S. Department of Housing and Urban Development (HUD) and was a pivotal player in the federal government’s effort to investigate fraud in the mortgage industry. His involvement in "Operation Stolen Dream" resulted in more than 1,500 arrests and more than $198 million in recoveries.

Frank Banda, CFE, CPA, PMP, PartnerFrank Banda has more than 30 years of fraud prevention, audit, accounting, and consulting experience with a special emphasis on managing complex large-scale engagements and assisting organizations with accounting, financial reporting, and business process management improvement. He is currently one of the CohnReznick Partners serving as an Integrity Oversight Monitor for the Superstorm Sandy funds and has served as a Project Manager for CohnReznick's disaster housing recovery engagements with the States of Texas, Mississippi, and Louisiana.

ABOUT COHNREZNICK LLPWith origins dating back to 1919, CohnReznick LLP is the 10th largest accounting, tax, and advisory firm in the United States, combining the resources and technical expertise of a national firm with the hands-on, entrepreneurial approach that today’s dynamic business environment demands. CohnReznick serves a large number of diverse industries and offers specialized services for Fortune 1000 companies, owner-managed firms, international enterprises, government agencies, not-for-profit organizations, and other key market sectors.

Headquartered in New York, NY, CohnReznick serves its clients with more than 280 partners, 2,500 employees, and 26 offices. The Firm is a member of Nexia International, a global network of independent accountancy, tax, and business advisors. For more information, visit www.cohnreznick.com.

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