Need Recognition Schemes
5 minutes
5 Questions
Need Recognition Schemes are a category of procurement fraud that occurs at the earliest stage of the procurement cycle—the point at which an organization identifies and defines its need for goods or services. According to the ACFE's Fraud Examiners Manual, these schemes typically involve collusion between a procuring entity's employee (such as a procurement officer or requisitioner) and a contractor or vendor. The employee manipulates the organization into recognizing a 'need' that is unnecessary, inflated, or tailored to benefit a specific supplier, usually in exchange for kickbacks, bribes, or other improper benefits. Common variations include: (1) creating a false need for goods or services the organization does not actually require; (2) over-ordering or purchasing excessive quantities beyond legitimate requirements; (3) justifying unneeded upgrades or replacements of existing functioning equipment; (4) defining requirements so narrowly that only a favored vendor can satisfy them (a precursor to specification schemes); and (5) splitting a legitimate large purchase into smaller ones to avoid competitive bidding thresholds. Red flags that a Certified Fraud Examiner should look for include: unusually high requirements for stock or inventory levels; items purchased that are not reflected in operating budgets or strategic plans; frequent purchases of products that are later written off, scrapped, or go unused; a particular employee consistently initiating requisitions for a specific vendor; requests for materials that duplicate existing inventory; and justifications for purchases that are vague, poorly documented, or rely heavily on the vendor's own assessment of need. To investigate, a CFE should review requisition documentation, compare purchased quantities against actual consumption and inventory records, analyze the relationship between requisitioners and vendors, and examine whether needs assessments were independently verified. Preventive controls include requiring independent justification and approval of needs, segregation of duties between those who identify needs and those who select vendors, periodic inventory audits, and a well-documented procurement planning process aligned with budgets.
Need Recognition Schemes in Procurement Fraud: A Complete CFE Exam Guide
Why Need Recognition Schemes Matter
Procurement fraud is one of the most costly categories of occupational fraud because it strikes at the point where an organization commits to spending money. Among the schemes tested in the ACFE Certified Fraud Examiner (CFE) exam under Financial Transactions and Fraud Schemes, need recognition schemes are unique because they occur before any bid is issued, before any contract is signed, and often before anyone outside the scheme even knows a purchase is being considered. The fraud is baked into the very decision to buy.
This makes need recognition schemes especially important for three reasons:
1. They are hard to detect. Because the purchase appears legitimately authorized and may go through a proper competitive bidding process afterward, traditional controls over bidding and payment do not catch them. The fraud occurred in the justification, not the execution.
2. They cause total loss, not partial loss. In most procurement frauds (such as inflated pricing or substandard goods), the victim organization at least receives something it needed. In a need recognition scheme, the organization pays for goods or services it did not need at all, or pays for far more than it needed. The entire expenditure may be waste.
3. They are a gateway to other collusion schemes. Once a corrupt employee has established a false need, the same employee frequently proceeds to tailor the specifications so only the favored vendor can win, leak bid information, or steer a sole-source award. The CFE exam frequently tests your ability to distinguish need recognition from these related schemes, so a solid understanding is essential.
Where Need Recognition Fits in the ACFE Framework
The ACFE Fraud Examiners Manual organizes procurement fraud schemes around the phases of the procurement process. You must know these phases for the exam:
- Presolicitation phase: The purchasing entity identifies its needs, develops specifications, and determines the method of acquisition.
- Solicitation phase: The entity prepares and issues the solicitation (invitation for bids or request for proposals), and bidders prepare and submit bids.
- Bid evaluation and award phase: Bids are opened, evaluated, and the contract is awarded.
- Post-award and administration phase: The contract is performed, changes are made, and payments are issued.
Need recognition schemes occur in the presolicitation phase, along with bid tailoring (specifications schemes). Both are classified under collusion between contractors and purchasing entity employees, as opposed to collusion among contractors alone (bid rigging schemes such as complementary bidding, bid rotation, bid suppression, and market division).
Remember this hierarchy for the exam:
Procurement Fraud
1. Collusion among contractors (bid rigging)
2. Collusion between contractors and employees
- Need recognition schemes (presolicitation)
- Bid tailoring / specifications schemes (presolicitation)
- Bid manipulation schemes (solicitation)
- Leaking bid data (solicitation)
- Bid splitting (solicitation)
- Unjustified sole-source awards (solicitation)
3. Defective pricing schemes
4. Performance schemes (nonconforming goods, change order abuse, cost mischarging)
What Is a Need Recognition Scheme?
A need recognition scheme is a form of procurement fraud in which an employee of the purchasing organization receives something of value from a contractor and, in exchange, convinces the organization that it needs goods or services it does not actually need, or that it needs them in excessive quantities or at an unnecessary quality level.
The ACFE definition emphasizes that the employee recognizes a need for a particular product or service, and that recognition is corrupted. The employee is essentially selling his or her authority to determine what the organization requires.
Key elements:
- Corrupt employee: Someone within the purchasing organization who has influence over requisitions, needs assessments, budget requests, or inventory levels.
- Favored contractor or vendor: The outside party who benefits from the sale and who provides a kickback, bribe, gift, or other inducement.
- Something of value: The corrupt payment can be cash, gifts, entertainment, promises of future employment, or any other benefit.
- A manufactured or inflated need: The organization is persuaded to purchase something unnecessary, something in excess of actual requirements, or something at a higher specification than required.
It is critical to understand that the need itself is the fraud. Everything that follows may look completely legitimate.
How Need Recognition Schemes Work
The typical sequence is as follows:
Step 1: The relationship is established. A contractor identifies an employee with influence over purchasing decisions, such as a department manager, inventory controller, engineer, project manager, or procurement officer. The contractor cultivates the relationship through gifts, entertainment, or direct offers of payment.
Step 2: The employee creates or inflates a need. The employee uses his or her position to persuade the organization that a purchase is required. This can happen in several ways:
- Fabricating a need entirely: Requisitioning equipment, software, consulting services, or supplies that the organization has no legitimate use for.
- Inflating quantities: Setting inventory reorder points or stock levels far above what operations require, so that excessive goods are purchased from the favored vendor.
- Inflating quality or specification: Insisting that a premium product or service is required when a standard one would suffice.
- Premature replacement: Declaring existing assets obsolete or defective when they are still serviceable, creating a need for replacement.
- Writing off inventory: Declaring large quantities of inventory as surplus, scrap, or obsolete to create a need to repurchase.
Step 3: The need is formalized. The employee prepares or influences the requisition, business case, budget request, or needs assessment. Supporting documentation may be weak, vague, or nonexistent, or it may be fabricated.
Step 4: The purchase proceeds. The organization authorizes the acquisition. The scheme may end here if the favored vendor is a sole source, or it may continue into bid tailoring and other schemes to ensure the favored vendor wins the award.
Step 5: The contractor pays the employee. The kickback or benefit is delivered, often disguised as a consulting fee, a gift, or a payment to a third party.
Illustrative Examples
Example 1 - Inventory manipulation: A warehouse manager at a manufacturing company accepts quarterly cash payments from a parts supplier. In return, the manager raises the minimum stock levels for several components to three times the historical usage rate, ensuring continuous large orders. Thousands of parts sit unused, and many are eventually scrapped.
Example 2 - Fabricated service need: An IT director receives a promise of a lucrative job from a software consulting firm. The director writes a business case asserting that the organization urgently needs a system security review and ongoing managed services, even though the internal team already performs these functions. The firm is engaged on a multi-year contract.
Example 3 - Premature replacement: A facilities engineer at a hospital is given expensive gifts by an equipment vendor. The engineer reports that functioning HVAC units are failing and must be replaced immediately, creating an emergency need that is met by the vendor.
Red Flags of Need Recognition Schemes
The CFE exam places heavy emphasis on red flags. The ACFE Fraud Examiners Manual identifies the following indicators that a need recognition scheme may be occurring:
- Unusually high requirements for stock and inventory levels that are not supported by usage or production data.
- Writing off large numbers of surplus items to scrap, which creates an artificial need to repurchase.
- Defining a need in a way that can only be met by a specific contractor (this overlaps with bid tailoring).
- Failure to develop a satisfactory list of backup suppliers, indicating dependence on a favored vendor.
- Inadequate or missing justification for the purchase; needs assessments that are vague, unsupported, or prepared by a single individual.
- An employee who bypasses or short-circuits the normal need determination process.
- Purchases that do not align with the organization's operational plans, budgets, or strategic objectives.
- Equipment or supplies that remain unused or are underutilized after purchase.
- Repeated emergency or urgent purchases from the same vendor.
- Close personal relationships between the requisitioning employee and the vendor, or an employee with a lifestyle inconsistent with income.
Prevention and Detection
Effective controls focus on the integrity of the needs assessment process:
- Segregation of duties: The person who identifies a need should not also set specifications, select the vendor, and approve payment.
- Independent review of requisitions: Require documented justification for purchases above a threshold, reviewed by someone outside the requesting department.
- Usage-based inventory controls: Tie reorder points and stock levels to historical consumption data and require approval for changes.
- Asset disposal controls: Require independent verification before assets or inventory are written off as surplus or obsolete.
- Vendor relationship policies: Enforce gift and entertainment policies and require disclosure of conflicts of interest.
- Data analytics: Compare purchases to usage, identify vendors with unusually concentrated business, and flag inventory write-offs followed by repurchases.
- Post-purchase audits: Verify that purchased goods and services were actually received, needed, and used.
Distinguishing Need Recognition from Related Schemes
This is where exam candidates most often lose points. Keep these distinctions clear:
- Need recognition: The decision to buy is corrupted. The question is whether or how much to buy. Occurs in the presolicitation phase.
- Bid tailoring (specifications scheme): The specifications are corrupted to favor a particular vendor. The need may be legitimate, but the requirements are written so only one vendor can win. Also presolicitation phase.
- Bid manipulation: The solicitation process is corrupted, such as restricting the bid pool, falsifying the bid log, or extending deadlines for a favored bidder. Solicitation phase.
- Leaking bid data: Confidential information about competing bids or budgets is given to a favored vendor. Solicitation phase.
- Bid splitting: A large purchase is divided into smaller ones to avoid competitive bidding thresholds. Solicitation phase.
- Unjustified sole-source award: The employee falsely claims only one vendor can provide the goods or services to avoid competition.
- Bid rigging (complementary bidding, bid rotation, bid suppression, market division): Collusion among contractors without necessarily involving a corrupt employee.
A simple test: If the fact pattern says the organization did not actually need the goods or services, or needed far less, and an employee was paid to create that need, the answer is need recognition.
Exam Tips: Answering Questions on Need Recognition Schemes
Tip 1: Anchor on the phase. Any question asking which phase of the procurement process a need recognition scheme occurs in has one answer: the presolicitation phase. If a question describes an employee influencing what the organization buys before any solicitation is issued, think presolicitation and then decide between need recognition and bid tailoring.
Tip 2: Anchor on the category. Need recognition is a collusion between contractors and employees scheme. It is not a bid-rigging scheme among contractors, and it is not a performance scheme. If an answer choice places need recognition among contractor-only collusion schemes or post-award schemes, it is wrong.
Tip 3: Look for the words that signal need recognition. Fact patterns will use phrases such as did not need, excessive quantities, unnecessary, inflated stock levels, written off as surplus, convinced the company it required, or in exchange for a kickback, recommended the purchase of. These point to need recognition.
Tip 4: Watch for the bid tailoring trap. If the fact pattern focuses on how the specifications were written (narrow, vague, or tailored so only one vendor qualifies), the answer is bid tailoring, not need recognition, even though both are presolicitation schemes. Need recognition is about whether and how much; bid tailoring is about what exactly and from whom.
Tip 5: Memorize the red flags list. The exam frequently asks which of the following is or is not a red flag of a need recognition scheme. The core ACFE red flags are: unusually high stock and inventory requirements, writing off large numbers of surplus items to scrap, defining a need that only one contractor can meet, and failure to develop a satisfactory list of backup suppliers. Red flags relating to bid opening, bid log alterations, or change orders belong to other schemes.
Tip 6: Remember that the subsequent process can look clean. A question may describe a competitive bidding process that was conducted properly and ask what scheme could still have occurred. Need recognition is the answer when the underlying purchase was not needed, because the fraud happened before the bidding began.
Tip 7: Identify the corrupt party correctly. Need recognition requires an employee of the purchasing entity working with a contractor. If the fact pattern involves only contractors coordinating among themselves with no inside employee, you are dealing with bid rigging, not need recognition.
Tip 8: Read all answer choices before selecting. CFE questions often include one answer that is partially correct (for example, correctly identifying the presolicitation phase but naming the wrong scheme). Eliminate choices that get the phase, the category, or the key behavior wrong, then select the one that matches all three.
Tip 9: Apply the elimination approach to scenario questions. Ask yourself in order: (1) Is there a corrupt employee? (2) Did the fraud occur before solicitation? (3) Was the problem the decision to buy or the quantity bought, rather than the specifications or the bidding process? If all three are yes, select need recognition.
Sample Practice Questions
Question 1: A purchasing manager accepts payments from a supplier and, in return, increases the company's minimum inventory levels for the supplier's products to well above historical usage. Which type of procurement fraud scheme is this?
A. Bid splitting
B. Need recognition scheme
C. Complementary bidding
D. Change order abuse
Answer: B. The manager has been paid to create an inflated need for goods. Increasing inventory requirements beyond actual usage is a classic need recognition scheme.
Question 2: In which phase of the procurement process do need recognition schemes generally occur?
A. Solicitation phase
B. Bid evaluation and award phase
C. Presolicitation phase
D. Post-award and administration phase
Answer: C. Need recognition occurs when the purchasing entity is determining what it needs, which is the presolicitation phase.
Question 3: Which of the following is a red flag of a need recognition scheme?
A. Alterations to the bid log after bid opening
B. Writing off large numbers of surplus items to scrap
C. Numerous change orders shortly after contract award
D. The winning bidder repeatedly subcontracts to losing bidders
Answer: B. Writing off surplus items creates an artificial need to repurchase. Choice A relates to bid manipulation, C to change order abuse, and D to bid rotation.
Question 4: An engineer is given gifts by a vendor and writes a requirement that a needed piece of equipment must have a proprietary feature that only that vendor offers. This is best described as:
A. Need recognition scheme
B. Bid tailoring scheme
C. Bid suppression
D. Defective pricing
Answer: B. The need for the equipment was legitimate; the fraud lies in the specifications being tailored to one vendor. This is bid tailoring, not need recognition.
Summary
Need recognition schemes are presolicitation-phase procurement frauds involving collusion between a corrupt employee of the purchasing entity and a contractor. The employee, in exchange for something of value, convinces the organization that it needs goods or services it does not actually require, or needs them in excessive amounts. Because the fraud occurs in the justification for the purchase, later stages of the procurement may appear entirely legitimate. For the CFE exam, master the phase (presolicitation), the category (collusion between contractors and employees), the red flags (excessive inventory requirements, scrap write-offs, needs only one vendor can meet, no backup suppliers), and the critical distinction from bid tailoring. With these anchors, you will be able to answer any need recognition question with confidence.
Procurement fraud is one of the most costly categories of occupational fraud because it strikes at the point where an organization commits to spending money. Among the schemes tested in the ACFE Certified Fraud Examiner (CFE) exam under Financial Transactions and Fraud Schemes, need recognition schemes are unique because they occur before any bid is issued, before any contract is signed, and often before anyone outside the scheme even knows a purchase is being considered. The fraud is baked into the very decision to buy.
This makes need recognition schemes especially important for three reasons:
1. They are hard to detect. Because the purchase appears legitimately authorized and may go through a proper competitive bidding process afterward, traditional controls over bidding and payment do not catch them. The fraud occurred in the justification, not the execution.
2. They cause total loss, not partial loss. In most procurement frauds (such as inflated pricing or substandard goods), the victim organization at least receives something it needed. In a need recognition scheme, the organization pays for goods or services it did not need at all, or pays for far more than it needed. The entire expenditure may be waste.
3. They are a gateway to other collusion schemes. Once a corrupt employee has established a false need, the same employee frequently proceeds to tailor the specifications so only the favored vendor can win, leak bid information, or steer a sole-source award. The CFE exam frequently tests your ability to distinguish need recognition from these related schemes, so a solid understanding is essential.
Where Need Recognition Fits in the ACFE Framework
The ACFE Fraud Examiners Manual organizes procurement fraud schemes around the phases of the procurement process. You must know these phases for the exam:
- Presolicitation phase: The purchasing entity identifies its needs, develops specifications, and determines the method of acquisition.
- Solicitation phase: The entity prepares and issues the solicitation (invitation for bids or request for proposals), and bidders prepare and submit bids.
- Bid evaluation and award phase: Bids are opened, evaluated, and the contract is awarded.
- Post-award and administration phase: The contract is performed, changes are made, and payments are issued.
Need recognition schemes occur in the presolicitation phase, along with bid tailoring (specifications schemes). Both are classified under collusion between contractors and purchasing entity employees, as opposed to collusion among contractors alone (bid rigging schemes such as complementary bidding, bid rotation, bid suppression, and market division).
Remember this hierarchy for the exam:
Procurement Fraud
1. Collusion among contractors (bid rigging)
2. Collusion between contractors and employees
- Need recognition schemes (presolicitation)
- Bid tailoring / specifications schemes (presolicitation)
- Bid manipulation schemes (solicitation)
- Leaking bid data (solicitation)
- Bid splitting (solicitation)
- Unjustified sole-source awards (solicitation)
3. Defective pricing schemes
4. Performance schemes (nonconforming goods, change order abuse, cost mischarging)
What Is a Need Recognition Scheme?
A need recognition scheme is a form of procurement fraud in which an employee of the purchasing organization receives something of value from a contractor and, in exchange, convinces the organization that it needs goods or services it does not actually need, or that it needs them in excessive quantities or at an unnecessary quality level.
The ACFE definition emphasizes that the employee recognizes a need for a particular product or service, and that recognition is corrupted. The employee is essentially selling his or her authority to determine what the organization requires.
Key elements:
- Corrupt employee: Someone within the purchasing organization who has influence over requisitions, needs assessments, budget requests, or inventory levels.
- Favored contractor or vendor: The outside party who benefits from the sale and who provides a kickback, bribe, gift, or other inducement.
- Something of value: The corrupt payment can be cash, gifts, entertainment, promises of future employment, or any other benefit.
- A manufactured or inflated need: The organization is persuaded to purchase something unnecessary, something in excess of actual requirements, or something at a higher specification than required.
It is critical to understand that the need itself is the fraud. Everything that follows may look completely legitimate.
How Need Recognition Schemes Work
The typical sequence is as follows:
Step 1: The relationship is established. A contractor identifies an employee with influence over purchasing decisions, such as a department manager, inventory controller, engineer, project manager, or procurement officer. The contractor cultivates the relationship through gifts, entertainment, or direct offers of payment.
Step 2: The employee creates or inflates a need. The employee uses his or her position to persuade the organization that a purchase is required. This can happen in several ways:
- Fabricating a need entirely: Requisitioning equipment, software, consulting services, or supplies that the organization has no legitimate use for.
- Inflating quantities: Setting inventory reorder points or stock levels far above what operations require, so that excessive goods are purchased from the favored vendor.
- Inflating quality or specification: Insisting that a premium product or service is required when a standard one would suffice.
- Premature replacement: Declaring existing assets obsolete or defective when they are still serviceable, creating a need for replacement.
- Writing off inventory: Declaring large quantities of inventory as surplus, scrap, or obsolete to create a need to repurchase.
Step 3: The need is formalized. The employee prepares or influences the requisition, business case, budget request, or needs assessment. Supporting documentation may be weak, vague, or nonexistent, or it may be fabricated.
Step 4: The purchase proceeds. The organization authorizes the acquisition. The scheme may end here if the favored vendor is a sole source, or it may continue into bid tailoring and other schemes to ensure the favored vendor wins the award.
Step 5: The contractor pays the employee. The kickback or benefit is delivered, often disguised as a consulting fee, a gift, or a payment to a third party.
Illustrative Examples
Example 1 - Inventory manipulation: A warehouse manager at a manufacturing company accepts quarterly cash payments from a parts supplier. In return, the manager raises the minimum stock levels for several components to three times the historical usage rate, ensuring continuous large orders. Thousands of parts sit unused, and many are eventually scrapped.
Example 2 - Fabricated service need: An IT director receives a promise of a lucrative job from a software consulting firm. The director writes a business case asserting that the organization urgently needs a system security review and ongoing managed services, even though the internal team already performs these functions. The firm is engaged on a multi-year contract.
Example 3 - Premature replacement: A facilities engineer at a hospital is given expensive gifts by an equipment vendor. The engineer reports that functioning HVAC units are failing and must be replaced immediately, creating an emergency need that is met by the vendor.
Red Flags of Need Recognition Schemes
The CFE exam places heavy emphasis on red flags. The ACFE Fraud Examiners Manual identifies the following indicators that a need recognition scheme may be occurring:
- Unusually high requirements for stock and inventory levels that are not supported by usage or production data.
- Writing off large numbers of surplus items to scrap, which creates an artificial need to repurchase.
- Defining a need in a way that can only be met by a specific contractor (this overlaps with bid tailoring).
- Failure to develop a satisfactory list of backup suppliers, indicating dependence on a favored vendor.
- Inadequate or missing justification for the purchase; needs assessments that are vague, unsupported, or prepared by a single individual.
- An employee who bypasses or short-circuits the normal need determination process.
- Purchases that do not align with the organization's operational plans, budgets, or strategic objectives.
- Equipment or supplies that remain unused or are underutilized after purchase.
- Repeated emergency or urgent purchases from the same vendor.
- Close personal relationships between the requisitioning employee and the vendor, or an employee with a lifestyle inconsistent with income.
Prevention and Detection
Effective controls focus on the integrity of the needs assessment process:
- Segregation of duties: The person who identifies a need should not also set specifications, select the vendor, and approve payment.
- Independent review of requisitions: Require documented justification for purchases above a threshold, reviewed by someone outside the requesting department.
- Usage-based inventory controls: Tie reorder points and stock levels to historical consumption data and require approval for changes.
- Asset disposal controls: Require independent verification before assets or inventory are written off as surplus or obsolete.
- Vendor relationship policies: Enforce gift and entertainment policies and require disclosure of conflicts of interest.
- Data analytics: Compare purchases to usage, identify vendors with unusually concentrated business, and flag inventory write-offs followed by repurchases.
- Post-purchase audits: Verify that purchased goods and services were actually received, needed, and used.
Distinguishing Need Recognition from Related Schemes
This is where exam candidates most often lose points. Keep these distinctions clear:
- Need recognition: The decision to buy is corrupted. The question is whether or how much to buy. Occurs in the presolicitation phase.
- Bid tailoring (specifications scheme): The specifications are corrupted to favor a particular vendor. The need may be legitimate, but the requirements are written so only one vendor can win. Also presolicitation phase.
- Bid manipulation: The solicitation process is corrupted, such as restricting the bid pool, falsifying the bid log, or extending deadlines for a favored bidder. Solicitation phase.
- Leaking bid data: Confidential information about competing bids or budgets is given to a favored vendor. Solicitation phase.
- Bid splitting: A large purchase is divided into smaller ones to avoid competitive bidding thresholds. Solicitation phase.
- Unjustified sole-source award: The employee falsely claims only one vendor can provide the goods or services to avoid competition.
- Bid rigging (complementary bidding, bid rotation, bid suppression, market division): Collusion among contractors without necessarily involving a corrupt employee.
A simple test: If the fact pattern says the organization did not actually need the goods or services, or needed far less, and an employee was paid to create that need, the answer is need recognition.
Exam Tips: Answering Questions on Need Recognition Schemes
Tip 1: Anchor on the phase. Any question asking which phase of the procurement process a need recognition scheme occurs in has one answer: the presolicitation phase. If a question describes an employee influencing what the organization buys before any solicitation is issued, think presolicitation and then decide between need recognition and bid tailoring.
Tip 2: Anchor on the category. Need recognition is a collusion between contractors and employees scheme. It is not a bid-rigging scheme among contractors, and it is not a performance scheme. If an answer choice places need recognition among contractor-only collusion schemes or post-award schemes, it is wrong.
Tip 3: Look for the words that signal need recognition. Fact patterns will use phrases such as did not need, excessive quantities, unnecessary, inflated stock levels, written off as surplus, convinced the company it required, or in exchange for a kickback, recommended the purchase of. These point to need recognition.
Tip 4: Watch for the bid tailoring trap. If the fact pattern focuses on how the specifications were written (narrow, vague, or tailored so only one vendor qualifies), the answer is bid tailoring, not need recognition, even though both are presolicitation schemes. Need recognition is about whether and how much; bid tailoring is about what exactly and from whom.
Tip 5: Memorize the red flags list. The exam frequently asks which of the following is or is not a red flag of a need recognition scheme. The core ACFE red flags are: unusually high stock and inventory requirements, writing off large numbers of surplus items to scrap, defining a need that only one contractor can meet, and failure to develop a satisfactory list of backup suppliers. Red flags relating to bid opening, bid log alterations, or change orders belong to other schemes.
Tip 6: Remember that the subsequent process can look clean. A question may describe a competitive bidding process that was conducted properly and ask what scheme could still have occurred. Need recognition is the answer when the underlying purchase was not needed, because the fraud happened before the bidding began.
Tip 7: Identify the corrupt party correctly. Need recognition requires an employee of the purchasing entity working with a contractor. If the fact pattern involves only contractors coordinating among themselves with no inside employee, you are dealing with bid rigging, not need recognition.
Tip 8: Read all answer choices before selecting. CFE questions often include one answer that is partially correct (for example, correctly identifying the presolicitation phase but naming the wrong scheme). Eliminate choices that get the phase, the category, or the key behavior wrong, then select the one that matches all three.
Tip 9: Apply the elimination approach to scenario questions. Ask yourself in order: (1) Is there a corrupt employee? (2) Did the fraud occur before solicitation? (3) Was the problem the decision to buy or the quantity bought, rather than the specifications or the bidding process? If all three are yes, select need recognition.
Sample Practice Questions
Question 1: A purchasing manager accepts payments from a supplier and, in return, increases the company's minimum inventory levels for the supplier's products to well above historical usage. Which type of procurement fraud scheme is this?
A. Bid splitting
B. Need recognition scheme
C. Complementary bidding
D. Change order abuse
Answer: B. The manager has been paid to create an inflated need for goods. Increasing inventory requirements beyond actual usage is a classic need recognition scheme.
Question 2: In which phase of the procurement process do need recognition schemes generally occur?
A. Solicitation phase
B. Bid evaluation and award phase
C. Presolicitation phase
D. Post-award and administration phase
Answer: C. Need recognition occurs when the purchasing entity is determining what it needs, which is the presolicitation phase.
Question 3: Which of the following is a red flag of a need recognition scheme?
A. Alterations to the bid log after bid opening
B. Writing off large numbers of surplus items to scrap
C. Numerous change orders shortly after contract award
D. The winning bidder repeatedly subcontracts to losing bidders
Answer: B. Writing off surplus items creates an artificial need to repurchase. Choice A relates to bid manipulation, C to change order abuse, and D to bid rotation.
Question 4: An engineer is given gifts by a vendor and writes a requirement that a needed piece of equipment must have a proprietary feature that only that vendor offers. This is best described as:
A. Need recognition scheme
B. Bid tailoring scheme
C. Bid suppression
D. Defective pricing
Answer: B. The need for the equipment was legitimate; the fraud lies in the specifications being tailored to one vendor. This is bid tailoring, not need recognition.
Summary
Need recognition schemes are presolicitation-phase procurement frauds involving collusion between a corrupt employee of the purchasing entity and a contractor. The employee, in exchange for something of value, convinces the organization that it needs goods or services it does not actually require, or needs them in excessive amounts. Because the fraud occurs in the justification for the purchase, later stages of the procurement may appear entirely legitimate. For the CFE exam, master the phase (presolicitation), the category (collusion between contractors and employees), the red flags (excessive inventory requirements, scrap write-offs, needs only one vendor can meet, no backup suppliers), and the critical distinction from bid tailoring. With these anchors, you will be able to answer any need recognition question with confidence.
Test mode:
CFE - Need Recognition Schemes Example Questions
Test your knowledge of Need Recognition Schemes
Question 1
A need recognition scheme occurs when an employee of the procuring organization convinces the organization that it needs excessive or unnecessary goods or services.
Question 2
Which of the following red flags MOST specifically points to a need recognition scheme rather than another pre-award procurement fraud scheme?
Question 3
A plant manager submits a requisition for additional forklifts and states that the current units are close to failure. Maintenance logs show the existing fleet is in good working order, and units bought the prior year sit idle in storage. The solicitation uses generic specifications, bids are opened publicly, and the lowest of five bidders wins the contract. A fraud examiner later learns that the winning vendor paid the manager to generate the order. Which pre-award procurement scheme does this situation BEST illustrate?
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