Analyzing procurement fraud in the US Navy
| DOI | https://doi.org/10.1108/JFC-09-2021-0207 |
| Published date | 24 October 2021 |
| Date | 24 October 2021 |
| Pages | 1297-1317 |
| Subject Matter | Accounting & finance,Financial risk/company failure,Financial crime |
| Author | Juanita M. Rendon,Rene G. Rendon |
Analyzing procurement fraud in
the US Navy
Juanita M. Rendon and Rene G. Rendon
Graduate School of Defense Management, Naval Postgraduate School, Monterey,
California, USA
Abstract
Purpose –The purpose of this paper is to analyze an ongoing fraud case in the US Navy involving the
procurement of ship-husbandingservices. The fraud acts will be analyzed from three perspectives–contract
life cycle,internal controls and fraud schemes.
Design/methodology/approach –A data search was conductedto collect publicly available documents
issued by the US Department of Justice (DOJ). A content analysis was used to analyze the fraud acts by
aligningthem with the contracting phase, internalcontrol component and fraud scheme category.
Findings –The majorityof the fraud occurred in thecontracting phases of contractadministration, followed
by procurement planningand then source selection. The majority of the fraud occurred because of internal
control component weaknesses in the control environment followed by information and communications.
The majorityof the fraud was alignedwith the fraud scheme of collusion,followed by billing, costand pricing.
Research limitations/implications –Because this is an ongoing investigation, additional DOJ
information will become available andprovide additional insight on the contracting phase, internal control
componentand fraud scheme.
Practical implications –The analysis suggests that the Navy’s lack of trained personnel, capable
processes and effective internal controls result in the increased vulnerability to procurement fraud in its
husbandingsupport services program.
Originality/value –To the best of the authors’knowledge,this study is the first to analyze fraud through
the lens of auditability theory, specificallyby the contracting phase and internal control component. Public
agencies canenhance fraud detection and deterrence effortsby understanding how weaknesses in contracting
processesand internal controls may increase an organization’s vulnerabilitiesfor fraudulent activities.
Keywords Procurement, Internal controls, Contracting, Fraud, Auditability theory
Paper type Research paper
Introduction
Background
Public procurement is an important part of the US Navy mission, which is to “maintain,
train and equip combat-ready Naval forces capable of winning wars, deterring aggression
and maintaining freedom of the seas”(Naval Surface Force, 2017, np). It is through the
management of procurement contracts that aircraft carriers, destroyers, submarines and
other weapon systems, which are core to the US’defense,are acquired and supported. In the
fiscal year 2020, the Navy was managing an estimated $640bn budget for major defense
acquisition contracts (GAO, 2020). In the management of these defense contracts, the
contracting process is critical to mission success (Rendon and Snider, 2019). These major
weapon systems are not only designed, developed and produced but also maintained and
The views expressed in this article are those of the authors and do not reflect the official policy or
position of the Department of Defense or the U.S. Government.
Analyzing
procurement
fraud
1297
Journalof Financial Crime
Vol.29 No. 4, 2022
pp. 1297-1317
© Emerald Publishing Limited
1359-0790
DOI 10.1108/JFC-09-2021-0207
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1359-0790.htm
supported, by defense contractors. These defense contracts are funded by the US Congress
using appropriated funds; therefore, public procurement statutes must be followed. These
statutes are established to ensure that the defense contracts are awarded and managed in
accordance withstatutes and public policy.
Indeed, the majority of these defense contracts are managed with the highest levels of
transparency, accountabilityand integrity, ensuring value for money and support of public
interest (Cohen and Eimicke, 2008). However, an increasing number of defense contracts
have been plagued with procurement fraud incidents, which have been committed by both
government and industry (contractor)personnel. The US Government Accountability Office
(GAO) has designated Departmentof Defense (DOD) contract management as a “HighRisk”
due to competency gaps in the acquisition workforce, challenges in managing services
acquisition contracts and DOD’s increasing susceptibilities to fraud, waste, abuse and
mismanagement (GAO, 2019). Additionally, the DOD Inspector General (DOD IG) has
highlighted DOD contract management as a “Top 10 Management Challenge for 2020”
due to its defense acquisition contracts being a high risk for fraud (DODIG, 2019). As the
DOD continues to increase its procurementof defense logistics support services, so have the
occurrences of procurementfraud increased (Prenzler, 2019). The DOD IG has reported that:
Advances in technology, along with the ongoing development of new fraud schemes, reinforces
the need for DOD organizations to be continuously alert to fraud, perform periodic fraud risk
assessments and provide fraud awareness training to all employees (DODIG, 2014, p. 2).
In its Global Study on occupational fraud and abuse, the Association of Certified Fraud
Examiners (ACFE) reports that organizations lose approximately 5% of revenue to fraud
each year,with the median loss per fraudcase of $125,000 and the averageloss per fraud case
of $1,509,000 (ACFE, 2020, p. 4). The ACFE report also identified corruption as the most
common fraud scheme in every region of the globe (ACFE, 2020, p. 4). Corruption includes
fraudulent acts, such as purchasing and sales schemes, invoice kickbacks, bid-rigging and
illegal gratuities. Fraud has been declared “the crime of choice for the 21st century”(Wells
et al., 2012, p. 1) and this declaration applies to the US federal government and specifically,
the DOD as well. Procurement fraud incidents are occurring on a prevalent basis and are
involvinghigh-ranking officialsin the DOD (Cavas,2015a, 2015b).
A cursory review of the recent literatu re on procurement fraud reflects research
focused on fraud theory (Dorminey, et al .,2010;Vousinas, 2019), fraud impacts on
organizations and economies (Graycar, 2019;Arif et al.,2019) and fraud deterrence
strategies and controls (Alfian, et al .,2017;Zakaria et al.,2016;Nawawi and Salin, 2018).
Not only is the literature sparse on res earch related to corruption in ministries of defense
procurement but the literature is also limited on research specifically in logistics support
service procurement. This paper aim s to help fill this literature gap by analyzing an
ongoing procurement fraud case involvi ng US Navy ship support service contracts. Navy
ship support services, also known as shi ph usbanding and port services, are logistics and
re-supply services provided by a contra ctor to ships at ports around the world. Examples
of common ship husbanding and port serv ices include harbor piloting, in-port ship fuel,
water and food, waste removal, van rentals, ph one rentals and force protection (Naval
Supply Systems Command, 2020). Th ese services are procured by the Navy for its ships at
ports around the world.
Research purpose
The purpose of this research is to analyze an ongoing fraud case in the US Navy involving
the procurement of ship husbanding and port services. This case is considered to be the
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