Lessons From the Bagel Man to Tackle Procurement Fraud

Spend Matters welcomes this guest article by Somdipto Ghosh, Product Marketing, Zycus.

In the year 1984, Paul F. decided to make a radical career transition from heading a public research group to selling bagels at corporate offices. He devised a unique “honor system” where he would leave bagels and a cash basket in company cafeterias in the morning and return in the evening to collect the payments.

Free Research: Implementing guided buying into your procurement organization

His business flourished and soon he was selling 700 dozen bagels a week to 140 companies. Over the course of many years in business, he documented and analyzed the fraudulent activities of his clients and leveraged his background in research to find unique irregularities. These reports later provided key insights into the human psyche and helped Stephen Dubner, of Freakonomoics fame, formulate startling revelations on “white collar crimes.”

Every procurement leader, while setting up processes to prevent procurement fraud – one of the most prevalent forms of white collar crime – needs to analyze what the implications of these findings are for his or her team:

Finding 1: Personal Mood Affects Honesty

Paul noticed that people usually cheat on payments more often in cold months or during rain and wind. If that’s true, procurement auditors need to be extra careful during such months. Most leading companies are already employing advanced spend analysis solutions that are able to monitor and detect sudden spikes in spending patterns. Such spikes should be analyzed thoroughly during months with bad weather. Any discrepancy in product costs can also be matched against price fluctuations of its components, provided the company has powerful cost modeling and commodity tracking software.

Finding 2: Corporate Employees Cheat More Before Big Holidays

While Stephen Dubner thought that this finding was due to social anxiety before Christmas and similar holidays, it might also be due to the fact that most process owners and approvers are usually on leave or preoccupied with work pressure, and cheating becomes easier. Technology is the safest bet to counter such challenges, as companies need to make sure that software for both upstream and downstream processes are tightly integrated with the tenant management systems. This means that whenever one person is on leave or has delegated responsibilities, the software can automatically detect that and pass responsibility to the next suitable employee with a transparent audit trail. This kind of flexibility built into SOX-compliant processes can nip any fraudulent activity in the bud.

Finding 3: Even Small Impediments Discourage Fraud

Paul previously used to leave an open cash basket, but money kept disappearing. Hence he switched to small plywood boxes with a slot cut into the top and found that people who routinely steal money from open boxes never stoop to steal the box itself.

This proves that people are easily discouraged from committing fraud, even with the smallest deterrents. This is a very strong argument in favor of strategic sourcing, which demands an electronic sourcing process for all categories with a mechanism to track negotiation details.

Finding 4: Executives Cheat More Than Their Underlings

Paul discovered this after delivering bagels to offices of companies that put people of different grades on separate floors. He noted that cheating on bagel payments was a lot more prevalent on floors that housed top management. While this is a startling revelation, the only safeguard against it is to provide a confidential whistleblower program where juniors can escalate fraudulent practices directly to the people in charge without fear of repercussions.

We have barely begun to scratch the surface of understanding how behavioral psychology can affect procurement processes, but definitely companies need to pay attention to the human element while formulating policies.

First Voice

  1. William Kohnen:

    Interesting and entertaining article. Even as a purchasing leader I struggle with how much responsibility we should take as a profession in this space. Certainly by the nature of our position we have a fiduciary duty personally and we are responsible to put in place good process, procedure and transparent practice that complies with SOX or other applicable requirements. That seems to me to be the end of our responsibility. Beyond that purchasing typically is not trained to do forensic audit, investigations and as suggested in the article the biggest risk generally is from Exec level. Even if not at the Executive level,still in many parts of the world not only is there no protection from workplace retribution for whistleblowers but it can literally put peoples lives at risks.

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