United Kingdom

Details

  • Service: Advisory, Risk Consulting
  • Type: Business and industry issue
  • Date: 07/06/2013

Procurement Fraud: Could this happen to you? - How it occurs 

Procurement Fraud: Could this happen to you? - How it occurs

This article is the first in a two-part series: the first looking at how procurement fraud occurs and the second looking at the prevention and detection of procurement fraud.

Abuse within the procurement cycle is common and can be damaging, from the magnitude of potential monetary losses to a loss of trust of important stakeholders such as investors, customers, and suppliers.

 

Consider a long-time employee who is suddenly struggling with making ends meet at home. Through many years of service in the procurement department, he has gained the trust of co-workers, established personal relationships with vendors, and has an intimate knowledge of the controls system and any gaps that may exist. Almost effortlessly, he could approach a vendor to inflate invoices and direct surplus payments to his personal bank account.

 

Such collusion is common in procurement frauds. Experience shows that fraud can flourish in times of economic boom or bust. ‘Change’ can have a significant impact on people at all levels in an organisation.

 

The offender will justify their actions: “the company won’t miss this; it’s a small drop in the bucket”, or “I’ll pay it back as soon as I am able”.

 

Perhaps less obvious; but equally alarming, it becomes increasingly enticing to accept gifts from a supplier when the demands on staff’s time is expanded and compensation is frozen or not increasing to the extent of the former ‘glory days’ of growth and profitability when the economy was flourishing.

 

In the push for short-term results it becomes more challenging to stay two steps ahead of the more unethical among us. Could this happen to you? Are you prepared? How confident are you with your answer?

 

Could This Happen to You?

It is very true that most payments to vendors are legitimate; but, consider what it would mean to your business if even a small proportion of such payments were fraudulent.

 

Fraud does not discriminate, by geography or industry.

 

As businesses seek avenues to streamline production and reduce associated costs, supply chains are extending across new, international borders.

 

Even smaller companies today deal with offshore suppliers who could have very different values, controls or business practices. Companies must recognise this and be extra diligent in managing these relationships.

 

Procurement fraud is something that simply cannot be ignored. People contemplating fraud or other actions not in the company’s best interest can sidestep those internal controls operating as your first line of defence. Perhaps the more pertinent question in today’s environment is ‘why couldn’t this happen to me?’


What Could Happen?

The first step in assessing the vulnerability of your procurement cycle and designing mechanisms to detect and prevent the fraud is to understand the common fraud schemes.

 

There are many procurement fraud schemes, with multiple themes and variations on certain basic fraud approaches. Some of the more common schemes are as follows:

 

Phantom vendors or other manipulation of the vendor master file – by creating a record in the vendor master file that directs payment to a fictitious company or a legitimate company that does not provide services to the organisation, an opportunity is created to generate a payment record and transfer money to a recipient that may be controlled by an employee or a third party in collusion with procurement personnel.

 

Cheque forgery – perhaps easily lost in the volume of transactions, a manual cheque can be transacted through forgery of the designated approval authority.

 

Fictitious invoicing and inflated billing rates – invoices could be generated for processing through Accounts Payable that do not relate to goods received or services rendered.

 

Conflicts of interest – where procurement personnel have a financial interest in the success of a supplier entity, their purchasing decisions may be biased towards that entity to the detriment of your organisation.

 

Vendor kickbacks and bribery – Vendors may send gifts to procurement personnel because of long-term relationships. This can create a conflict where a personal relationship between the buyer and vendor is established that may put pressure on the buyer’s efforts to act in the company’s best interest.

 

Less innocently, vendors may collude with procurement staff in order to ‘work around’ established procurement controls and fraudulently withdraw money from your organisation.

 

Bid rigging – through collusion between procurement personnel involved in the vendor selection process and outside vendors, or between outside vendors participating in the bidding process, inflated rates may be contracted for projects.

 

Companies should reduce the opportunity for employees to not act in the company’s best interest by increasing the risk of being caught. This added risk to the individual can act as a rather convincing deterrent.

 

Coming up in the second part we will be looking at the prevention and detection of procurement fraud, so it doesn’t happen to you.

 

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Contact

Priya GiulianiPriya Giuliani

Director

KPMG in the UK

 

020 7311 3633

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