Are You Being Ripped Off by Your Employees?
If your company purchases goods or services from a third party, then you are probably being ripped off!
Procurement fraud represents a significant challenge for organizations of all sizes. Costly, elusive, and difficult to prosecute, procurement fraud can silently drain resources and undermine trust within a business. In the past five years, procurement fraud has been a significant issue in Australia, with substantial financial impacts. The estimated cost of fraud against the Commonwealth alone rose from $91.6 million in 2017–18 to $265.9 million in 2020–21.
Procurement fraud can hit government at all levels and the private sector.
New South Wales: A Pakistani national was charged with sending proceeds from a multimillion-dollar scam targeting the NSW government overseas, involving $2.1 million mistakenly transferred to scammers posing as a legitimate financial institution.
South Australia: An audit revealed that Ventia, holding a $4 billion contract with the South Australian government, overcharged for services, including a $65,000 quote for a fence estimated at $2,000 by a local contractor.
Procurement Fraud Has Many Tentacles:
Fake Invoicing
A small construction company discovered that an employee had created a fake supplier and submitted false invoices for non-existent services. The employee approved the payments, diverting funds to their own account. Fraud was detected only after an internal audit.
Collusion With Vendors
In a medium-sized manufacturing firm, procurement staff colluded with vendors to inflate prices. The staff received kickbacks from the vendors for approving overpriced contracts. Uncovered by information from a whistleblower.
Unauthorized Purchases
A retail business faced procurement fraud when an employee made unauthorized purchases using the company’s procurement system. The employee ordered personal items and disguised them as business expenses. Identified after routine audit.
This article explores the key aspects of procurement fraud, digging into its causes, common schemes, and effective mitigation strategies. By understanding the risks and putting preventive measures into practice, organizations can safeguard their resources and enhance operational integrity.
What Is Procurement Fraud?
Procurement fraud occurs when individuals or groups manipulate the purchasing process to gain undue financial or material advantage. This manipulation often involves collaboration between employees and suppliers, creating an environment ripe for fraudulent activity.
For example: A vendor is awarded a contract at an inflated price. In exchange, the employee who approved the deal receives kickbacks, which could be cash, gifts, or other favours.
Procurement fraud is more likely to occur in organizations with high purchasing volumes and inadequate oversight. Internal factors, such as financial stress, personal challenges, or dissatisfaction with the employer, often motivate offenders.
Five Common Types of Procurement Fraud
Kickbacks
This is one of the most common forms of procurement fraud. This scheme involves collusion between employees and suppliers. The supplier is awarded a contract at an inflated price, and in return, the employee receives compensation, often termed a “kickback.” This can be money, benefits such as goods and/or travel for self or family.
Conflicts of Interest
In conflict-of-interest schemes, the employee manipulates the procurement process to benefit friends or family members. While awarding contracts to acquaintances is not inherently fraudulent, the absence of transparency and adherence to fair bidding processes introduces the element of fraud.
Sham Company Payments
This involves payments made to shell companies that provide no actual goods or services. Such schemes flourish in environments with lax procurement oversight, where invoice reconciliation and purchase order matching are not diligently performed. NO separation of duties.
Inflation or Under-Delivery
Here, suppliers inflate prices or deliver substandard or fewer goods than agreed upon in the contract. Employees often facilitate these discrepancies for compensation.
Falsified Statements
This form of fraud occurs when suppliers misrepresent their qualifications or certifications. Claiming to have indigenous mix for government contracts. Providing food or other items claiming they are organic, but the goods are standard.
How to Spot Procurement Fraud
Some common signs:
Unusual Employee Behaviour
Observe sudden changes in the lifestyle of employees involved in procurement. A significant improvement in material wealth, such as driving an expensive car, may justify closer scrutiny.
Irregular Bid Activity
Be alert to anomalies in the bidding process, such as disproportionate support for a particular vendor or unauthorized subcontracting. Many variations in contract once awarded.
Material or Service Discrepancies
Track the quality and quantity of delivered goods. Discrepancies in inventory levels or subpar materials are potential red flags.
Discrepancies in Invoices
Cross-check invoices with purchase orders and delivery receipts. Inconsistent or inflated invoices often signal fraudulent activity. Another reason for separation of duties.
Responding to Procurement Fraud
Policy: You MUST have a fraud and procurement (corruption) policy. This policy should outline the action to take if you discover/suspect procurement fraud.
Notification: What is the immediate action–what areas should be advised? This may include HR, Legal, and/or the police.
Communication Plan: Develop internal and external communication strategies, including appointing a PR representative to handle public relations. The public response to a fraud can cripple a business.
Audit Process: investigate to determine the fraud and identify all participants.
Stakeholder Engagement: Notify board members, investors, and regulators as necessary to ensure transparency and accountability.
Best Practices in Preventing Procurement Fraud.
You need to be proactive.
Procurement Training
Provide training to procurement and finance teams about common fraud schemes and the importance of vigilance. Incorporate fraud awareness into the onboarding process for new employees.
Provide ongoing training to tell the team about emerging threats.
Establish Approval Controls
Implement a documented procurement process with multiple layers of approval. This approach makes sure purchases undergo scrutiny, making it harder for fraudulent transactions to slip through. Once again-Separation of Duties.
Develop Preferred Vendor Lists
Work exclusively with vetted and approved suppliers. By conducting rigorous due diligence and maintaining a pre-qualified vendor list, organizations can reduce exposure to fraudulent suppliers.
Conduct Regular Audits
Schedule regular internal and external audits to identify potential vulnerabilities in procurement practices. High-visibility audits act as a deterrent to would-be fraudsters.
Create a Whistleblower Policy
Encourage employees to report suspicious activity without fear of retaliation. A strong whistleblower policy fosters a culture of accountability and transparency, helping to uncover fraud early.
Building a Fraud-Resistant Culture
Fraud will flourish if there are weak internal controls and poor communication. A strong organizational culture that emphasizes ethical behaviour, transparency, and accountability is key to preventing fraud.
Tips for Cultivating an Ethical Culture:
Leadership Commitment: Lead from the top. Display a commitment to ethical practices.
Explicit Policies: Develop and Enforce Policies That Outline Acceptable Behaviours and Procurement Procedures.
Open Communication: develop processes for employees to voice concerns or report irregularities (anonymous reporting, strong anti-reprisal policies).
Regular Training: inform all employees of fraud risks and prevention strategies. Toolbox talks and/or planned discussions with examples.
Conclusion
Procurement fraud poses a significant threat, undermining trust and depleting resources in both businesses and government entities. By understanding the various forms of procurement fraud, recognizing the warning signs, and putting preventive measures into practice, companies, and government can greatly mitigate their risk.
Integrating strong internal controls, conducting regular audits, and fostering a whistleblower-friendly culture are essential steps to protect procurement processes. These efforts not only safeguard financial resources but also bolster the integrity and reputation of the organization.
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