ICAI FORENSIC AUDIT COURCE 2015 (BAHRAIN)

RESEARCH PAPER ON

BID RIGGING & CASH LAPPING

SUBIMTTED BY

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ACKNOWLEDGEMENT

I would like to extend my sincere gratitude to The Institute of Chartered Accountants of India (ICAI), for
giving me an opportunity to present a research paper on Bid Rigging and Cash Lapping. I acknowledge
this as a part of completion of the certification program on Forensic Accounting and Audit course. In
specific, I would like to thank the ICAI faculty who conducted the course. I also extend my sincere
thanks to The Bahrain Chapter of Institute of Chartered Accountants of India for providing a perfect
platform for this course and without whom; every effort to attend the course would have been in vain.

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Membership XXXXX

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DISCLAIMER

This Research Paper has been prepared by the Author as a part of the certification course on Forensic
Accounting and Audit course conducted by the ICAI for academic purposes only. The views presented
are referenced from handbooks, internet websites and subjective elaborations during lectures. This report
drafted are personal and are not binding either on the Author or ICAI or any of its faculty, staff or
personnel. At the same time, this report is the intellectual property of ICAI and the same or any part
thereof may not be used in any manner whatsoever, without express permission from the ICAI in writing.

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1 Contents
1 ABSTRACT........................................................................................................................................1
1.1 BID RIGGING............................................................................................................................1
1.1.1 Introduction:........................................................................................................................1
1.1.2 Features of a typical Bid Rigging:........................................................................................1
1.1.3 Objective of Bid rigging:.....................................................................................................2
1.1.4 Types of Bid rigging:...........................................................................................................2
1.1.5 How to detect Bid Rigging? RED FLAG.............................................................................3
1.1.6 Case Example of Bid Manipulations....................................................................................4
1.1.7 Conclusion...........................................................................................................................6
1.2 Cash Lapping...............................................................................................................................6
1.2.1 Introduction.........................................................................................................................6
1.2.2 Features of a typical Cash Lapping:.....................................................................................6
1.2.3 Objectives of Lapping:.........................................................................................................6
1.2.4 Types of Lapping:................................................................................................................7
1.2.5 How to detect Cash Lapping? RED FLAG..........................................................................7
1.2.6 How to Prevent, detect or Control Cash Lapping.................................................................7
1.2.7 Conclusion...........................................................................................................................8
2 Bibliography........................................................................................................................................9

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1 ABSTRACT

This research paper is an explanation of Bid Rigging and Cash Lapping which are common forms of
frauds happening in any industry. Bid rigging in a model of corruption in which the auctioneer
orchestrates fraud either by inviting a bidder to either lower or raise his bid, whichever is more profitable!
Bid rigging is influential price quote with an element and intention to cause loss or gain uneconomically
at the expense of other. Cash Lapping is on the other hand a fraudulent practice of concealing cash theft
in an innovative way to avoid discovery. Such embezzlement is committed by persons in position of trust.

1.1 BID RIGGING

1.1.1 Introduction:

Bid Rigging is illegal, organized scheme; where, competing businesses collude, to secure contracts, for
goods or services, at, pre-determined price.

In simple language, it can be defined as a form of fraud in which commercial contracts, business deals,
procurement orders, or exchange of goods and services for money is contracted or awarded or signed
under a contractual obligation to one particular party even though other party or parties appear to have bid
for the same. Competitors also illegally conspire to artificially increase the prices of goods and services
offered in bids to potential customers. This form is a fraud in collision. Such fraudulent collision amounts
to cheating in many countries and is declared illegal. This is elimination of competition and denying a fair
price.

1.1.2 Features of a typical Bid Rigging:

Bid rigging appears and bears to be a normal business contract; however, it has certain following features
which taint the deal:

 It is a form of price fixing

 It is possible where the competitors can communicate with each other freely
 It is practiced when competitive bidding is called for
 It is manipulation of market allocation of resources
 It thrives in a perfectly competitive environment
 It survives on artificial influence over price or performance or quality of delivery
 It results in economic loss to shareholders, consumers, tax payers
 It is normally practiced in perfect market economy

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  It is generally seen in government contracts

1.1.3 Objective of Bid rigging:

 The primary and typical objective of bid rigging is to obtain contracts at uncompetitive
prices:
 at higher prices if they are sellers, or
 lower prices if they are buyers
 The other parties are compensated in various ways, for example, by cash payments, or by
being designated to be the "winning" bidder on other contracts, or by an arrangement where
some parts of the successful bidder's contract will be subcontracted to them. In this way, they
"share the spoils" among themselves.

1.1.4 Types of Bid rigging:

 Bid suppression occurs where some competitor/s agrees not to submit a bid in collision, so that
another competitor can win the contract.
 Bid rotation occurs where the bidders take turns to become successful bidder. Example each
bidder is successful on certain contracts, in agreement with other competitors who will in turn win
other contracts. This is a form of market allocation, where they share, allocate or apportion markets,
products, customers or geographic territories among themselves. Each will get a "fair share" of the
total business, without having to truly compete with the others for that business.
 Buy-Back is the strategy whereby the auctioneer or seller bids on his own or through any agency
representing the seller on a lot and buys it back to protect it from being sold to the highest bidder for
an insufficient price. This is a typical fraud if the auction is advertised as an "Absolute Auction",
meaning there are no reserve bids.
 Complementary bidding, also known as cover bidding or courtesy bidding, occurs where
some of the bidders agree to submit bids that are intended not to be successful, so that another can
win the contract. This is deliberate losing. For example, the cover bids might contain prices that are
uncompetitive in relation to the prices submitted by the conspirator who is designated to win the
contract, or alternatively, the cover bids might contain conditions that the conspirators know will be
unacceptable to the agency calling for the bids.
 Phantom auctions The seller/financiers will 'tentatively' auction a for example a foreclosed
home, and give bidders an option to give "preliminary bids" for homes that are not yet authorized for
auction. If the reserve bids are not met, the home will be updated as "never was available for auction"
even though bids were received. Some houses will be auctioned at fire-sale prices and the auctions
will be closed before the auction was formally announced. Investors rush to get in their preliminary
bids before the house is technically up for auction. Bidders fear losing options so it causes irrational
feeding frenzy in the bidders, bidding up the price far higher than normal. If bidders don't make the
target bids, then the item was never available for auction. This is normally done by the auctioneers
like banks or housing financiers to get rid of all their non performing asset. This is done to avoid the
collapse of housing market. Foreclosed / re-processed homes are normally dealt out with such
phantom auctions.
 Phantom Bids are false bids taken by an auctioneer for the purpose of tricking a legitimate
bidder into bidding more than he would have bid otherwise. The auctioneer hires Shills to call out the
phantom bids. If the phantom bid is the winner, either the lot is hidden and comes back around for a

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 second auction, or the 2nd-highest legitimate bidder is informed that the first bidder was unable to
make payment.
 Multi form of rigging: These forms of bid rigging are not mutually exclusive of one another, and
two or more of these practices could occur at the same time. For example, if one member of the
bidding ring is designated to win a particular contract, that bidder's conspirators could avoid winning
either by not bidding ("bid suppression"), or by submitting a high bid ("cover bidding").

1.1.5 How to detect Bid Rigging? RED FLAG

 Markets that are more susceptible to bid rigging. The presence of certain factors increases the
need for vigilance.

 Small number of bidders – Few Bidders means higher or increase in the probability of
bid rigging. Bid rigging requires bidders to reach an agreement that eliminates
competition. It is also easier to reach an agreement if the same bidders are involved in
repeated procurements.
 Standardized or simple products - The chances of bid rigging are greater if the
products or services being purchased are standardized and simple, and do not change over
time. Under these circumstances, it is easier to work out an agreement and have it last a
long time.
 Little or no entry - If entry in a certain bidding market is costly, hard or time
consuming, firms in that market are protected from the competitive pressure of potential
new entrants. The protective barrier helps support bid-rigging efforts. 7

 Opportunities that the bidders have to communicate with each other. Bidders need to know
and communicate with each other to reach an agreement. Once bidders know each other well enough
to discuss bid rigging, they need a convenient location where they can talk. Of course,
communications can occur by telephone, email, fax or letter, and they often do; however, many bid-
riggers believe that they are less likely to leave evidence of their communications if they have face-
to-face meetings. These meetings occur most often at, or in association with, trade association
meetings, or other professional or social events. They are also likely to occur prior to the opening of
the tender process.
 Indications that the bidders have communicated with each other. Bid rigging requires actual
and often repeated communications between the bidders. Procurement officials may hear or come
across statements indicating that information may have been shared, such as a bidder having
knowledge of another bidder’s pricing, or not expecting to be the low bidder, or perhaps when a
bidder refers to “industry” or “standard” practices or prices. Sometimes procurement agents can infer
that bidders are communicating. For example, if one bidder picks up or submits bidding material for
another firm, then some communication must have taken place between them. In other instances, a
bidder may say something that indicates that certain non-public information, or an answer to a
question, was learned through 8 talking to another bidder.
 Relationships among the bidders after the successful bid are announced. In some cases,
bidders may attempt to split the extra profit that is earned through bid rigging. This is especially true
if one large contract is involved. Sometimes the winning firm may pay the other bidders directly;
however, the ‘profit split’ can also be passed on through lucrative sub-contracts to do some of the
work or to supply inputs to the project. Joint bids can also be used as a way to split profits.

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 Suspicious bidding patterns. Bidders may have devised a scheme that reveals itself as a pattern
over the course of many bids. For example, there may be a pattern to the winner (A,B,C,A,B,C), or it
may be that the same bidder always wins bids of a certain type or size, or that some bidders only bid
in particular geographic areas. Perhaps a bidder never wins but keeps bidding; or a bidder wins
whenever it bids, even if it bids rarely. A bidder may show a pattern of submitting relatively high
bids for some tender offers and relatively low bids for other, similar tender offers. Pricing may be
unusual. All bids may be unexpectedly high, or discounts or rebates may be unexpectedly small. Bids
may also be different from previous, similar procurements, but the differences are unrelated to any
change in the underlying economic conditions. Bid levels may change when a new bidder (i.e. one
who has not bid in the past) submits a bid. Pricing may not make sense when you consider
transportation costs to different locations.

1.1.6 Case Example of Bid Manipulations

1.1.6.1 Electricity Grid Tendering Board

 A special audit of the Electricity Grid Tendering Board’s procurement function was conducted as
a losing bidder reported that a whistle blower of the Evaluation Committee (EC) disclosed that other
members of the EC had removed required documents from its bid in order to disqualify the
company.  The bidder claimed that other sources told it that the EC did this in order to facilitate the
award of the contract to another firm as the result of corruption.  The bidder insisted that its bid was
complete and showed the auditors a retained copy of its bid which included all of the required
documents.
 The auditors reviewed the Board’s procurement files and Bid Evaluation Report, which indicated
that the complainant and other losing bidders were disqualified heir because bidding documents were
incomplete. The auditors contacted the other losing bidders who also insisted that their bids had been
complete when submitted.  None of the losing bids could be located in the procurement files.  Finally,
the auditors discovered that the score of the winning bidder had been arbitrarily raised to defeat the
one remaining competitor.
 As a result of their findings, the auditors recommended that the Board adopt more transparent
procurement procedures, including public bid openings, reading out the contents of bids at the
opening and permitting a losing bidder to be briefed on the reasons that its bid was unsuccessful.

1.1.6.2 South East India, Railway Projects

 From 2000 to 2003 small groups of local construction companies rigged contract awards in
Railway rehabilitation projects in collusion with government and project officials.  To execute the
schemes, the project officials would, among other things, deliberately fail to announce or publicize
requests for bids in a timely manner, refuse to sell bid documents to outside companies or find trivial
or invented reasons to disqualify those companies that were able to bid.  Senior government officials
would then choose the winning bidder, or “champion,” from among those allowed to compete after
private negotiations with all of the companies.  The designated losing bidders would submit
deliberately higher priced or non-responsive bids to allow the winner to inflate its prices sufficiently
to fund the necessary bribes and enjoy handsome profits.
 The designated winner often was a shell company set up solely to bid on the project in which
project or government officials held undisclosed interests.  Such firms would subcontract all of work
to smaller firms, often “losing bidders,” at far lower prices.

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 The scheme was detected when investigators noted that all of the bid securities – commitments by
the bidders that they would perform the contract if selected – submitted by the different bidders were
purchased at the same bank on the same day, indicating they were all purchased by the same person.  
Other indicators included losing bids that were an exact percentage apart (because they were all
generated by the winning bidder by multiplying its winning bid), and a pattern of the winning bids
falling just under the threshold of acceptable bids, with the losers being over the thresholds.

1.1.6.3 Pan Africa Pharmaceutical Supply Contracts

 At the suggestion of the government, for several years four major international pharmaceutical
companies, operating through local subsidiaries, had divided the market for medicines and medical
supplies purchased by the government under projects financed by international donors. The
conspirators met quarterly in the capital city to agree on which company would provide which items
and set highly inflated prices.
 A Ugandan pharmaceutical firm saw the very high prices that the government was paying and
submitted a bid at a much lower price.  The bid prompted concerted protests by the consortium
members, who complained that the company was not qualified to supply the drugs because of local
laws and regulations.  Eventually, under pressure from the lead donor, the low bid was accepted.
 Such unwanted interference was, of course, a cause for concern by the four consortium members,
who responded by inviting the low bidder to their next quarterly meeting.  There they invited the
interloper to join the conspiracy, which it did, and thereafter five companies divided the spoils and
claimed the big profits.

1.1.6.4 South American, Transportation Project

 A review of bids submitted by several local construction companies for six bid packages on a
$150 million roads improvement project revealed strong circumstantial evidence of collusion,
including:
 False and forged bid securities submitted by three of the bidders on four of the bid packages.  
False bid securities are a strong indicator of collusion.  This is because the security will be called
only from the winning bidder, meaning that companies that know they are going to lose can avoid the
expense of purchasing a real security.
 Inconsistent disqualifications across bid packages.  Certain firms were disqualified from one
package for deficiencies such as previous non performance or inadequate experience, but were
allowed to bid on other almost identical packages.  Such actions, of course, indicate that the
procurement officials were involved in the collusion scheme.
 Inflated engineers estimates.  The estimates were substantially higher than virtually all of the bids
received and estimates provided by other experts during the investigation.  Higher estimates provide
a platform for the acceptance of artificially inflated bids and again indicate the involvement of
procurement officials.
 Inconsistent unit prices across bid packages (submission of “ping-ponged” bids).   On numerous
occasions the same bidder quoted significantly different unit prices for nearly identical line items
across several bid packages, sometimes lower to enable them to win the award, sometimes much
higher to enable a competitor to win.   Such bids are a common and strong indicator of collusion.

1.1.6.5 Asia-Pacific,  Transportation Project

 Bidders in two rounds of bidding on another transportation project in Asia- Pacific agreed to
submit non-competitive bids to ensure that a designated company, pre-selected by government
officials, would win at an artificially high price. The winner compensated the designated losers for

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 their cooperation. Non-cooperative companies were threatened with exclusion from future contracts,
once again indicating the involvement of government procurement officials.
 Two companies ignored the inducements and threats and attempted to submit real bids.   The first
was pressured to amend its legitimate bid and raise its price by 60%.    An employee of the second
company was kidnapped en route to submitting a bid and detained at a local hotel until the bid
opening session was completed.  The winning bidder graciously paid the non-cooperative bidders,
including the company of the kidnapped employee, a respectable sum in compensation.
 Similar intimidation tactics, in which “muscle men” hired by the designated winning bidder have
forcibly prevented other companies from submitting bids have been seen in cases in Bangladesh,
India, Vietnam and Cambodia.   Such tactics are often associated with local political parties.

1.1.7 Conclusion

Bid rigging is an anti-competitive activity with adverse economic implications such as loss of efficiency
and diversion of money away from development programs. Even though in most cases sanctions and
punishments for engaging in bid rigging are quite severe its detection might pose a challenge. Dealing of
Bid Rigging requires recognition of conditions facilitative of bid rigging and deterrence; enforcement
through procurement reform; and the use of trained Auditors /Examiners/ Observers.

1.2 Cash Lapping

1.2.1 Introduction

Lapping is a method to cover a fraud called skimming or embezzlement of cash received from customer.
Lapping occurs when an employee steals cash by diverting a payment from one customer, and then hides
the theft by diverting cash from another customer to offset the receivable from the first customer.
Also called teeming and lading. This type of fraud can be conducted in perpetuity, since newer payments
are continually being used to pay for older debts, so that no receivable involved in the fraud ever appears
to be that old. Lapping is an accounting method which involves altering the accounts receivable section of
the balance sheet wherein cash that is received for the payment of a receivable is stolen. Lapping can also
be done to cover such diversion of funds by write off of customer’s dues as irrecoverable or raising of
credit notes to conceal theft.

1.2.2 Features of a typical Cash Lapping:

 Happens typically where cash handling and cash recording duties are handled by the same person.

 This situation most commonly arises in a smaller business, where a bookkeeper may be
responsible for all collection and accounting tasks.
 If these tasks are split up amongst several people then lapping can only be conducted when two or
more employees are involved.
 Lapping typically requires that the person engaged in the fraud be involved every day.
 Employee refuses to take the vacation time that they have earned can be considered a possible
indicator of the existence of lapping.

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1.2.3 Objectives of Lapping:

 Personal gain
o compulsions, over commitment, vices etc lead to Fraud
 Abuse of power
o indispensible feeling, jealousy, abuse the owner, revenge etc
 A thrill to get away with crime
o Adventure to commit fraud or perfect crime and get away

1.2.4 Types of Lapping:

Skimming of Cash can be covered by Lapping, which can be broadly classified as:

 Teeming and Lading where Cash embezzled after receipt from one customer is accounted for
with cash received from other customer and so on and so forth
 Write offs of Customer balances as not receivable after embezzlement of cash received from the
customer
 Issuing fraudulent credit notes to customers after embezzlement of cash receipt

1.2.5 How to detect Cash Lapping? RED FLAG

 Existence of ongoing evidence that cash receipts are routinely being applied against the wrong
customer accounts.
 Employee handling both Receipts and Recording of cash towards receivables with lack of
segregation of duties
 Employee, handling collection and Accounts Receivables refusing to go on earned leave
 Set of employees working as a team in collections of dues from accounts receivables and refusing
rotation of duties to other staff
 One-off write offs from regular customers
 Credit notes issued under suspicious reasoning

1.2.6 How to Prevent, detect or Control Cash Lapping

Controls that can be used to prevent lapping include the following:

 Contact customers and ask if they have received monthly statements from the company. The
responsible party may have been intercepting and destroying the statements before they were
mailed.
 Sudden cash verification. The calculation of the amount of money in the company should be done
suddenly, with the intention that lapper cannot prepare for the possibility of fraud known to the
auditor. Given the element of surprise, deception posed insurmountable.
 Have someone other than the cashier send statements to customers. Customers know what they
paid to the company, so they should be able to detect unusual payments ascribed to their
accounts, or note that certain payments were never applied against their accounts.
 Audit cash receipts transactions on a regular basis, as noted above

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  Require all employees in the accounting area to take all of their vacation time, without exception.
 Track the days of accounts receivable on a trend line. A gradual increase in this measurement can
be caused by lapping.
 Tightly control the use of credit memos. A party committing fraud may attempt to terminate a
lapping situation by writing off a receivable in the amount of the missing funds.
 Stamp all checks with "For Deposit Only," so that employees cannot deposit these checks to their
own accounts.
 Have customers pay directly to through electronic payment channels or Post office lock box, so
that cash cannot be intercepted and stolen by employees
 Frequent rotation of duties

1.2.7 Conclusion

Lapping is one of the most widely practiced type of fraud since the inherent risk of cash is very high. This
can be easily controlled or prevented by proper segregation of duties, surprise checks, proper controls and
rotation of duties. More reliance on electronic fund transfers as a mode of customer settlement will ensure
total control over cash embezzlement.

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2 Bibliography

 www.investopedia.com 
 www.oecd.org
 www.investopedia.com
 https://en.wikipedia.org
 www.accountingtools.com
 http://guide.iacrc.org