Procurement fraud is a huge issue right now. According to PwC, over 51% of organisations worldwide have been victims of fraud in the past two years. Additionally, there are rising concerns about irregularities and intentional misconduct during the procurement process due to negligence or deliberate actions rooted in collusion and fraud (Primahadi and Utami, 2017).
By 2027, financial losses will surpass US$348 billion globally. It can’t be eliminated, but it needs to be minimised.
One of the difficulties is that most procurement fraud is committed by employees who have never done it before. That’s right – most offenders are first-timers. This fact alone means it’s difficult to recruit for the ‘right’ people, when most people at an interview haven’t committed fraud before – probably haven’t even thought about it.
But that doesn’t mean procurement fraud can’t be anticipated, spotted and even prevented. Here’s how to do it.
What is procurement fraud?
Procurement fraud refers to the manipulation, deception or misrepresentation within an organisation’s procure-to-pay process for personal gain or to cause financial harm, often exploiting weaknesses in processes such as vendor selection, bidding and payments.
Fraudulent actors deceive by providing false information, collaborate with external parties for financial benefits like kickbacks, and engage in various schemes like bid rigging and invoice manipulation. With the increasing number of entities in the procurement process and financial strains, cases of such frauds are escalating (Matthew and Patrick, 2013). This can lead to significant financial losses, reputational damage and legal repercussions.
What are the red flags?
The modern procure-to-pay process is incredibly complex, involving many steps and, therefore, many opportunities for a person to commit fraud. Let’s take a look at some of the most common red flags.
- Multiple invoices from the same vendor in quick succession.
- Vendors with similar names or addresses.
- Payments made to vendors outside the normal payment cycle or to vendors with different bank account details.
- Vendors entertaining procurement staff in an extravagant manner.
- Unusual methods of communication between staff and vendors – calls or text messages to mobile phones.
- Splitting large orders into smaller ones to avoid competitive bidding thresholds.
- Payments made immediately upon receipt of an invoice without proper review.
- Employees or decision-makers involved in the procurement process having relationships with vendors.
- Favouritism towards specific vendors without valid reasons.
5 tips for strengthening your procurement fraud approach
Procurement fraud cannot be eliminated, but there are things we can do to minimise our chance of being victims to it.
Here are our top tips.
1. Continually assess internal controls
To minimise the risk of fraud, it’s essential to regularly review and evaluate existing controls, thresholds and procedures to ensure their relevance, adequacy and effectiveness. This becomes particularly crucial in the context of the expanding use of technology and the globalisation of businesses. Detecting fraud requires a grasp of risk, including the specific risks a region or industry might be susceptible to. Pinpointing vulnerabilities in a control system helps spotlight and rectify areas prone to fraud.
However, even meticulously crafted and tightly enforced systems can be subverted. Procurement fraud frequently arises when controls are intentionally bypassed by individuals confident, they won’t face challenges, or by collusive groups leveraging their expertise to conceal fraudulent actions.
2. Set the tone and the culture
This is not merely about discouraging bribery but about instilling a culture where unethical practices, including the exchange of undue gifts and favours, are absolutely unacceptable. Every staff member should be educated on this stance and its implications.
The Gifts Policy should outline the conditions under which gifts can be accepted, if at all, and the appropriate procedures for reporting or declining gifts. This becomes especially important in sectors where gift-giving is a traditional or customary practice.
These policies should be designed to be pragmatic, straightforward, and readily available to all employees. Such proactive measures ensure that all employees are aligned in understanding and upholding the company’s values. Spearheaded by senior management, the creation and dissemination of these policies effectively establish the groundwork for identifying and countering fraudulent or unethical conduct. In turn, having these policies in place streamlines disciplinary procedures when breaches occur.
Staff should also be given access to appropriate training modules that focus on fraud, compliance and risk mitigation. Policies are one thing; knowing how to spot fraudulent or inappropriate behaviour is something else. Give your workers the tools they need to protect themselves as well as the organisation at large.
3. Vet your suppliers
Conducting thorough background checks and integrity due diligence serves as a crucial step in verifying the credibility of manufacturers and suppliers. This process not only confirms their reputable status but also brings to light their affiliations, interests, related entities and potential conflicts of interest. Prior to starting any business collaboration, assessing the financial viability and corporate ethos of suppliers is the most important step.
4. Segregate roles
Keep roles separate. Imagine a scenario where a single person isn’t in charge of creating purchase orders, inputting invoices, and approving payments. This separation is like a locked door against fraud, even when controls are tight. Ideally, two distinct departments handle purchase orders and invoices. Procurement manages orders, while accounts payable takes care of invoices and payments. And if resources are limited, those requesting purchases can handle orders, but only accounts payable deals with invoices. This strategy safeguards transparency and shields against fraud risks.
5. Make use of modern procurement platforms
Big data is your friend when it comes to preventing procurement fraud. These platforms aren’t only about improving productivity; the best ones offer a suite of features designed to prevent corruption and fraud. Such platforms integrate cutting-edge technologies like artificial intelligence, machine learning, and pattern recognition to identify anomalies and suspicious activities in real-time. They can automate vendor vetting, cross-check invoices with vast data repositories, and instantly flag irregularities, making it increasingly challenging for fraudsters to slip through the cracks.
One might wonder, with such a robust suite of features, which platform truly stands out? Let’s take a closer look.
ProcureTRAK helps prevent procurement fraud and corruption
ProcureTRAK is one such platform that has a range of built-in features to deter fraud and corruption. All fraudsters leave a trail, and our compliance dashboards can tracks and reveal duplicate invoices, invoice splitting, contract overspend and more. These dashboards are easy to use, revealing the necessary information in a straightforward manner and tracking which user is responsible for which action.