Fraud in procurement
Procurement still appears to be an area that is highly susceptible to fraud and corruption for organisations. There is often more focus placed by organisations on strategising the most cost-effective methods of acquiring goods and services, and as such, controls around the procurement process are often neglected, overlooked or ineffectively managed. It is also one of the more complex frauds to identify as there are numerous ways it can be committed in the procurement process.
Procurement fraud can take various forms, some of which include:
Bribes and Kickbacks
Bribes and kickbacks involve the giving or receiving of something of value or benefit to influence the actions of another, which in procurement could be the awarding of a contract.
This involves two or more suppliers colluding to submit false or complementary bids to allow each other to win contracts. Employees may also manipulate the bidding process, through the favouring of a specific supplier.
Conflicts of Interest (Undisclosed)
Conflicts of interests arise when an employee does not disclose they have an interest in a supplier, and instead, engage in unauthorised discussions with the prospective supplier or accept gifts or benefits.
False, Inflated or Duplicate Invoices
Suppliers may intentionally submit false, inflated or duplicate invoices. This can either involve the supplier acting alone or in collusion with an employee.
Employees may either collude with a third party to submit invoices for goods or services from a non-existent vendor, or submit invoices for the benefit of themselves.
Procurement fraud often occurs when there are either insufficient, weak or unenforced controls in place within an organisation. Some control measures that can be implemented to reduce the risk of procurement fraud include:
- Implementing clear and concise policies and procedures
- Conducting regular random risk and audit reviews to look for patterns, trends and unusual/suspicious activities or transactions
- Restricting employee access to sensitive tender information
- Vendor due diligence to establish the legitimacy of suppliers and/or possible links to employees
- Establishing a framework for employees to manage conflicts of interest
- Implementing a gift register
- Segregating duties to ensure no one employee has control of multiple stages of the procurement process
- Establishing and monitoring delegations of authority for compliance and currency
- Maintaining robust contract management and oversight to enforce contractual terms and deliverables, including any variations
- Conducting regular fraud awareness training
- Providing employees with an avenue that allows them to report suspected incidents of unethical behaviour such as a whistleblower hotline
All organisations should have strong controls and rigour around the procurement function, as a single incident of fraud can have disastrous consequences for an organisation. Procurement fraud incidents generally continue undetected for a protracted period of time and as such have a propensity to have a significant cost impact upon an organisation. And it’s not just the financial impact it can have on an organisation, but the indirect losses such as reputational damage and loss of customer or shareholder confidence.