DOD Fraud Risk Management: Actions Needed to Enhance Department-Wide Approach, Focusing on Procurement Fraud Risks
Fast Facts
The Department of Defense, which spent about $422 billion on contracts for goods and services in FY 2020, has been the target of contracting-related fraud schemes. For example, one contractor pleaded guilty to defrauding the department by overbilling. DOD is also vulnerable to other types of contract fraud and corruption.
One way DOD tried to fight fraud in FY 2020 was to tap its subject matter experts for a Fraud Reduction Task Force. But we found 11 of 59 DOD organizations hadn't designated task force representatives. We also found DOD could more thoroughly assess and report department-wide fraud risks. We recommended addressing these issues.
Highlights
What GAO Found
The Department of Defense (DOD) faces numerous types of procurement fraud schemes (see figure). For example, in January 2015, the owner of a contracting firm pleaded guilty to bribing DOD officials and defrauding DOD of tens of millions of dollars by overbilling for goods and services. To combat department-wide fraud risks, DOD has taken initial steps that generally align with GAO's Fraud Risk Framework. However, DOD has not finalized and implemented a comprehensive approach. For example:
- DOD created a Fraud Reduction Task Force—a cross-functional team represented by subject matter experts across the department—to prioritize fraud risks and identify solutions. But its membership is incomplete. A year after formation, 11 of DOD's 59 component organizations, including the Army, had not designated a Task Force representative. Filling vacant Task Force positions would further strengthen DOD's ability to manage its fraud risks.
- DOD uses its risk management program to assess and report fraud risks. But the policy governing the risk management program does not specifically require fraud risk assessments. As a result, DOD may not be identifying all fraud risks, and its control activities may not be appropriately designed or implemented.
- DOD officials told GAO that they share fraud risk information with agencies' risk management officials, but documentation of stakeholders' roles and responsibilities remains incomplete. Such documentation can help ensure these stakeholders understand their responsibilities.
Examples of Procurement Fraud Schemes DOD Faces
DOD has taken steps to ensure components plan for and assess fraud risks. But some selected components did not report procurement fraud risks, as required by DOD. DOD provides guidance, tools, and training to its components to conduct fraud risk assessments and to assess procurement fraud risks. However, GAO found that three of six selected components reported procurement fraud risks in their fiscal-year-2020 risk assessments, and that three—which obligated $180.1 billion in fiscal year 2020—did not. Because DOD consolidates reported procurement risks from the components' fraud risk assessments and uses this information to update the department-wide fraud risk profile, it cannot ensure that its fraud risk profile is complete or accurate.
Why GAO Did This Study
GAO was asked to review issues related to DOD's fraud risk management. DOD obligated $421.8 billion in fiscal year 2020 on contracts. GAO has long reported that DOD's procurement processes are vulnerable to waste, fraud, and abuse. In 2018, DOD reported to Congress that from fiscal years 2013-2017, over $6.6 billion had been recovered from defense-contracting fraud cases. In 2020, the DOD Office of Inspector General reported that roughly one-in-five of its ongoing investigations are related to procurement fraud. This report assesses the steps DOD took in fiscal year 2020 (1) to combat department-wide fraud risks and (2) to conduct a fraud risk assessment and ensure that DOD's component organizations reported procurement fraud risks.
GAO analyzed applicable DOD policy and documents and compared them with Fraud Risk Framework leading practices, interviewed DOD officials, and reviewed fiscal year 2020 fraud risk assessments from six DOD components. GAO selected the six based primarily on fiscal years 2014-2018 contract obligations.
Recommendations
GAO makes five recommendations, including that DOD fill all Task Force positions, update its policy to require fraud risk assessments, and ensure that components assess procurement fraud risks. DOD agreed with some, but not all of the recommendations. GAO continues to believe all the recommendations are warranted and should be implemented.
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Department of Defense | The Deputy Chief Financial Officer should ensure that cognizant DOD components designate representatives to the Fraud Reduction Task Force as expeditiously as possible. (Recommendation 1) |
In March 2022, DOD officials told us that they have made progress in addressing this recommendation and that they expect to have the Fraud Reduction Task Force fully staffed by April 30, 2022. In June 2023, DOD officials provided us with a Task Force roster, which indicated 59 DOD components and three vacancies. In November 2023, DOD provided us with the October 2023 Task Force roster, which indicates that all DOD components that are required to have a Task Force representative now do so. By filling the Task Force vacancies, DOD has strengthened its ability to effectively make fraud risk a management priority and ensure resources are available to develop action plans for mitigating fraud risks across the department.
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| Department of Defense | The Comptroller should update DOD Instruction 5010.40 to include fraud-risk-assessment and reporting requirements. Specifically, the instruction should:
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In March 2022, DOD officials informed us they were working to address this recommendation. At that time, responsibility for the relevant DOD Instruction was shared between the Comptroller and the Office of the Chief Management Officer (OCMO). However, after the OCMO position was repealed, its duties were largely transferred to the Office of the Director, Administration and Management (ODA&M). As a result, DOD Instruction 5010.40 must be updated to reflect these changes and incorporate our recommendation. In July 2023, DOD officials reported that they were updating the Instruction. In September 2024, DOD confirmed the updates were complete and that the Instruction was being routed for signatures, with an anticipated release in November 2024. To fully implement our recommendation, DOD needs to issue the updated Instruction, which will make fraud-risk-reporting requirements explicit in policy. We will continue to monitor the Department's progress.
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| Department of Defense | The Comptroller should update its Statement of Assurance Execution Handbook to clarify that components should report all fraud risks, including fraud risks that are not categorized as a material weakness or a significant deficiency. (Recommendation 3) |
While DOD disagreed with this recommendation at the time of our report, it subsequently implemented this recommendation. In February 2024, DOD officials provided us with the Fiscal Year 2024 Statement of Assurance Handbook, which clarifies that components are to report all fraud risks in their risk assessment template. The Handbook also instructs components to provide supporting documentation to support the low-risk rating if no fraud risks are identified. The revisions made to the Handbook remove the ambiguity about what fraud risks should be reported that was in previous editions. By updating the Handbook to provide explicit fraud-risk-reporting guidance, DOD is better poised to manage fraud risks and to develop a more complete and accurate Department fraud risk profile.
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| Department of Defense | The Comptroller should determine and document the fraud-risk-management roles and responsibilities of all oversight officials, including department-wide Assessable Unit Senior Accountable Officials and their Action Officers and the Defense Business Council, and the chain of accountability for implementing DOD's fraud-risk-management approach. (Recommendation 4) |
As noted in this report, DOD officials informed us that fraud risk information is shared with Assessable Unit Senior Accountable Officials, their Action Officers, and the Defense Business Council. However, these entities are not mentioned in DOD's fraud-risk management guidance, and their specific roles and responsibilities in managing fraud risk remain unclear, as does the accountability framework. This lack of documentation does not align with Federal Internal Control Standards, which emphasize that documentation helps retain organizational knowledge, mitigate the risk of knowledge being confined to a few individuals, and facilitate communication with external parties, such as auditors. At the time this report was issued, DOD did not concur with our recommendation to address this gap. However, DOD has since changed its position. In June 2022, DOD officials told us they were updating the Fraud Risk Management Strategy and related policies to better align with actual practices. InSeptember 2024, they reported that these revisions were ongoing, with an expected completion date of November 2024. We will continue to monitor DOD's progress on this recommendation.
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| Department of Defense | The Comptroller should direct components, as part of the annual statement of assurance process, to plan and conduct regular fraud risk assessments that align with leading practices in the Fraud Risk Framework. Specifically, the assessment process should include: (1) identifying inherent procurement fraud risks, (2) assessing the likelihood and effect of these risks, (3) determining fraud risk tolerance, (4) examining the suitability of existing fraud controls, and (5) compiling and documenting the fraud risk profile. (Recommendation 5) |
In July 2023 DOD officials told us that they have made progress in implementing this recommendation. The Fiscal Year 2023 Statement of Assurance Execution Handbook instructs components to evaluate their fraud risk management environment using the GAO Fraud Risk Management Framework Assessment template and to develop corrective action plans to mitigate any identified gaps. It also instructs components to report fraud risks using the Risk Assessment template. In October 2023, DOD provided us with the Fiscal Year 2023 risk assessment templates for our six selected components-(1) Defense Contract Management Agency, (2) Defense Logistics Agency, (3) Department of the Navy, (4) Department of the Air Force, (5) Department of the Army, and (6) Washington Headquarters Services. Our review of these assessments found that five of our six selected components included procurement fraud risks in their assessments, which is up from three of six at the time of our engagement. The Department of the Army did not include procurement fraud risks in its assessment. Additionally, we found that the risk assessment template does not include a fraud risk tolerance. In September 2024, DOD officials told us that they will update the Statement of Assurance Handbook and Fraud Risk Management Strategy to reinforce the inclusion of fraud risks and fraud risk tolerance. To fully address our recommendation, DOD must ensure that components' fraud risk assessments align with leading practices in the Fraud Risk Framework, including evaluating inherent procurement fraud risks and establishing fraud risk tolerance. By doing so, DOD will be better positioned to manage its fraud risks. We will continue to monitor the Department's progress.
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