Procurement Fraud (part 5) – Anti-Fraud Principles 4,5 and 6

- December 11, 2012 4:27 AM
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Today we’re continuing with our six key principles for minimising the risk of procurement fraud – numbers 4, 5 and 6. Numbers 1,2, and 3 were here. And previous parts of this series are available (here, here and here)

4. Procured goods or services must be checked to ensure what was received (quality, quantity, etc) is aligned with the contract and payment.

Even if we see that the requirement is genuine, and the supplier is genuine, fraud can take place where the nature of what is supplied – quality, quantity, specification – is not as contracted for. So a lower value product is substituted if we are talking about goods. Or in the case of services, it may be the quantity that is the heart of the fraud.

Perhaps the most difficult procurement fraud to detect would be a budget holder and a professional services supplier in collusion, with the budget holder signing off that 20 days of consulting or contingent labour services were provided when really it was only 15. This is very difficult to detect; but some additional checks on what has really been received, obviously involving more than just the single budget holder, provides some protection here.

5.  Supplier selection and pricing of purchased goods and services must be transparent.

Even if the goods or services received are as per the contract, how do we know the price paid was appropriate? And even if the price was reasonable, are we sure the supplier was selected in a fair and transparent manner, rather than because of a bribe or connection to the buyer? This, like the previous example, is very hard to detect. Perhaps the manager paying £1000 a day for a contractor should only be paying the market price of £800. The senior manager may be taking the £200 “excess” back as a bribe for awarding the contractor the work. Transparency over selection decisions and value for money can at least reduce the risk of this particular fraud.

In a recent case, Sainsbury’s supermarket chain in the UK were de-frauded by their potato buyer working with a supplier. Sainsbury’s paid over the market price for potatoes for years, and the excess monies were split between the internal buyer and the supplier. It was the supplier’s auditor who eventually discovered it, not Sainsbury’s themselves. Here, a transparent selection process would presumably have shown that the prices were out of line, and would have introduced alternative suppliers into the picture. And benchmarking, or some other way of accessing the true market prices, would presumably have helped identify something was wrong here.

6.  Opportunities for collusion between suppliers, and between suppliers and buyers, must be minimised.

Many of the frauds we’ve described rely on collusion between buyer or budget holder and seller. So reducing the chances of this will reduce the chance of fraud. Steps can be taken to ensure that there is always more than one person involved with any major procurement or in signing-off work with suppliers. Moving staff regularly is another option, so there is less time for the relationship, and perhaps the fraudulent plans, to mature. Some organisations have a policy that no-one in a decision making procurement role will stay for more than 3 years in that same job role for this reason.

It is not just procurement people of course to whom this applies. Indeed, procurement often worries about stakeholders (budget holders, users) getting too close to suppliers. When that marketing or IT manager makes it clear (s)he doesn’t want procurement involved with “their” relationship with a key supplier – that can be a warning sign that it isn’t totally innocent. Organisations should look at discouraging closeness that goes beyond the need to work well with a supplier to get a job done. This may influence, for instance, the policy on hospitality and entertainment.

So, that wraps up this series . But even after several thousand words, there is still a lot more that could be written about procurement fraud. For instance, we haven’t touched on the technology and tools that can be used to support these anti-fraud principles; perhaps that will be a future topic. But if you act on the principles we’ve outlined here, you will at the very least reduce the probability of successful procurement fraud going on in your organisation.

Comments

  • bitter and twisted:

    I’d add
    7, Purchasing processes and tools need to be fit for purpose.
    If honest people resort to workarounds to get the job done, you wont see the crooks.

    4 and 5 are often underemphasised

    Approvals are worse than useless if the overseer is not competent or interested.

    Make fraud impoosible to get away with, not impossible to commit

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