Article #267 Can Forensic Audits Help Recovering Funds Associated with Fraudulent Activities on Capital Construction Projects?

Financial losses during the implementation of capital construction projects arising from fraudulent activities can reach up to 45% of the project budget (Source: Association of Fraud Examiners, Russian Branch). In general, funds spent on capital construction projects are considered as sunk cost. A sunk cost refers to money that has already been spent and which cannot be recovered. Nevertheless, forensic audits could help project owners to identify entities and individuals who have committed the fraudulent activities to support pursuing the recovery of those lost funds.

One of the key challenges to perform successful forensic audit is the availability of data in a format that allows analyzing, identifying and reporting the fraudulent activities. As an absolute minimum, the data required for a forensic audit includes approved cost estimates, baseline budget, budget adjustments, details of invited bidders, bids analysis, awarded contract agreements, interim payment certificates (IPC) and approved and disputed change orders and related records such as request for information, site work instructions, meeting minutes among others. Of course, the outcome of the forensic audit could lead to the requirement of reviewing other project records such as substituted material and equipment, testing and commissioning inspection requests, punch lists among others.

Using a Project Management Information System (PMIS) like PMWeb, the audit will have a comprehensive ready to use solution to perform the forensic audit. PMWeb out of the box modules for document management, cost estimate, budget, budget requests, contractor qualification, bids comparison, commitments, progress invoices, miscellaneous invoices and change orders will be used to provide the ultimate forensic audit.

Document Management

To start with, the forensic audit team needs to scan all documents captured for the audit into searchable files and upload into PMWeb document management. Folders and subfolders will be created to organize and secure the captured and uploaded documents. Attributes can be added to capture additional data fields for the uploaded documents. PMWeb markup viewer can be used to highlight and provide notes on important sections of the uploaded documents. Since those documents will be searchable, the team can search the content of the uploaded documents for key events that could be needed for the analysis. Those documents will also become available to be attached to other PMWeb records.

Cost Estimate

PMWeb cost estimate module will be used by the audit team to capture all project cost estimate revisions including the final approved cost estimate. The details of those cost estimates could be either readily available in MS Excel or needs to be converted into a structured MS Excel file. This will enable importing the cost estimates into PMWeb cost estimate module to enable analyzing and investigating those estimates to identify and report possible fraudulent activities.

Budget Baseline

The final approved cost estimate will be used to by the audit team to generate the “realistic” project baseline budget. In addition, PMWeb budget module will be used to capture the other project budgets used on the project including the baseline budget. To expedite the process of capturing those budgets, PMWeb allows copying and pasting those budgets into PMWeb budget module. This will enable the audit to compare, analyze and identify differences between the approved baseline budget and the “realistic” project baseline budget.

Budget Adjustments

PMWeb budget request module will be used to by the audit team to capture the details of all omissions, additions and transfers that the project’s baseline budget was subject to. The budget request module will capture the reason for each adjustment, who have requested and approved the change, scope of work, date among many others.

Contractors’ Qualification

PMWeb contractor qualification module will be used by the audit team to capture the details of the invited bidders for the different project’s bid packages. In addition, the module will be used by the audit team to score the bidders on their qualification as it relates to financial capacity, track record, non-conflict and other areas to better understand the capabilities of the invited bidders.

Bid Comparisons

PMWeb procurement module will be used by the audit team to compare the prices received from all bidders along with the approved cost estimate established earlier. This will immediately unbalanced bid items, front loading among others. The module will also capture the details of the technical bid analysis if those were available.

Awarded Contracts

PMWeb commitment module will be used by the audit team to capture the details of all awarded contracts including the relevant terms and conditions. The bill of quantity lines can be copied and pasted from MS Excel file into PMWeb commitment module.

Change Orders

PMWeb change order module will be used by the audit team to capture the details of all approved and disputed or claims change orders. Each change order will include the bill of quantity line items affected by the change order and the time extension granted to the project’s contractual completion date if any.

Interim Payment Certificates (IPC)

For each commitment contract, PMWeb progress invoice module will be used by the audit team to capture the details of interim payment certificate (IPC) for each period. This will include the percent complete of work in place and payment for materials delivered and stored on site. The progress invoice will be used to capture the amount actually paid, when and other relevant details.

Miscellaneous Invoices

For all other non-contract related invoices, the details of those invoices will be captured in PMWeb miscellaneous invoices module by the audit team. Those could be for rental of site storage, permits and authorities fees among others. This will ensure that all incurred project’s expenses are captured and stored in PMWeb.

Single Version of the Truth

All financial transactions captured in PMWeb will be automatically stored in PMWeb cost ledger. Of course, the audit team could have also opted to directly populate the cost ledger with the financial details although this is not recommended as the desired traceability will be diluted.

The cost ledger will enable to audit team to create their own financial analysis reports also known as cost worksheet layouts using PMWeb define cost worksheet module. This will enable adding the required PMWeb cost fields as well as create new fields to display calculations made using PMWeb cost records. The output will be viewed using PMWeb cost worksheet module which can be saved in MS Excel format if needed.

Forensic Audit Analysis and Reporting

By having all project’s data captured in PMWeb to ensure its trust-worthiness, the forensic audit team can now consume this data in the form and format that will give them the insight for better and faster analysis of the project’s records. Using business intelligence and data visualization tools like MS Power BI, the team can identify variances and transactions that will be subjected for detailed analysis to determine if they could be considered as fraudulent activities. Those reports could include scorecards and visuals to better explain and communicate the outcome of the forensic audit.

Enterprise Forensic Audit Reporting

Since PMWeb allows capturing unlimited number of projects and programs, project owners can have a consolidated report of all forensic audit results on a single dashboard. The importance of being able to report on all projects subject to the forensic audit is that the audit can identify if there is any correlation between projects. For example, if there is any correlation between the entities and individuals that were involved in delivering projects, time period where those projects were delivered, type of those projects among many others.

About the Authorfounder

Bassam Samman, PMP, PSP, EVP, GPM is a Senior Project Management Consultant with more than 35-year service record providing project management and controls services to over 100 projects with a total value in excess of US $5 Billion. Those projects included Engineering and Construction, Oil and Gas Plants and Refineries, Telecommunication and Information Technology projects. He is thoroughly experienced in complete project management including project management control systems, computerized project control software, claims analysis/prevention, risk analysis/management (contingency planning), design, supervision, training and business development.

Bassam is a frequent speaker in topics relating to Project Management, Strategic Project Management and Project Management Personal Skills. Over the past 35 years he has lectured at more than 350 events at different locations in the Middle East, North Africa, Europe and South America. He has written more than 250 articles on project management and project management information systems that were featured in international and regional magazines and newspapers. He is a co-founder of the Project Management Institute- Arabian Gulf Chapter (PMI-AGC) and has served on its board of directors for more than 6 years. He is a certified Project Management Professional (PMP) from the Project Management Institute (PMI), a certified Planning and Scheduling Professional (PSP) and Earned Value Professional (EVP) from the American Association of Cost Engineers (AACE) and Green Project Management (GPM).

Bassam holds a Masters in Engineering Administration (Construction Management), (1982) with Faculty Commendation, GWU, Washington, D.C., USA, Bachelor in Civil Engineering (1980) – Kuwait University, Kuwait and has attended a number of executive management programs at Harvard Business School, Boston, USA and London Business School, London, UK.


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