Mitigating Procurement Fraud
While often overlooked, procurement fraud is one of the most common and insidious forms of fraud an organisation can encounter. Since 2014, PwC has listed it as the world’s second most commonly reported economic crime ranking above bribery, corruption and cybercrime. There can be many reasons behind fraudulent activity. From lucrative contract wins to disgruntled employees, there is no ‘standard’ behaviour for organisations to watch out for.
The more senior the perpetrator, the more damaging the result is likely to be: executives who engage in occupational fraud cost their business over 10-times more than regular employees. Procurement fraud lowers revenues, ruins reputations and distracts from the crucial work of businesses. What’s worse is that it usually hides in plain sight. Often committed by known suppliers and those closest to the organisation, procurement fraud is estimated to place up to five per cent of business spend at risk each year.
Procurement fraud can emerge in any organisation that fails to acknowledge and address it. This is why procurement and other forms of internal fraud are such a menace. Many organisations are in denial over the scale of internal fraud, leading to belated investigations that fail to uncover its true extent. While fraud is primarily an external threat, half of all cases are assisted by employees.
So long as fraud remains taboo, it will be impossible to eradicate. The first step in overcoming the stigma is to understand you are not alone in being defrauded. Even businesses making genuine efforts to fight back may struggle to stay on top. Their efforts will come up short if they rely on outdated manual processes, and their own biases.
When an organization lacks means to defend itself from fraud, it often falls victim of all types of fraud once. Here is the list of most common: -
- Suppliers colluding with Suppliers – Bid rigging
- Employees share information with suppliers – bid rigging
- Employees with interest or shares in supplier’s business
- Occupational Fraud – Use of ones position for personal enrichment
- Double Invoicing
- Trading with ghost vendors
Successful fraud prevention is a two-stage process. First, organisations must look hard at their current prevention regime and modernise their detection framework. It’s important to be proactive. Assume that fraud and error will happen. With the right mindset, procedures and basic business rules in place, stage two can begin implementing appropriate technology with data analytics to ensure accuracy and speed of response. With this approach, it’s possible to not only catch fraud, but to prevent it from happening at all.
Supplier selection is key in preventing procurement fraud from onset. A wide range of competing interests and viewpoints goes into every purchase decision. It’s no different when organisations select a vendor or supplier. Going into procurement with the right mindset and priorities can help companies make the right choice, and not just from a financial perspective. To avoid procurement fraud, businesses must expect the same ethical standards from suppliers as they do their own employees. What’s more, they need to investigate to be certain. When choosing a new supplier, companies consider quality of product or service, cost and industry recognition to be the most important factors in their decision. It’s unsurprising also that current suppliers have an advantage over new ones.
It is important to perform due diligence on suppliers in addition to conducting the basic checks when selecting a new supplier. Regardless of your organizations culture, it is critical to look out for suppliers history of fraud or errors and integrity as key procurement considerations. While each procurement scenario will be different, with unique considerations each time, a history of wrongdoing should always be taken into consideration. The concern of some with procurement integrity is not broadly reflected in wider auditing practices. Similar to internal auditing, supplier due diligence is performed sporadically.
Common red flags to look out for include incorrect tax details, frequent bank account changes, anomalous sequence between invoicing and payments, duplicate documents and employees with interests or shares in third party businesses.
A comprehensive supplier due diligence process should sit at the heart of every project or transaction. The longer organisations wait to perform a check, the greater the chance they will be deceived. A year or even three months is too long to wait and increases the chance of your company entering into a contract with a suspect supplier. Instead, businesses would benefit from a process that analyses the market constantly, vetting vendors and highlighting the risk of fraud before it can begin. It’s understandable that fraud and reputation aren’t the top priorities for organisations during procurement. However, carefully vetting a supplier with connections to past or current employees could minimise exposure. Caution and investment at the procurement stage help prevent procurement fraud further down the line. With the right solution, it’s also possible to perform due diligence without delaying the process.
Beyond auditing and procurement practices, detection capabilities make perhaps the largest contribution to defending an organisation from fraud. The technology a business equips its staff with to detect the warning signs is a crucial investment. While some organisations fail at fraud detection by not looking for it, others fall short despite their best efforts. The problem is not a lack of awareness or a denial of the issue, but mainly the capabilities they use for detection. Of those that do actively monitor for procurement fraud, the majority are over-reliant on manual processes and user access controls.
Investment in procurement technology with adequate data analytics will deliver adequate or persistent protection. Considering the lack of accountability for fraud prevention in companies, it’s unlikely those performing manual controls consider it to be their primary role. Inevitably, corners will be cut and other tasks prioritised by employees, making it easy for fraud to slip through the net. Manual controls also bring human bias into the equation. Fraud can be perpetrated by any employee or business leader, but certain personnel may be popular or senior enough that they avoid suspicion.
The majority of organisations are aware of the danger posed by procurement fraud and are taking steps to tackle it. However, thanks to inconsistent audit regimes, failure to utilise the latest technologies, the true scale of the challenge is poorly understood.
Until organisations adopt appropriate procurement technology with data-driven approach to detection, millions will continue to be lost to procurement fraud. Companies need solutions able to spot errors and fraud anywhere during the procurement cycle, from bid to contract execution.
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